Research shows public debt surging due to virus

The National Business

THE level of the country’s public debt had been rising in the lead-up to the Coronavirus (Covid-19) pandemic, with policymakers preparing themselves for fiscal consolidation in 2020, a discussion paper says.
The National Research Institute (NRI) released yesterday the discussion paper titled Fiscal Policy for Sustainable Debt in Papua New Guinea, was put together by Prof Satish Chand and Dr Osborne Sanida.
They noted that the pandemic not only delayed the planned fiscal tightening but increased both the levels of budget deficits and public debt.
According to them, the level of public debt has raised concerns regarding the risk of debt distress in future.
“We present data on the trajectory of budget deficits, primary balances, and the level of debt in PNG from 2006 and 2020,” they said.
“We use this information to argue that fiscal policy has been used to support growth, and this, in turn, has led to an upward trajectory in both deficits and debt.
“This leads us to ask if the recent rise in debt is sustainable, particularly within the context of the revised debt ceiling of 45 to 60 percent of GDP (gross domestic product) with a long-term vision of returning this to 35 per cent of GDP as envisioned under the FRA (Fiscal Responsibility Act).
“Our simulations show that the PNG Government can abide by the revised FRA ceiling if:

  • INTEREST rates remain low;
  • GDP growth is high; and,
  • FUTURE deficits are contained.

“Public debt is considered sustainable so long as the debtor is able to meet their payment obligations without resorting to emergency assistance or having to default.
“Such an eventuality has not arisen recently, but warnings are being sounded of the risk of debt distress.”