When students from poor families in developing countries are offered places at prestigious universities, they are often faced with a tough choice. One option is to accept the offer and create more debt, likely through borrowing from a loan shark, to pay for tuition fees. Another option is to forgo this opportunity, which could be the first in family generations, and start working as low-wage workers.
Which option is better? If what matters is the ability to repay debt in coming months, then entering the labour market not only avoids creating new debt but also generates income. Yet, if one adopts a longer-term view and considers that tertiary education could offer higher earnings, and thus ability to pay off debt, and savings in the long run, then going to a university seems more viable.
While governments are different from individuals in many ways, this is also the nature of choices that policymakers in developing countries face. They embark on ambitious development pathways, such as providing universal healthcare services and boosting renewable energy production, which are good for people and the environment in the future, but they often mean additional sovereign borrowing and debt today. Should governments borrow more to invest in development, or should they give up these investments to attain ‘sustainable’ public debt level, as perceived by creditors and financial markets?
Arguably, investments to foster equitable and green development do not bode well with the current approaches on public debt sustainability analysis adopted by international financial institutions and credit rating agencies. This is because returns to investment in development only become clearly visible in the long run, but the current approaches prioritize a country’s ability to meet debt obligations in the near term. There is a risk that too much emphasis is being put on reducing short-term debt distress risk at the cost of social and environmental welling.
Given the lack of a long-term, development-aligned approach to assess public debt sustainability, ESCAP in its Economic and Social Survey of Asia and the Pacific 2023 proposes a new, ‘augmented’ approach to supplement the existing approaches.
This augmented approach duly considers the scale of a country’s investment needs to achieve the Sustainable Development Goals (SDGs) and how such investment can reduce, rather than increase, the government debt-to-GDP ratio in the future. For example, investing in the SDGs would raise the potential GDP level amid a more educated and healthier workforce, technological innovation, and climate-resilient economies.
The augmented approach also considers the sovereign debt implications of pursuing national SDG financing strategies and structural development policies. In the same way that many students seek financial grants and part-time jobs to make their university education a reality, governments also actively explore domestic and international financing options to fund their development ambitions. This financing aspect should form a critical part of any debt sustainability analysis.
Unlike traditional approaches, the augmented approach does not categorize debtor countries into a low or high risk of public debt distress based on some common thresholds. This is because ‘sustainable’ debt level should be country specific, depending on the gap between development progress and goals, among others.
Instead, based on the ESCAP Macroeconomic Model, this new approach illustrates different trajectories of government debt levels under different policy scenarios and adverse shocks. This helps policymakers make informed choices on how to strike a balance between achieving the SDGs and maintaining public debt sustainability in the long run.
The analysis on Mongolia as a pilot country in the Survey 2023 shows that investing in the SDGs would, as expected, result in a surging government debt level initially due to large spending needs. Yet, after considering the sizeable socioeconomic and environmental benefits of investing in the SDGs as well as a package of policies aimed at promoting a green and diversified economy, mobilizing fiscal resources and attracting private finance for development, government indebtedness is expected to fall notably in the long run.
Going beyond policy research, the augmented public debt sustainability analysis was discussed at the fourth session of the Committee on Macroeconomic Policy, Poverty Reduction and Financing for Development in early November 2023. During a dedicated session, high-level government officials also highlighted policy actions that Mongolia, Pakistan and Viet Nam have undertaken to balance the SDG attainment with long-term public debt sustainability.
The augmented approach is also implemented as part of ESCAP’s technical assistance for its member States. For example, ESCAP is working with the Ministry of Planning and Investment (MPI) of Viet Nam to study the fiscal, socioeconomic and environmental implications of policies on carbon pricing, poverty reduction, and investments in information and communications technology. A national workshop was organized in mid-December 2023.