W’Bank: Developing Countries Face Growing Risks from COVID-19 Induced Fragility, Non-transparent Debt

Nume Ekeghe

Developing countries face growing risks from financial fragility created by the COVID-19 crisis and non-transparent debts, a report by the World Bank has indicated.

The World Bank stressed that rising inflation and interest rate increases, pose further challenges to recovery and advised that developing countries need to focus on creating healthier financial sectors.

According to the document titled, “World Development Report 2022: Finance for an Equitable Recovery,” the World Bank said 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.

“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.

He added, “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. The global public health crisis triggered by COVID-19 quickly turned into the largest global economic crisis in more than a century, resulting in major setbacks to growth, increased poverty rates, and widened inequality.

“In response, governments initiated large and unprecedented emergency support measures, which helped mitigate some of the worst social and economic impacts, and increased sovereign debt levels – already at record highs in many countries before the crisis. The response also exposed several challenges with private debt that now need to be urgently addressed – including a lack of transparency in reporting non-performing loans, delayed management of distressed assets, and tighter or no access to credit for the most vulnerable households and businesses.”

The new World Development Report highlights several priority areas for action, including early detection of financial risks.

It added, “Since few countries have the fiscal space and capacity to address all challenges simultaneously, it outlines how countries can prioritize resources depending on their context. Surveys of businesses in developing countries during the pandemic found that 46 percent expected to fall into arrears. Loan defaults could now sharply increase, and private debt could quickly become public debt, as governments provide support.

“Despite the severe contraction in incomes and business revenues resulting from the crisis, the share of non-performing loans remains largely unimpacted and below expectations. However, this may be due to forbearance policies and relaxed accounting standards that are masking significant hidden risks that will become apparent only as support policies are withdrawn.”

On his part, the Senior Vice President and Chief Economist at the World Bank Group, Carmen Reinhart added, “Prior to crises, it’s often the things that you don’t see that ultimately get you. There is reason to expect that many vulnerabilities remain hidden. It’s time to prioritize early, tailored action to support a healthy financial system that can provide the credit growth needed to fuel recovery. If we don’t, it is the most vulnerable that would be hit hardest.”