Developing nations at risk of financial fragility: World Bank

NEW DELHI: The World Bank released ‘World Development Report 2022’ on February 15. The report said that the COVID-19 crisis has created growing risks from financial fragility and non-transparent debt for the developing nations. The report titled, ‘Finance for an Equitable Recovery’, established that the financial risks might be hidden currently because home, company, bank, and government balance sheets are all intertwined.

The report noted that high levels of non-performing loans and hidden debt impairs access to credit and disproportionately reduce access to finance for low-income households and small businesses. According to David Malpass, President, World Bank, the risk is that the financial fragility will lead to economic crisis in the form of inflation and higher interest rates. He mentioned that tighter global financial conditions and shallow debt markets in many developing nations are crowding out private investments and dampening the recovery.

Malpass suggested that the nations should work towards broad-based access to credit and growth oriented capital allocation. This is expected to enable smaller and more dynamic firms and sectors with higher growth potential to invest and create jobs. The report called for proactive management of distressed loans. It said that improving insolvency mechanisms, facilitating out-of-court workouts, especially for small businesses, and promoting debt forgiveness can help in orderly reduction of private debts.