The Prospector

Financing Sustainable Development in Asia and the Pacific

August 23, 2018 By Zhenqian Huang

Reading Time: 4 minutes

Reading Time: 4 min read

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Zhenqian Huang*

Three years into the 2030 Agenda for Sustainable Development, can Asia and the Pacific hope to achieve the Sustainable Development Goals (SDGs) it lays out? On one hand, a recent United Nations survey1 shows the region beset by worsening inequality and environmental degradation. On the other hand, it continues to be the engine of global growth. The Economic and Social Survey of Asia and the Pacific 2018,2 produced by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), therefore, encourages the region to take advantage of currently favourable economic conditions to address vulnerabilities and enhance economic resilience, social inclusion and environmental sustainability.

Financing is key to sustainable development. Adequate financing requires the effective use of existing financial resources—both public and private—and the generation of additional financial means. The ESCAP survey discusses three policy dimensions:

1. Strengthening tax revenues – This applies especially to South and South-West Asia, here the ratio of tax to gross domestic product (GDP) is low.3 This goal can be achieved by two avenues:

  • Improving the efficiency of tax administration – The survey proposes a new composite tax administration index4 to measure how well institutional arrangements, core business functions, and legal and policy frameworks enable tax authorities to address tax avoidance and evasion, thus enhancing revenue collection efficiency. A one-point improvement in the 100-point index is associated with a tax revenue increase equal to 0.15%5 of GDP.
  • Rationalising existing tax incentives and creating new tax items to expand the tax base – The survey estimates that rationalising tax incentives for foreign direct investment and introducing a carbon tax could jointly generate $60 billion6 in revenue annually across the region.

2. Enhancing prudent sovereign borrowing from financial markets by issuing public bonds – Of 47 countries in the region with available data, 20 have never issued a government bond.7 Where bonds have been issued, the quality tends to be low. The survey finds that countries tend to enjoy more success in issuing government bonds in both domestic and international markets if they have manageable debt, credible regulatory frameworks and comfortable current account balances.

While public bonds issues should not compromise debt sustainability, many economies in Asia and the Pacific have room to increase public debt, if done prudently. The International Monetary Fund (IMF) projects that public debt in 11 of 248 developing economies in Asia and the Pacific will decrease from 2017 to 2022. To keep public debt sustainable, the survey recommends that governments closely monitor any contingent liabilities that may arise from bank failure, default on subnational debt, or losses incurred by state-owned enterprises, as well as from natural disasters.

3. Leveraging private finance – Public-private partnership (PPP) requires an enabling policy environment that reduces investment risks9 such as those arising from macroeconomic or political instability. As an illustration, the survey proposes an index to assess a country’s readiness to pursue PPP for infrastructure projects, finding that those with a more enabling environment tend to have PPP projects with higher risk-adjusted returns10 and commercial viability. However, PPP projects should be implemented with care to contain contingent fiscal liabilities.11

To unleash the potential of PPP and support the issuance of sovereign bonds, financial markets need to be developed further12 in Asia and the Pacific. This is a long-term task that requires policy actions on various fronts to establish an effective legal framework, a sizable investor base, diverse financial instruments and services, knowledgeable financial intermediaries, and sound market infrastructure.

What can Sri Lanka do?

Sri Lanka has great potential to mobilise financial resources for sustainable development in all three policy dimensions discussed in the ESCAP survey.

  • Strengthening tax revenues – Sri Lanka’s ratio of tax to GDP was 12.3%13 in 2016, lower than either the regional average of 15.2%14 or the average of 25.1%15 in the advanced economies of the Organisation for Economic Co-operation and Development. In recent years, the Sri Lankan government has introduced new tax items and other reforms that are expected to improve compliance and increase revenues.
  • Enhancing prudent sovereign borrowing – Sri Lanka has issued both domestic and international bonds. Between 1995 and 2016, annual domestic public bond issuance equalled, on average, 10% of GDP,16 and international bond issuance 1.3%.17 Although public debt in Sri Lanka is currently high, equivalent to nearly 80% of GDP, the IMF forecasts a decline in debt in the next five years.18Sri Lanka faces only medium to low risk19 from contingent liabilities.
  • Leveraging private finance – Sri Lanka’s low score20 on the PPP enabling environment index suggests room for improvement. The focus should be on reforming the regulatory and institutional environment, enhancing macroeconomic stability, and deepening financial markets. Current efforts to stabilise the Sri Lankan economy and achieve fiscal consolidation promise to contribute to a more enabling environment.

To conclude, the current economic health of Asia and the Pacific – vast and diverse as the region may be – provides scope for policymakers to look beyond economic growth and strive for social inclusion and environmental sustainability. Financing will be critical to achieve such SDGs. The region has great potential to strengthen tax revenues, enhance prudent sovereign borrowing and leverage private capital. But there is more to mobilising finance than just focusing on the money. It also involves designing and implementing national policies, building state institutions, and enhancing regional cooperation. The ESCAP survey provides valuable lessons for the region and beyond.

Notes:

1Afghanistan, Bangladesh, Bhutan, India, Iran, Maldives, Nepal, Pakistan, Sri Lanka and Turkey. United Nations. (2018). Economic and Social Survey of Asia and the Pacific 2018. Available at: https://www.unescap.org/sites/default/files/publications/Survey2018_Final_0.pdf.

2 Ibid.

3 Ibid., 83.

4Ibid., 13.

5Ibid., 6.

6Ibid., 76.

7Ibid., 13.

8Ibid., 14.

9Ibid.

10 Ibid.

11Ibid., 100.

12Ibid., 14.

13World Bank. (2018). Sri Lanka, Tax Revenue (% of GDP). Available at: https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS?locations=LK.

14 United Nations. (2018). Economic and Social Survey of Asia and the Pacific 2018. Available at: https://www.unescap.org/sites/default/files/publications/Survey2018_Final_0.pdf#page=131

15Ibid.

16Ibid., 94.

17Ibid.

18Ibid., 90.

19Ibid., 91.

20Ibid., 101.

*Zhenqian Huang is an Associate Economic Affairs Officer in the Macroeconomic Policy and Financing for Development Division of ESCAP. She is a member of the core team that produces the ESCAP flagship annual publication, the Economic and Social Survey of Asia and the Pacific. The opinions expressed in this article are the author’s own and not the institutional views of LKI, nor do they necessarily reflect the position of any other institution or individual with which the author is affiliated.

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