Govts should mobilise more domestic resources via tax reforms: Albert Park

In an Q&A, ADB Chief Economist Albert Park tells that countries in region may not be able to carry on with large expenditures and social transfers meant for pandemic, given rising debt burden

The Asian Development Bank (ADB) is going to downgrade its growth forecast and upgrade inflation projection for the region in the Asian Development Outlook later this month. ADB Chief Economist Albert Park tells Asit Ranjan Mishra that countries in the region may not be able to carry on with large expenditures and social transfers meant for the pandemic, given the rising debt burden. Edited excerpts:

How different is the current economic turmoil from the past ones? How long may it last? 

There are two things. The pandemic itself was really a very unusual type of global economic shock. There was a huge shock to both supply and demand, and the world never had such experience with widespread locking of activity and mobility. But as vaccinations have come on line, the pandemic itself seems to be much less a drag on growth. But the Russian invasion of Ukraine has created a huge shock to commodity prices. So the combination of repeated shocks has created a lot of unique challenges. Governments have spent a lot of resources to deal with the pandemic, and now with the second shock, they have much less space to address all of these challenges while still supporting economic recovery. That is creating a lot of challenges that each country is having to navigate depending on specific circumstances, of course India included, where we have been expecting pretty robust economic recovery based on rising demand after a very tuff shock from the pandemic. But now there are a lot of issues related to commodity prices and inflation. So the Indian central bank has raised interest rates to address some of these concerns and, of course, that puts a damper on economic growth. These are just the trade-offs that have to be navigated by each country.

What is ADB’s view on the fears that the world may be heading towards a recession? 

I think it is too early to say so. I know that the IMF (International Monetary Fund) has said we should not rule out a global recession next year. It’s certainly in the realm of possibility. Our forecast for Asia is still that recovery and growth rates will be robust although we are downgrading our growth forecasts compared to our earlier forecast for the region. But we still anticipate positive growth in the 4-5 per cent range in the region; of course it will vary across countries. We are hopeful that we will not have a global recession. But there's an unusual amount of risk in the forecast this year because of the difficulty of predicting how things like the world will turn out and how inflation will transmit across countries etc.

How long do you think this inflationary trend will last and how badly it will impact developing Asia? 

We are upgrading our forecast for inflation in the region relative to before although inflation in Asia is significantly lower than inflation in the rest of the world. We are projecting that to continue into next year. There are forces which could relieve some of the pressure on inflation. For example, if we have a recession or slowdown, this also puts a damper on the demand side. It’s not like inflation is going to be crazy globally for many years. We have not typically seen that. This is part of a business cycle correlated globally because everyone is facing this common huge shock.

The biggest effect on Asian countries from the war has been the elevated commodity, food, and fertiliser prices. Some ways Asia has been shielded a bit from the food price shocks because in a lot of countries the staple is rice and not wheat or corn. Rice prices have stayed fairly stable and even have come down relative to last year. But of course, that’s not true for all countries. India, of course, consumes quite a lot of wheat and so does Central Asia. Some consumers will shift from wheat and corn to rice, which will put up pressure on rice prices. So it will have effects although the current concerns are more about energy prices in Asia and its impact on inflation.

India is facing the challenge of twin deficits again, with pressure on both current account deficit and fiscal deficit. How should the government deal with it? 

The interest rate increases should help address the depreciating currency problem somewhat. We are in the third year of the pandemic and it has taken a lot of ammunition from the government. One thing we have been encouraging governments to do is to really think about ways to mobilise more domestic resources through tax reforms and even in some cases increasing taxes because governments need that increased fiscal space to be able to do more to address these different challenges.

High deficits should be a major concern because if deficits go too high, then it can really lead to lack of confidence among international investors. There are more concerns now because growth is slowing and interest rates are rising, that makes carrying high debt burdens harder to sustain. It could mean that many countries will face a higher risk of debt sustainability crisis. It will be hard to continue very large expenditures and large social transfers and supports after several years of the pandemic. So governments need to be much more targeted and smart about really identifying groups of people (in need of help) and prioritising support for them so it doesn’t have a large budgetary hit.