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publication June 29, 2021

Hidden Debt: Solutions to Avert the Next Financial Crisis in South Asia

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The COVID-19 crisis, which has sent economies in South Asia and around the world into a deep recession, has highlighted South Asia’s rising debt levels and sizable hidden liabilities.

State-owned enterprises, state-owned commercial banks, and public-private partnerships have been at the center of the rising debt wave and the latest pandemic response.Historically, South Asia has relied on these direct public interventions more than other regions.

While they have helped governments tackle key development challenges and quickly deliver relief measures during crises, they are also a significant source of public indebtedness due to their inefficiencies and weak governance.

Hidden Debt: Solutions to Avert the Next Financial Crisis in South Asia examines the trade-off between addressing development challenges through direct state presence in the market through these types of off-balance sheet operations, and avoiding unsustainable debt due to their economic inefficiencies.

The study recommends a reform agenda based on the four interrelated principles of purpose, incentives, transparency, and accountability (PITA). The reforms can mitigate the risks that off–balance sheet operations will become the source of the next financial crisis in South Asia.