Thursday, 23 September, 2021

WB warns South Asia risks ‘hidden debt’ financial crises

WB warns South Asia risks ‘hidden debt’ financial crises

NEW YORK: South Asia’s reliance on state-led development is concealing vulnerabilities to growing levels of unsustainable debt that could lead to financial crises, the World Bank warned.

Governments in the region, including India and Pakistan, are exposed to the risk of “hidden debt” via funding guarantees by state-owned banks and enterprises, as well as public-private partnerships, the World Bank said in a report Tuesday, which also included policy reforms to help alleviate the risks, report agencies.

“While the government must lead in reform, it takes a concerted effort by society to ensure that the off-balance sheet operations of government serve the right socioeconomic purpose and responsibly leverage public capital,” the bank said in the report. “Falling short of this task, South Asian countries face the threat of possible financial crises soon.” The World Bank’s recommendations include clearly defining the purpose of the state-backed entities, as well as ensuring transparency and data collection on explicit and implicit debt obligations. In terms of debt funding for state-owned enterprises, it recommended deeper and more liquid corporate bond markets.

India, the region’s biggest economy, is particularly vulnerable to sovereign debt and funding risks, especially after the pandemic shuttered businesses and left millions jobless.

A key danger for India is the government’s guarantee for debt raised by state-owned entities for public-private infrastructure projects. The coronavirus pandemic is likely to lead to the cancellation of many of those projects, strain partnerships and hit their viability, adding to the government’s debt obligation, the World Bank said.

The country accounts for 85 per cent of the US$328 billion invested in public-private partnership projects in South Asia, and their early termination poses a fiscal cost to India as high as US$18.5 billion, the most in the region, for the remainder of their contractual periods, the World Bank said in the report.

Across South Asia, a systemic crisis that triggers public-private partnership failures could cost governments more than 4 per cent of revenues.