Opening Statement at the Committee on Macroeconomic Policy, Poverty Reduction and Financing for Development, First Session
Honorable Mr Apisak Tantivorawong,
Welcome to the Committee on Macroeconomic Policy, Poverty Reduction and Financing for Development. This Committee was restructured and expanded to integrate the financing for development agenda to support the priorities of 2015 Addis Ababa Action Agenda. Today, it has an opportunity to take an integrated view of the economy, public finances and financial stability. This is critical as weak macroeconomic fundamentals and financial instability reduces the potential to service public demands or reduce poverty. Financial crises clearly have serious macroeconomic consequences disruptive to medium and long-term growth and poverty reduction. Growing inequalities, given their interrelationship with economic and social cohesion, can dampen the benefits of growth.
In the future, sustainability considerations must be central to macroeconomic, fiscal and financial policies. ESCAP has been improving the quality and substance of the Region’s macroeconomic assessment. It has analyzed fiscal and financial policy constraints and explored options to increase resource mobilization and policies enabling the implementation of the 2030 Agenda for sustainable development. Let me share some thoughts on these areas.
First, there is need to lift growth, above all else, the quality of growth – which must be inclusive, equitable and sustainable; underpinned by policy measures fostering the nexus between economic, social and environmental dimensions. The dynamism of our region came under stress during the prolonged global crisis. Growth, and more so trade, did slow in Asia and the Pacific over 2008-2013. Although the region nonetheless continued to be the engine of global growth. The Region’s developing countries are now set to grow at 5.4 per cent in 2017 (relative to around 8 per cent at pre-crisis levels in 2007) with emerging markets and less developed economies doing better and China’s growth stabilizing to new a normal just under 7 per cent. Growth dynamics in Asia have changed. Domestic demand has finally gained momentum driven by a rise in public and private consumption, facilitated by low inflation, low interest rates, and robust consumer confidence. In addition, regional trade has gained momentum as global external demand picked up.
Although economies continued to pursue expansionary monetary policies, their impact on private investment growth in 2015 has remained subdued. Overcapacity in certain sectors is untenable. In some major economies, a debt overhang in the corporate and banking sectors weighs on growth, on productivity and on jobs. Risks of overleveraging, unproductive investments and financial vulnerabilities remain potential risks on the horizon. Against this backdrop, productive investments and structural reforms to support economic diversification, arrest environmental degradation, enhance social protection and increase wage flexibility will be critical to revive productivity to ensure sustainable, robust growth. But they require stronger economic governance.
Second, while large fiscal stimulus packages have spurred public spending in several countries, a more durable approach is needed to generate the necessary fiscal space to finance SDGs, both through direct public financing and private sector finance. Tax revenues average about 17.6 per cent of gross domestic product (GDP) and in some countries only 10 per cent of GDP: almost half of the global developing country average of 21.3 per cent. Accommodating core expenditures such as interest payments, essential services and basic social security coverage already results in fiscal deficits – pressures on which are likely to be compounded by the emerging requirements of financing the SDGs. Fiscal space - the gap between current fiscal balance and the constant balance that stabilizes debt over a medium-term horizon - is critical.
In Asia and the Pacific, government debt/GDP ratio varies a lot, but it should stabilize in coming years. However, it remains sensitive to the growth scenario, potential interest rates spikes, and commodity prices. Fiscal policies impact on economic growth does matter for debt sustainability. Alleviating structural constraints to growth through infrastructure, skill enhancement and productivity innovation is critical.
Third, challenges to fiscal policy management during the implementation of sustainable development calls for a significant transformation of national tax regimes, along with the strengthening of public expenditure management by eliminating unproductive expenditures and incentives. Public finances need to be inclusive, redistributive and deployed to leverage private and sustainable investment. Tax policy must be supportive of industry, economic diversification, technology and innovation. It should tax emissions, excesses and exploit the tax potential of the economy by tightening the tax base and its administration and curbing illicit financing. While pursuing domestic resource exploitation, tax policy must promote equity through enhancing progressivity and boosting spending to enhance social protection coverage. In several economies there is a need to vertically and horizontally align and balance fiscal federalism arrangements across all tiers of governments. Given the demographic pressures on urban areas and associated demands for sustainable development, developing coherent municipal finance strategies must be considered.
Fourth, small and medium size enterprises are known to support growth, competitiveness, productivity and jobs. They also have a critical role in enhancing financial inclusion – now being boosted by Fintechs and other newer businesses and technological solutions. Not only is there scope to enhance bank lending, but a range of innovative alternatives: private microfinance institutions that offer a range of financial services to the poor, women and smaller enterprises, shared liability models and collateral-free lending backed by appropriate risk management to contain default rates and Fintechs. To ensure broader and deeper access to finance for the vulnerable, financial inclusive policies should be backed by the right blend of regulatory and supervisory frameworks to manage financial and technology risks.
Fifth, the demand for sustainable infrastructure and its financing is colossal in Asia and the Pacific. It is estimated at around $26 trillion over the next 13 years. That’s equivalent to 6% of GDP annually, more than 2% of GDP higher than current investment levels. Some $3.6 trillion of this additional infrastructure investment is needed to mitigate carbon emissions and increase resilience to climate change. Public resources alone will never suffice. There is substantial scope to scale up the capitalization of stock markets of developing countries, and tap institutional assets under management, of which a quarter are from the Asia-Pacific region. Progress has been made in the region to promote corporate bond markets as evident within ASEAN. At the same time, efforts are underway to structure PPPs to blend public private financing and expertise. There is a need to enhance PPPs’ legal, regulatory and institutional frameworks across the region and to develop robust project pipelines with appropriate risk management frameworks to lend confidence to private investors. Newly established multilateral financing institutions are expected to double sources of multilateral and cross-border infrastructure financing in Asia-Pacific. At ESCAP, we have been collaborating with eleven international organizations to support the PPP Knowledge Lab initiative and have recently signed a memorandum of understanding with the China PPP Center.
Finally, low-carbon, climate-resilient infrastructure development demand is sizeable. Available estimates suggest public climate finance from developed countries to Asia and Pacific rose by 21 per cent between 2012 and 2015 and reached $19 billion, almost half the global total. In addition to these grants and concessional borrowing, budgetary support is emerging in some economies to finance climate-aligned investment. Phasing out inefficient fossil fuel subsidies offers fiscal space for greening the economy and infrastructure projects. ESCAP is working with UNFCCC and private stakeholders to promote the understanding of climate finance and its modalities, developing awareness of macroprudential and financial regulatory frameworks to promote green investments.
Focusing on some of these areas, ESCAP with support of ministers of finance, central bankers and industry experts held four rounds for financing for development forums annually since 2014. These platforms have served to enhance advocacy, develop understanding and capacities for the right design of tax policies and strategies for resource mobilization and intermediation options for supporting the Implementation of the Regional Roadmap for the 2030 Agenda in Asia and the Pacific. Now we need to
- Develop analytical national studies and convene a regional working group on SME financing
- Strengthen the ESCAP platform for PPP financing by partnering with the Asia-Pacific network of national PPP units and infrastructure financing specialists to exchange best practice, identify options to finance infrastructure projects and offer capacity building.
- Establish a region wide tax cooperation network by enhancing inter-agency collaboration through an alliance with national and regional tax stakeholders, the global Platform for Collaboration on Tax launched in 2016, ADB, and OECD and others. This network will develop a comprehensive portal of joint analytical products and capacity building programs for countries with special needs.
- Preparing LDCs for graduation and mainstreaming tax policy work and financial inclusive policy deliberations in Vienna, Istanbul and Samoa Action Plans.
To conclude, sustaining long-term and quality economic growth is critical to promote inclusive and sustainable development. Macroeconomic and financial stability is a prerequisite for sustainable development, but needs to be accompanied by an overhaul of the enabling policy environment that not only incentivizes private investment, but enhances avenues and opportunities for sustainable investment. SDGs fiscal support cannot be feasible unless accompanied by measures to fully tap the tax potential of economies, while reorienting tax policies to promote equity and efficient investments. Expenditure reprioritization and efficiency is critical to direct spending for SDGs implementation including diverting resources for enhancing social protection options. Effective debt management is critical to ensure the durability of fiscal space.
We are focused on producing relevant analytical products; organizing capacity building workshops in countries with special needs; and building regional consensus through consultations and high-level dialogues. We look forward to your guidance and approval for the background note for agenda item 5, reorienting the Committee’s terms of reference to enhance their coherence with the 2030 Agenda, the Addis Ababa Action Agenda and the Regional Roadmap.