Developing economies and sub-Saharan Africa (SSA) have been advised to restrain from increasing their public debt profile through conscious national reforms.
This is contained in the report released by the World Economic Forum (WEF) in its 2020 second edition of Global Competitive Report titled, “How Countries are performing on the Road to Recovery.”
According to the report
- An increasing public-debt burden presents new challenges for future growth, potential debt sustainability challenges and financial instability, especially in developing countries.
- The importance of maintaining budget discipline and macro-economic resilience during boom years becomes evident during crises, when public sector expenditure is crucial to keep the economy afloat.
- It also challenges current tax systems and calls for a review of tax structures. Further, in countries where trust in institutions is declining, there may be doubts about the efficacy of public spending of the large amounts being mobilized to stabilize the economy in the current crisis.
- Second area of concern before the 2020 pandemic was high levels of debt in selected economies as well as widening inequalities.
- The emergency and stimulus measures have pushed already high public debt to unprecedented levels, while tax bases have continued eroding or shifting.
- To respond to these issues, in the revival phase, the priority should be on preparing support measures for highly indebted low-income countries and plan for future public debt deleveraging.
- In the longer run (transformation phase), countries should focus on shifting to more progressive taxation, rethinking how corporations, wealth and labour are taxed. This will require both national reforms and setting up an international cooperative framework.
What they are saying
According to the Managing Director, WEF, Saadia Zahidi, while commenting on other findings in the report, she said:
- “In emerging markets and developing economies, business leaders noted an increase in business costs related to crime and violence, a reduction in judicial independence, a further reduction in competition and growing market dominance, and stagnating trust in politicians. They, too, expressed positive views on government response to change, collaboration within companies, and venture capital availability. They also noted an increase in the capacity to attract talent, potentially facilitated by the more digital labour market.”
- “During this time of profound uncertainty, the health crisis and economic downturn have forced a fundamental rethink of growth and its relationship to outcomes for people and planet. Policy-makers have a remarkable opportunity to seize this moment and shape new economic systems that are highly productive, while growing shared prosperity and environmental sustainability.”
Why this matters
- It is important that developing nations are aware of the fiscal implications of unduly increasing their huge public debt portfolio, as the cost of servicing such debts could be quite high and have adverse effects on the annual budget.
- A high level of indebtedness by any country inevitably means a reduced room to manoeuvre should external and unforeseen shocks occur, and such country always has less to invest for its infrastructures and economic development – as it will always continue to borrow from time to time.
- Rising debt burden leaves a country poorer, under intense financial pressure, with fewer economic opportunities for the country to exploit, as well as mortgaging the future of its citizens.