The unprecedented fiscal firepower used to protect the vulnerable from the harsh socio-economic impact of the Covid-19 pandemic and the resulting economic contraction have pushed the average government debt level in the Asia-Pacific region to its highest since 2008.
Multilateral lenders and credit rating agencies focus excessively on keeping debt sustainable in the short term. Such perceived optimal debt levels are too low and lead to suboptimal development outcomes. Revisiting current debt sustainability norms has also become necessary with the emergence of major non-traditional bilateral creditors and a drastic fall in concessional development lending to Asian and Pacific countries over the past decade.
Rather than penalizing bold fiscal support for people and the environment, international creditors should consider if such spending would boost economic productivity. Lenders and credit rating agencies should see debt relief as helping support the fiscal outlook, rather than as a sign of an upcoming debt default.