Developing Countries Face Growing Risks of Financial Fragility: World Bank
Developing countries face growing risks from financial fragility created by the Covid-19 crisis and non-transparent debt, the World Bank said in a report, urging policymakers to focus on building sectors healthier finances.
“Risks can be hidden” as household, corporate, bank and government balance sheets are intertwined, according to the World Development Report 2022: Financing a Fair Recovery.
High levels of non-performing loans and hidden debt hinder access to credit and “disproportionately” reduce access to finance for low-income households and small businesses, the report notes.
“The risk is that the economic crisis of inflation and rising interest rates will spread due to financial fragility,” World Bank Group President David Malpass was quoted as saying by the agency. Xinhua press.
“Tightening global financial conditions and shallow domestic debt markets in many developing countries are crowding out private investment and holding back the recovery.”
The World Bank chief said it was essential to work towards widespread access to credit and growth-oriented capital allocation.
“This would allow smaller, more dynamic businesses – and sectors with higher growth potential – to invest and create jobs,” he said.
Surveys of businesses in developing countries during the pandemic found that 46% expected to be in arrears, the report showed, warning that defaults could now “rise sharply” and private debt could quickly become public debt as governments provide support.
Calling for proactive management of distressed loans, the report says improving insolvency mechanisms, facilitating out-of-court arrangements, especially for small businesses, and promoting debt cancellation can help enable an orderly reduction of private debt.
The multilateral lender also noted that in low-income countries, the dramatic increase in sovereign debt levels “must be managed in a proactive, orderly and timely manner.”
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