An augmented long-term approach to public debt sustainability analysis

This policy brief makes a case for policymakers in Asia and the Pacific and the international development community to rethink how public debt assessment should be undertaken, especially keeping in view the 2030 Agenda for Sustainable Development. It does so by outlining an “augmented”, long-term approach to analyse public debt sustainability. This approach duly incorporates a country’s investment needs to achieve the Sustainable Development Goals (SDGs), governments’ structural development policies that go beyond financial investments, and national SDG financing strategies. By supplementing the short- to medium-term approaches currently adopted by international financial institutions and credit rating agencies, this new approach is important because, without a complementary long-term analysis, there is a risk that too much emphasis will be put on reducing near-term debt distress risk at the cost of achieving inclusive and sustainable development. The analysis is based on macroeconomic modelling and illustrates different trajectories of government debt level under different policy scenarios and adverse shocks. This helps policymakers make informed choices on how to strike a balance between maintaining public debt sustainability and achieving more inclusive and sustainable development in the long term.