EDB: Tajikistan continues accumulating debt obligations in order to meet development objectives
4 months ago Web Desk 0
Amid the COVID-19 pandemic policymakers now face the dilemma of whether to stimulate infrastructure development by raising debt, which may reduce future flexibility, or to strengthen their fiscal positions. In order to shed light on this issue, the present study analyzed an optimal debt level, taking into account countries’ institutional characteristics.
The key findings on the debt–GDP relationship reveal monotonic increase of the debt threshold from less institutionally developed countries to more developed ones. While economies with weak political institutions feature a 37% debt-to-GDP threshold, in countries with strong institutions the debt threshold rises above 55% of GDP. This distribution of debt thresholds stresses the greater resilience of the advanced economies to growing debt burdens compared to their less institutionally sustainable peers.
Russia and Kazakhstan are in a comfortable position of low public debt (below 20% of GDP), which does not exceed a 37-38% debt-to-GDP threshold. Concurrently, other EDB and EFSD countries have to be cautious about their debt positions given their uneven development of institutions. Nevertheless, our findings suggest that above a threshold value of 37–38% of GDP, growing public debt still features a very small positive effect on economic growth of Armenia, while the study does not indicate statistically significant negative effect for Belarus, Kyrgyzstan and Tajikistan.
Insofar the debt-to-GDP ratio is below the threshold, external financing reportedly may benefit countries with weak institutions.
EDB analysts stress that the debt–growth nexus depends on a wide range of countries’ features, which should be considered carefully with regard to their policy implications. In developing economies, there is a number of other factors, which underline a possibility to raise debt without materially jeopardizing the country’s debt position, e.g. access to concessional financing.
Belarus, Kyrgyzstan, and Tajikistan have remained in a weak institutional framework, which makes them more vulnerable to periods of crisis and stagnation, according to the report. Furthermore, the study findings suggest that above a threshold value of 37% of GDP, growing public debt does not have a significant effect on economic growth. The role of financing seems most important for countries with weak institutions: when the debt-to-GDP ratio is below the threshold.
The report notes that two EFSD recipient countries, Tajikistan and Kyrgyzstan, illustrate that access to concessional loans may mitigate default risks. Although estimated growth-maximizing debt for those countries is around 37%, which is considerably lower than the actual debt level, which is around 50–60%, Tajikistan and Kyrgyzstan have continued to accumulate debt obligations in order to meet development objectives. In general, the research does not suggest to the EFSD countries reducing their actual debt level to estimated threshold. Rather, it implies that, above a certain debt level, the countries may need to access carefully whether additional financing from loan resources will stimulate their economic activity or whether it imposes unnecessary risks to their budget sustainability. Apart from fthat, EDB analysts stress that the debt–growth nexus depends on a wide range of countries’ features, which should be considered carefully with regard to their policy implications.
The COVID-19 outbreak has revealed the sensitivity of economies and their debt positions to a wide range of disruptions. In order to shed light on how much debt Tajikistan and Kyrgyzstan can sustain EDB experts consider a baseline scenario as well as three alternative, more adverse scenarios: 1) a protracted global crisis; 2) a slow economic recovery in the region; and 3) a natural disaster shock.
Source: Asia Plus