Fiscal Deficit and Public Debt Sustainability in South Asia
Bangkok (UN Information Services) – High levels of public debt in South Asia remain a burden, drawing away much needed funds for development and basic services, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), reports in its latest regional survey.
The Economic and Social Survey of Asia and the Pacific 2008 says that lowering high public debt ratios “is essential to avoid adverse economic and social consequences.”
The Survey says that both domestic and external public debt carry concerns of “higher interest rates and lower private investment; higher debt servicing costs and less funding for basic services; and in the most severe cases, inflation, a debt trap, economic collapse and widespread poverty.”
While the share of domestic public debt in total debt is on the rise in most countries, domestic debt has received relatively less attention despite its serious economic and social implications.
Across South Asia, debt has been a focus of government policy. In 2006 in Sri Lanka, public debt stood at 93 per cent of gross domestic product (GDP) – the highest in the sub-region and the result of years of high fiscal deficits.
“In India, high fiscal deficits increased the combined debt of the central and state governments from about 70 per cent of GDP in 1990 to about 87 per cent over 2002–2004,” the Survey says, Public debt is estimated at 82 per cent for fiscal year 2006.
Pakistan’s debt growth over the 1990s was “unprecedented.” But a credible debt reduction strategy and faster economic growth reduced the public debt burden from 84 per cent of GDP in 2000 to 57 per cent by 2006. The reductions in the debt burden came by way of rescheduling, a debt swap for social spending, debt cancellation and pre-payment of expensive debt.
In Bangladesh, the level of public debt has stabilized “below 50 per cent of GDP” and is estimated at 47 per cent in 2006. In Nepal, public debt stood at 56 per cent of GDP in 2005.
But the Survey notes that the “real burden of public debt” lay in its servicing. In Sri Lanka over 90 per cent of government revenues went to debt servicing in 2006, in India interest payments alone consumed more than 28 per cent of the revenue of the central and state governments in 2005.
The debt service ratio declined substantially in Pakistan over 2005–2006 “though about 30 per cent of government revenues remain allocated to debt servicing.” But in Nepal, debt servicing stabilized at about 29 per cent of total government revenues in 2006, while in Bangladesh, interest payments consumed about 18 per cent of government revenues.
The Survey warns that Sri Lanka may face an unsustainable situation “if GDP growth and primary balances continue at the average of the last decade, an already high debt–to-GDP ratio would continue rising.”
But the debt ratios can be significantly reduced over the medium term by promoting growth and adopting fiscal consolidation policies.
On a positive note, if India’s high GDP growth and fiscal consolidation continue then the debt-to-GDP ratio “will fall by ten percentage points over the next five years.” But if the variables such as GDP growth and primary balances remain at the average level of the last decade “there will be no reduction in the debt-to-GDP ratio.”
The Survey also notes that in the case of Pakistan “the improvement in the ratio of domestic public debt to GDP since 2001 appears to have bottomed out.” “The country is likely to face a higher external debt-servicing burden as repayments of the rescheduled non-ODA Paris Club stock resume in 2008 and some foreign currency bonds mature.” For Nepal, no reduction in the debt-to-GDP ratio is expected in the medium term.
The Survey says growth and the adoption of fiscal consolidation policies would “reduce significantly” the ratio of public debt to GDP and ratio of public debt service to government revenue.” But making South Asia’s public debt sustainable would require controlling fiscal deficits, expanding government revenues, and prioritizing development spending on key areas.
“Widespread poverty and lack of basic services mean that demand for public spending is high. The challenge for governments is to contain wasteful public spending and orient it towards priority sectors,” the Survey points out. Public expenditure, as a priority, should promote pro-poor growth, and basic services such as education, health, sanitation and housing.
As the region's most comprehensive annual review of economic and social developments, ESCAP's Economic and Social Survey of Asia and the Pacific provides the only independent source of analysis covering all countries in this vast and diverse region, and considers both the social and economic spheres of development. The 2008 Survey, entitled "“Sustaining Growth and Sharing Prosperity,” looks at the most critical issues, challenges and risks our region faces in the months ahead.
Headquartered in Bangkok, Thailand, ESCAP is the largest of the UN's five Regional Commissions in terms of membership, population served and area covered. The only inter-governmental forum covering the entire Asia-Pacific region, it aims to promote economic and social progress.