Debt crisis threatens economic recovery in poor countries -WB

Developing countries face growing risks from financial fragility created by the Covid-19 crisis and non-transparent debt, says a new World Bank report.

As rising inflation and interest rate increases pose further challenges to recovery, developing countries need to focus on creating healthier financial sectors.  

 According to world development Report 2022: Finance for an Equitable Recovery, risks may be hidden because 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.  

According to the World Bank Group President David Malpass, the risk is that the economic crisis of inflation and higher interest rates will spread due to financial fragility.

He adds that the tighter global financial conditions and shallow domestic debt markets in many developing countries are crowding out private investment and dampening the recovery. 

“It is critical to work toward 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,'' Malpass said. 

The report shows low-income economies, in particular, face more severe constraints in choosing optimal policies, due to external factors, weaker institutions, and more limited fiscal space.

This increases the likelihood of an uneven and inequitable recovery, characterized by discrepancies in the ability of different population groups to recover losses in human capital, assets, jobs and income.

The World Bank's report is coming just days after a survey by Geopoll revealed that three out of every four small businesses have used solely their founders' own funds to finance their business out of the Covid-19 quagmire.

This, as commercial lenders, holds on to funds or simply prefer to lend consciously after being forced to carry the heavy debt burden after borrowers failed to honor loan repayments due to social-economic disruptions caused by Covid-19.

The latest Africa SME Pulse Report by GeoPoll shows just 11 per cent have received bank loans, illustrating the difficulties MSMEs face securing financing. 

The banking sector recorded a significant drop in net earnings due to high loan provisions. They are, however, expecting better earnings for the year ended December 31, 2021. 

The Covid-19 crisis also saw public debt soar to the highest levels as governments worked to stabilize the economy and provide adequately for the health sector to manage the pandemic. 

In 2020, the International Monetary Fund IMF) noted the largest one-year debt surge since World War II, with global debt rising to $226 trillion as the world was hit by a global health crisis and a deep recession.

''Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, and rising inflation,'' IMF said.

According to the latest update of the IMF’s Global Debt Database, global debt rose by 28 percentage points to 256 per cent of GDP.

Borrowing by governments accounted for slightly more than half of the increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highs.

''In a world where rock-bottom interest rates have kept debt costs manageable, it’s also affordable. But if rates rise faster and higher than expected, the end of the Covid-19 crisis could mark the beginning of a reckoning,'' the Institute of International Finance said last year.

In Kenya, public debt stock increased by 16.82 per cent between March 2020 and March 2021.

Besides the increasing public debt stock, the composition of public debt stock, debt servicing and debt sustainability have drawn the attention of policymakers.