Economic disruption caused by the COVID-19 pandemic gives countries the opportunity to pursue “greener, smarter and more equitable” development paths, but the heavy debt burden remains a major obstacle for poorer countries struggling to rebuild, the World Bank said on Tuesday.
“Without a solution, the problem of unsustainable debt and restructuring that does too little will delay life-saving recoveries, especially in the poorest countries,” warned World Bank President David Malpass in the foreword. from the bank’s winter edition of its World Economic Outlook. report.
The World Bank estimates that the global economy shrank 4.3% last year. This year, he forecasts a “moderate” recovery of 4% growth. That’s more than 5% or some $ 4.7 trillion less than its pre-pandemic projections.
After this year’s hike, the bank sees global growth slowing to 3.8% in 2022.
But this prospect is steeped in uncertainty.
Without a solution, the problem of unsustainable debt and restructuring that does too little will delay vital recoveries.
Skyrocketing COVID-19 infections, delays in purchasing and distributing vaccines and other pandemic-related setbacks could derail the economic recovery, according to the bank. The same goes for financial strains caused by historically high debt levels and weak growth.
As the World Bank sees growth in emerging markets and developing economies (EMDEs) firm to 5% this year and moderate to 4.2% in 2022, much of this more positive forecast reflects the expected rebound in China, the world’s second largest economy.
Take China out of the equation, and the EMDE’s average growth forecast this year and next is much more subdued at 3.5%.
“The pandemic has brought down per capita income in more than 90% of EMDEs, pushing millions of people into poverty,” the report said, adding that the coronavirus is expected to wipe out at least 10 years of gains in per capita income in more than a quarter of these countries.
Among the grouping, “activity is expected to be lowest in the Middle East and North Africa and sub-Saharan Africa,” the report said.
The pandemic has brought down per capita income in more than 90 percent of EMDEs, pushing millions back into poverty.
Before the pandemic, rampant EMDE borrowing, dubbed the “fourth wave” of debt accumulation, had raised concerns about the sustainability of rising debt levels.
The global recession caused by the pandemic has now seen countries, including EMDEs, borrow even more to fund public health responses and afloat economies.
While this spending has been deemed necessary, there are risks that rising debt will make these countries even more vulnerable to financial crises.
“The global community must act quickly and forcefully to ensure that the fourth wave [of debt accumulation] does not end with a series of debt crises in EMDEs like previous waves have done, ”the bank warned.
The World Bank estimates that public debt in EMDEs increased by 9 percentage points of gross domestic product in 2020 – the biggest increase since the late 1980s, when the group of countries was swept away by a wave of crises of the debt.
The global community must act quickly and forcefully to ensure that the fourth wave [of debt accumulation] does not end with a series of debt crises.
Private sector debt accumulated by companies struggling to cope with the economic fallout from the pandemic is also expected to have increased in 2020.
The bank warns that many countries, especially low-income countries, face significant debt servicing costs, with several already in debt distress.
As of November, only 44 of 73 eligible countries had requested a temporary suspension of debt service payments as part of a Group of 20 (G20) initiative.
The program does not cancel the debts of the world’s poorest countries, nor does it reduce their debt levels. This only gives them a temporary reprieve from debt repayments.
While the World Bank views these policies as important emergency responses, it warns that they only fill in the gaps “to make room until permanent solutions can be found.”
The bank advocates a series of solutions to avoid possible debt crises, including greater participation of all creditors in debt service relief efforts, greater transparency of debt contracts, streamlining of the process legal private sector debt restructuring and a “deep reduction in the debt of countries.” in distress”.