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The World Bank has issued a warning to developing countries about post-COVID banking sector instability

The World Bank has urged developing countries to strengthen their financial systems, saying risks posed by the COVID-19 outbreak have led to “non-transparent debt”, which has contributed to some fragilities. The interconnected nature of the balance sheets of families, businesses, banks and governments can currently mask these risks, according to the Bank’s World Development Report 2022, published on February 15.

According to the World Development Report 2022, the risks associated with higher levels of debt, both public and private, could emerge more quickly for developing countries and could carry longer-term financial and macroeconomic risks. These risks include an increase in bad debts and financial sector difficulties, the lack of options for households and businesses to discharge debts incurred during the pandemic through formal insolvency, difficulties in accessing credit and high levels of sovereign debt.

“The risk is that the economic crisis of inflation and rising 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 holding back the recovery,” said World Bank Group President David Malpass.

The World Development Report 2022 highlighted the decisions taken by Indian authorities in the aftermath of the pandemic that hit the country, praising them for their “decisive policy response” which included a variety of tools.

The report defines an “equitable recovery” as all adults, including those in vulnerable groups, able to recover from the loss of jobs, income, human capital and assets. “COVID-19 has deepened inequalities both within and between countries. Addressing financial risks is important to ensure that governments and financial institutions can support the recovery, including through investments in public services, such as healthcare and education,” the report says. .

“The strategy recognized that the sectors of its economy – households and businesses, financial institutions and governments – are interconnected. A large shock in one sector can generate contagion risks that destabilize the economy as a whole if not addressed quickly and in an integrated manner,” the World Bank report notes. However, he added that while these policies – in India and other countries – have helped limit the worst in the short term, the challenges they present, such as rising public and private debt burdens, must soon be addressed for a fair economic recovery.

One of four policy areas the report says needs urgent action is raising sovereign debt levels, the other three being managing and reducing distressed loans, improving insolvency legal frameworks and ensuring continued access to funding. Calling the increase in sovereign debt due to the pandemic “dramatic”, the report notes that the average total debt burden of low- and middle-income countries has increased by about 9 percentage points of gross domestic product (GDP). ) in 2019-20 alone – the first year of the pandemic. In contrast, the previous decade had seen an average increase of 1.9 percentage points.

Outstanding general government debt as a percentage of GDP using World Bank income classification. “During the pandemic, governments have accumulated debt to fund current spending, but this has come at the cost of limiting their ability to spend in the future, including on public goods such as education. and public health. Underinvestment in these services can worsen inequalities and human development outcomes. High debt and a lack of flexibility in spending also limit the ability of governments to cope with future shocks,” warns the report.

India’s general government debt has soared to around 90% of GDP from just over 70% in FY2019. Next year the central government plans to borrow a record Rs 14 crore .95 lakh in the market to meet its spending needs, more than 40% up from FY22. However, it has targeted a budget deficit of 6.4% of GDP, which would represent a reduction 280 basis points from 9.2% in FY21.

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  • The World Bank has issued a warning to developing countries about post-COVID banking sector instability
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