Fiscal space: Asias fiscal safety net has shrunk

Andrea Presbitero

Chapter 10 in The Sustainability of Asia’s Debt, 2022, pp 269-298 from Edward Elgar Publishing

Abstract: Asian developing countries have been hit by the coronavirus disease (COVID-19) pandemic in a context characterized by (1) weaker fiscal stance than before the global financial crisis (GFC), and (2) large financing needs to fund infrastructure and social spending to achieve the Sustainable Development Goals (SDGs). Preliminary data on public spending after COVID-19 in developing Asia show that a more limited initial fiscal space is associated with higher borrowing costs and a lower capacity to increase discretionary fiscal expenditures. Moreover, the experience of the GFC indicates that a weaker initial fiscal position is likely to translate into a larger decline in public investment. However, given favorable global financing conditions and large infrastructure needs, the case for public investment remains strong, as it could deliver short-term employment benefits and long-run inclusive growth, and it is the key ingredient to achieve the SDGs. Financing options and policies should strike the balance between the needs to expand investment and preserve debt sustainability, considering that some countries have very limited room to maneuver and also have limited external financing. In developing countries with no fiscal space, debt relief and increased concessional lending by multilateral and bilateral donors could contribute to reducing the debt overhang and rebuilding fiscal space in the short run, to allow investment to pick up in the recovery phase. Countries with fiscal space could instead develop a prudent borrowing strategy to preserve public investment plans also in the short term, by diversifying their financing sources. In this respect, a shift toward state-contingent debt instruments and an increase in long-term and local currency debt could mitigate the future vulnerability to external shocks.

Keywords: Asian Studies; Development Studies; Economics and Finance (search for similar items in EconPapers)
Date: 2022
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