Public debt spending needs new approach to minimise future risks: UN report

Though Bangladesh is among five countries in the Asia-Pacific with a low risk of public debt stress, the average government debt in the region is at an 18-year high, a UN report says, calling for a bold and innovative approach to invest public debt for development gains.

Although the average government debt position in the region is not necessarily bad news, public debt distress is expected to worsen due to the global economic slowdown, high inflation, rising interest rates, and uncertainty caused by the war in Ukraine, it warns.

Published on Wednesday by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), the survey report stresses that a reconsideration of the public debt-development nexus is needed to effectively pursue sustainable development under current difficult economic conditions.

The survey proposes an innovative approach to public debt sustainability analysis, considering a country's sustainable development goals (SDG) financing needs and strategies along with the governments' structural development policies.

"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," says the survey titled Rethinking Public Debt for the Sustainable Development Goals.

The Latest joint World Bank-IMF Debt Sustainability Analyses, Bangladesh has been placed in the low-risk category of debt stress along with Myanmar, Cambodia and Nepal and Uzbekistan.

Countries with a credit rating of B+ (S&P's assessment) or highly speculative and below are considered as facing a high risk of debt distress.

A summary of sovereign credit rating actions between January 2022-February 2023 shows Bangladesh's credit rating is "Ba3" by Moody's, and "BB-" by S&P and Fitch.

Of a total of 32 countries for which credit rating information is available, 12 are further classified as facing a high risk of public debt distress and five including Bhutan at moderate risk.

Maldives, Pakistan, Sri Lanka, Cambodia and Turkey are among the countries at high risk of debt distress, according to the World Bank-IMF analyses.

The ESCAP survey suggests that 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.

"A higher debt level does not necessarily mean a higher risk of debt distress," said Armida Salsiah Alisjahbana, under-secretary-general of the UN 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," she added.

The report cites two high-income countries in the region – Japan and Singapore – whose general government debt is extraordinarily high, exceeding 150% of the debt-GDP ratio, and points out that the level of public debt is only one of the factors having an impact on public debt sustainability.

The other factors include – political stability, debt-carrying capacity and fiscal position, drivers and purpose of increasing debt and composition of debt.

It cites how the ongoing war and decades-long conflicts downgraded the credit rating of Russia and Afghanistan.