According to World Development Report 2022: Funding for a Fair Recovery risks can be masked because the balance sheets of households, businesses, banks and government are closely linked. At present, high levels of non-performing loans and hidden debts hinder access to credit and significantly reduce the ability to finance low-income households and small businesses.
“The risk is that financial instability is contributing to the inflationary economic crisis and rising interest rates. Tight global financing conditions and slow domestic debt markets in many developing countries are deterring private investment and holding back recovery, ”he said. President of the World Bank Group David Malpass. “It is important to work on expanding access to credit and ensuring the distribution of capital in a way that stimulates growth. This will allow smaller but more dynamic companies and sectors with greater growth potential to invest and create jobs. »
The global health crisis caused by COVID-19 quickly became the world’s largest economic crisis in more than a century, leading to a sharp decline in growth, poverty and inequality.
Faced with this situation, the authorities urgently took a series of unprecedented and far-reaching measures to mitigate some of the worst economic and social consequences of the crisis, as well as increase public debt, which has already reached record levels in many countries.
This response also identified several private debt issues that need to be addressed in advance, including a lack of transparency in the reporting of non-performing loans, late processing of distressed assets, and restrictions on or loss of credit for the most vulnerable households and businesses. .
The new World Development Report draws attention to several priority areas, including early detection of financial risks. As few countries have the fiscal space and capacity to address all the challenges they face simultaneously, the report demonstrates how they can prioritize resources according to their circumstances.
Surveys of companies in developing countries during the pandemic showed that 46% of participants expected debt to accumulate. Defaults can increase significantly, and private debt will quickly turn into public debt as governments implement support measures. Despite the sharp decline in corporate income and turnover due to the crisis, the share of non-performing loans remains virtually stable and lower than expected.
But this can be blamed on policies of tolerance and weakening of accounting standards, which hide a wide range of hidden risks that will become visible only after the abolition of ancillary policies.
“Before the crisis comes, you often get what you don’t see. That’s why many vulnerabilities remain hidden, “he said Carmen Reinhart, Senior Vice President and Chief Economist of the World Bank Group. “Now is the time to focus on rapid and individualized action to support the clean-up of the financial system so that it can provide the additional credit needed to stimulate recovery. Otherwise, the most vulnerable will suffer the most. »
The report also calls for active management of problem loans. Many businesses and households are burdened with unbearable debts due to declining incomes and revenues. Effective insolvency regimes can minimize the risks of long-term over-indebtedness and lending to zombie firms that weaken economic recovery. Improving insolvency regimes, facilitating out-of-court settlements, especially for small businesses, and facilitating debt write-offs can help ensure orderly private debt reduction.
In low-income countries, a sharp increase in sovereign debt needs to be managed methodically and quickly. Experience has shown that untimely resolution of sovereign debt leads to prolonged recessions, inflationary pressures and reduced resources allocated to such important sectors as health, education and social protection, with disproportionate consequences for the poor.
Finally, ensuring access to financial services for all is important to support recovery from the historic pandemic. In low- and middle-income countries, 50% of households are unable to meet their basic consumer needs for more than three months. The average business says it only has cash reserves to cover two months’ expenses.
Households and small businesses are most at risk of losing access to credit, while credit increases the resilience of low-income households and allows small businesses to avoid liquidation, stay in business, and ultimately prosper and help recover. Digital financial instruments and products can significantly assess the borrower’s risk and provide recourse in the event of default. At the same time, they improve credit risk management, encourage lending and promote new economic opportunities.
COVID-19: reaction of the World Bank Group
Since the beginning of the COVID-19 pandemic, the World Bank Group has mobilized more than $ 157 billion to address the health, economic, and societal effects of this crisis, with an unprecedented and effective response since its inception.
This funding is helping more than 100 countries better prepare for the pandemic, protect the poor and jobs, and embark on a climate-friendly recovery. The Bank also supports the purchase and deployment of COVID-19 vaccines for nearly 70 low- and middle-income countries, more than half of which are in Africa, and plans to raise $ 20 billion in funding. 2022.
The reforms needed to ensure a fair recovery also offer governments and regulators the opportunity to accelerate the transition to a more efficient and sustainable global economy, as well as a roadmap for this. Climate change is a major source of missed risks in the global economy. Well-thought-out policies in response to crises and long-term reforms can stimulate capital inflows to greener businesses and sectors.