World Bank calls for rapid action to prevent Covid debt crisis

World Bank calls for rapid action to prevent Covid debt crisis

January 5, 2021

The World Bank has called for rapid and decisive action to prevent a new debt crisis as it said the Covid-19 pandemic could result in a decade of disappointment for the global economy.

In its half-yearly health check, the Washington-based institution said the pandemic had led to the sharpest annual increase in government debt in more than 30 years, and had exposed the vulnerability of many emerging market and developing countries.

David Malpass, the Bank’s president, said the biggest slump in the global economy since the 1930s had widened the gap between rich and poor and there was a risk it could take years for people at the bottom to see a sustained improvement in their lives.

The bank’s Global Economic Prospects (GEP) report said there would be only a subdued recovery in 2021, with projected growth of 4% still leaving output 5% below its pre-crisis trend.

It added, however, that there was a “material risk” that setbacks in containing the pandemic could lead to a much weaker rebound at a time when countries were faced with growing financial difficulties.

Several countries had already defaulted on their debts and more were at risk of debt distress, the GEP said.

Malpass said: “Already at record levels before the pandemic, both domestic and external debt burdens have become much heavier due to the devastating contraction in incomes across emerging market and developing economies.”

A comprehensive set of policy interventions was needed to tackle what the bank called a fourth wave of debt, Malpass said. Similar episodes in the past had culminated in the Latin American debt crisis of the 1980s and the Asian financial crisis of the 1990s.

Efforts to come up with a comprehensive package to alleviate debt have been hampered by the unwillingness of private sector creditors and some countries – particularly China – to take part. Malpass said there was a need for greater participation by all private and official bilateral creditors along with deep debt reduction for countries in debt distress; better debt transparency practices that overcome secrecy and restrictions in debt contracts; and legislative reforms to speed up the restructuring of private sector debt.

“The global community needs to act rapidly and forcefully to make sure the latest wave of debt does not end with debt crises in emerging market and developing economies, as has been the case previously,” the GEP said. “The pandemic has exacerbated existing debt-related risks and vulnerabilities.”

Shallower recessions in advanced economies and a stronger recovery in China meant the estimated 4.3% slump in global output in 2020 was slightly less severe than the World Bank feared six months ago. It added, however, that in addition to a heavy death toll, the pandemic had plunged millions into poverty and could depress incomes and activity for a prolonged period.

“As with previous economic crises, the pandemic is expected to leave long-lasting adverse effects on global economic activity and per capita incomes. It is likely to steepen the slowdown in the growth of global potential output – the level of output the global economy can sustain at full employment and capacity utilisation – that had earlier been projected for the decade just begun. If history is any guide, unless there are substantial and effective reforms, the global economy is heading for a decade of disappointing growth outcomes.”

Advanced economies were likely to experience a “slow and challenging recovery” as a result of new waves of infections, the Bank said.

The US, the world’s biggest economy, was forecast to expand 3.5% in 2021, after an estimated 3.6% contraction in 2020, while the euro area was anticipated to grow 3.6% this year, following a 7.4% decline in 2020. China, which grew by 2% in 2020 was likely to expand by 7.9% this year, the bank said.

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