While the average government debt level in the Asia-Pacific region is at an 18-year high, this is not necessarily bad news, and it is time for a bold shift in thinking about public debt sustainability, according to the 2023 edition of the Economic and Social Survey of Asia and the Pacific.
Published today by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), the Survey argues that current policy debates around public debt sustainability do not sufficiently account for the long-term positive socioeconomic and environmental impact of public investments. This type of spending lays sound foundations for inclusive, resilient and sustainable prosperity.
“A higher debt level does not necessarily mean a higher risk of debt distress,” said Armida Salsiah Alisjahbana, United Nations Under-Secretary-General and Executive Secretary of ESCAP. “Nor is higher debt necessarily detrimental to economic growth. Rather, deploying public debt as an investment in people and the planet offers sizeable medium- and long-term economic, social, and environmental returns.”
The current high levels of government debt are largely a result of the unprecedented expenditure to cope with the COVID-19 pandemic and the resulting economic contraction. Public debt distress is expected to worsen amid the global economic slowdown, record-high inflation, and rising interest rates, and uncertainty induced by the war in Ukraine.
This implies that the scale of fiscal responses available for investing in Sustainable Development Goals (SDGs) and for climate action is likely to remain limited. To effectively pursue sustainable development under current difficult economic conditions, a reconsideration of the public debt-development nexus is needed.
The Survey proposes an innovative approach to public debt sustainability analysis that augments the conventional short- to medium-term methodologies of international financial institutions and credit rating agencies. This approach considers a country’s SDG financing needs and strategies along with the Government’s structural development policies. Using different policy scenarios, the analyses show that public debt goes down over the long term when the socioeconomic and environmental benefits of public investments are incorporated.
On the back of these findings, the Survey argues that it is time for international financial institutions and credit rating agencies to consider the positive long-term economic, social and environmental outcomes of investing in the SDGs in their assessments of public debt sustainability, also considering whether such spending would boost economic productivity. Debt relief should be viewed as helping to support the fiscal outlook, rather than as a sign of an upcoming debt default.
Effective public debt management reduces fiscal risks and borrowing costs, and there are several examples of good public debt management practices in the Asia-Pacific region. At the same time, countries with high debt distress levels may need pre-emptive, swift, and adequate sovereign debt restructuring, while efforts towards common international debt resolution mechanisms and restructuring frameworks also need to be accelerated.
Produced annually since 1947, the Economic and Social Survey of Asia and the Pacific is the oldest United Nations report on the region’s development progress. The Survey provides analyses to guide policy discussion on current and emerging socioeconomic issues and policy challenges to support inclusive and sustainable development in the Asia-Pacific region.