Developing countries face growing risks from financial fragility created by the coronavirus pandemic and non-transparent debt, says a new World Bank report.
According to the 2022 World Development Report, rising inflation and interest rate increases pose further challenges to recovery, and developing countries need to focus on creating healthier financial sectors.
The report highlighted that these risks may be hidden as the balance sheets of households, businesses, banks, and governments are tightly interrelated. Today, high levels of non-performing loans and hidden debt impair access to credit and disproportionately reduce access to finance for low-income households and small businesses.
“The risk is that the economic crisis of inflation and higher interest rates will spread due to financial fragility. Tighter global financial conditions and shallow domestic debt markets in many developing countries are crowding out private investment and dampening the recovery,” said World Bank Group President David Malpass.
“It is critical to work towards broad-based access to credit and growth-oriented capital allocation. This would enable smaller and more dynamic firms — and sectors with higher growth potential — to invest and create jobs.”
The pandemic and public health measures necessary to contain the spread of the disease led to a decline in economic activity that was unprecedented in scale, severity, and global impact.
The cross-country decline in output — with 95 percent of countries registering a contraction in 2020 — was greater than that experienced in either of the World Wars or the economic depression of the 1930s. The repercussions of this economic shock were felt very unevenly within and across countries.
Furthermore, smaller firms, low-income households, women, and other vulnerable populations were more adversely affected by changes to work arrangements. Likewise, the effects were worse in emerging markets and developing economies (EMDEs), where the existing social safety nets to mitigate the impacts of the crisis on poverty are weaker.
The regressive effects of the pandemic also extend to the perception of sovereign risk, leading to 15% of advanced economies’ credit ratings being cut since the start of 2020 — the comparable share of downgrades for EMDEs is about 40%.