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The World Bank says the lack of debt transparency and COVID has posed a risk to developing countries.
Developing countries are facing increasing risks from the financial fragility created by the COVID-19 crisis and the lack of debt transparency, according to a new World Bank report. At a time when rising inflation and interest rates add to the challenges of recovery, developing countries need to focus on strengthening the health of the financial sectors.
According to 2022 World Development Report: Financing for an Equitable Economic Recovery, the risks may be hidden because the balance sheets of households, businesses, banks and governments are closely interlinked. Today, high levels of non-performing loans and hidden debt impair access to credit and disproportionately reduce access to financial resources for low-income households and small businesses.
“The economic crisis created by rising inflation and high interest rates is in danger of spreading due to financial fragility. “Further tightening of financing conditions in world markets and the shallowness of domestic debt markets in many developing countries are hampering private investment and weakening economic recovery.” said World Bank Group President David Malpass. “It is very important to work towards broad-based access to credit and growth-oriented capital allocation. “This would enable smaller and more dynamic firms – as well as sectors with the highest growth potential – to invest and create jobs.”
The global crisis caused by the COVID-19 pandemic quickly turned into the world’s biggest economic crisis in more than a century, resulting in a sharp slowdown in economic growth, increasing poverty and deepening inequalities. In response to the crisis, governments undertook significant and unprecedented emergency support measures, which helped mitigate some of the most serious social and economic consequences and increased sovereign debt levels – which even before the crisis had reached record levels in many vend. The crisis response also highlighted some debt-related challenges in the private sector that now need to be addressed urgently – including a lack of transparency in reporting non-performing loans, delays in managing borrowers’ assets in financial difficulties, and a lack of access or limited access to credit for the most vulnerable families and businesses.
New World Development Report identifies several priority areas for action, including early detection of financial risks. Since few countries have the fiscal space and capacity needed to address all challenges at once, the report describes how countries can prioritize resources depending on their context.
Surveys of businesses in developing countries during the pandemic found that 46 percent of them expected to create arrears. The level of loan default can increase significantly now and, as a result of the support provided by governments, private debt can soon be turned into public debt. Despite the drastic contraction of revenues and monetary turnover of businesses as a result of the crisis, the share of non-performing loans remains largely unaffected and below expectations. However, this may be due to tolerance policies and relaxed accounting standards, which are hiding serious risks which will only become apparent once supportive policies are discontinued.
“Before crises, there are often things you do not see that will eventually defeat you. “There is reason to think that many weaknesses remain hidden.” said Carmen Reinhart, Senior Vice President and Chief Economist of the World Bank Group. “It’s time to prioritize early action, tailored to support a sound financial system that can provide the credit boost needed to stimulate recovery. “If we do not do that, then those who will be hit hardest are the most vulnerable groups.”
The report also calls for proactive loan management. Many households and firms are facing volatile debt levels due to declining incomes. Effective bankruptcy mechanisms can help avoid the risk of long-term difficulties in debt payments and lending to “ghost” firms that undermine economic recovery. Improving bankruptcy mechanisms, facilitating out-of-court solutions, especially for small businesses, and promoting debt forgiveness can help reduce private debt structuring.
In low-income countries, extremely high levels of sovereign debt need to be managed proactively, in a structured and timely manner. Historical data show that delays in addressing sovereign debt unaffordability are associated with prolonged periods of recession, high inflation, and fewer resources for essential sectors such as health, education, and social security networks, resulting in more serious consequences for the poor. .
Finally, to support the economic recovery from the pandemic it is necessary to work towards comprehensive access to financial resources. In low- and middle-income countries, 50 percent of households are unable to afford basic consumption for more than 3 months. Average businesses report that they have enough cash reserves to cover only 2 months expenses.
Households and small businesses have been more exposed to the risk of credit disruption, although access to credit improves the financial viability of low-income households and enables small businesses to avoid closing down, staying in the market and consequently to grow and support economic recovery. Digital financial instruments and products can play an important role in assessing borrower risk and providing a recourse in the event of loan default, thereby improving credit risk management, enabling lending and promoting lending. new economic opportunities.
The policy reforms needed to achieve equitable recovery also provide governments and regulators with an opportunity and guidance to accelerate the shift towards a more efficient and sustainable world economy. Climate change is an important source of neglected risk in the world economy. Well-designed crisis response policies and long-term reforms can encourage capital flows to greener firms and industries.
Click here to view the interview with Carmen Reinhart, Senior Vice President and Chief Economist of the World Bank Group, for a discussion on the key findings of the 2022 World Development Report: Financing for Equal Recovery.
World Bank Group Response to COVID-19
Since the onset of the COVID-19 pandemic, World Bank Group has allocated over $ 157 billion to combat the health, economic and social consequences of the pandemic, which is the fastest and largest response to the crisis in its history. Funding is helping over 100 seats strengthen pandemic preparedness, protect the poor and jobs, and embark on a climate-friendly recovery. The bank is also supporting about 70 low- and middle-income countriesmore than half of which are in Africa, for the purchase and distribution of COVID-19 vaccines, making available for this purpose $ 20 billion in funding by the end of 2022.
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