Rising debt could undermine South Asia’s growth: RBI governor

Some countries in the region have been contending with the ramifications of unsustainable debt and climate change induced events, forcing them to seek recourse to the IMF’s financing facilities, Reserve Bank of India governor Shaktikanta Das told a meeting of the International Monetary Fund on Friday.

Notwithstanding these challenges, as per the World Economic Outlook database (October 2022) of the IMF, India, Bangladesh and Maldives would be among the fastest growing economies in the world in 2022 and 2023. 

According to the Asian Development Bank’s December 2022 outlook, the South Asian region’s GDP is projected to grow at 6.5 per cent in 2022 and 6.3 per cent in 2023.

The World Bank estimates that regional co-operation could be a win-win situation for all countries of the region. For example, intra-regional trade is currently only one-fifth of its potential, implying an annual shortfall of $44 billion. The World Bank assessment also suggests that a common electricity market for Bangladesh, Bhutan, India and Nepal can yield savings of $17 billion in capital costs. 

Investment in transport and logistics could help reduce the cost for container shipments in South Asia. 

According to a study by the IMF (2019) on South Asia, more than 150 million people will enter the South Asian labour force by 2030. The dependency ratio is expected to continue ebbing for almost two decades, indicating the strong demographic dividend the region is set to reap.

However, the RBI governor said, multiple external shocks in the form of Covid related global supply chain disruptions, food and energy crisis following the war in Ukraine, and financial market volatility arising from the aggressive monetary policy tightening have exerted sustained price pressures in the South Asian economies, as in other parts of the world. During the first three quarters of 2022, food price inflation in South Asia averaged more than 20 per cent. 

The region’s heavy dependence on imported fossil fuels has made it vulnerable to imported fuel inflation. For successful disinflation, credible monetary policy actions accompanied by targeted supply side interventions, fiscal, trade policy and administrative measures have become the key instruments, he pointed out.

While the recent softening of commodity prices and supply chain bottlenecks should help in lowering inflation going ahead, risks to growth and investment outlook may rise if inflation persists at high level, the governor noted, adding that prioritising price stability may therefore be the optimal policy choice in the current context for the region. The approach to disinflation, however, needs to be mindful of the rising risks to the growth outlook in an environment of deteriorating prospects for global growth and trade activity.

A surge in external debt in recent years and associated vulnerabilities have undermined macroeconomic stability in several countries of the South Asian region. External debt, which was already elevated in low- and middle-income countries (that include all South Asian economies) in the pre-pandemic period, surged to $9.3 trillion in 2021 from $8.2 trillion in 2019, an increase of $1.1 trillion, Shaktikananta Das pointed out.

Das noted that under the Debt Service Suspension Initiative (DSSI), set up by the G20 in May 2020, an estimated $12.9 billion of debt service was deferred up to December 2021. According to the World Bank, 60 per cent of the 73 DSSI-eligible countries are at high risk of debt distress or are already experiencing it. It is estimated that total external debt service payments on public and publicly guaranteed debt by poorest countries may rise by 35 per cent to over $62 billion in 2022 and remain high up to 2024 due to rising global interest rates and the compounding of interest on DSSI debt service deferrals.

Of late, there has been a notable shift in the creditor composition of low- and middle-income countries between 2010 and 2021. The share of lending by private creditors in long-term public and publicly guaranteed debt was 61 per cent in 2021 (46 per cent in 2010) and the share of debt owed to bondholders was 47 per cent in 2021 (29 per cent in 2010).

There has been a distinct shift in the creditor base over time in favour of private lenders and non-Paris Club official creditors has added a new dimension to debt restructuring processes for the low-income International Development Assistance (IDA)-eligible debtor countries. The share of debt owed to non-Paris Club creditors rose to 68 per cent in 2021 from 42 per cent in 2010. The increasing reliance on private creditors has raised debt servicing costs and complicated creditor coordination in debt resolution efforts. During 2010-2021, the average maturity on loans from private creditors was 12 years as compared with 26 years for loans from official creditors, and the average interest rate on loans from private creditors was 5 per cent vis-à-vis 2 per cent on loans from official creditors.

The role of multilateral organisations, particularly the IMF and the World Bank, has now become crucial in making debt treatment efforts more effective, while also strengthening the mechanism of recording, reporting and analysis of debt data so as to enhance transparency and preserve debt sustainability. The IMF’s role in capacity building in the region, with a focus on region specific macro dynamics, policy effectiveness challenges, and economic aspirations of the nations would also be helpful.

The RBI governor said in order to sustain a broad-based economic recovery, the policy focus should be on undertaking deep structural reforms to raise the potential growth trajectories of the economies in the South Asian region. The ongoing global realignment of supply chains, green transition and advances in technology offer new opportunities for investment and growth, but policies would need to create the congenial climate for attracting new private investment, with public sector taking the lead in areas that can create large positive externalities, such as infrastructure, education, and health, he said.