The World Bank urges decisive action to avert the debt crisis in Covid

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Institution says in more than 30 years, the pandemic has led to the sharpest increase in national debt
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In order to avoid a new debt crisis, the World Bank called for immediate and decisive action, saying that the Covid 19 pandemic could lead to a decade of deception for the global economy. The Washington-based institution said in its semi-annual health check that the pandemic has contributed to the sharpest annual rise in government debt in over 30 years and highlighted the vulnerability of many emerging and developed economies. The bank’s president, David Malpass, said that the biggest recession in the global economy since the 1930s has widened the gap between rich and poor, and there is a possibility that it could take years for people at the bottom of society to see their lives change sustainably. The Global Economic Prospects report of the bank said that there would be only a silent recovery in 2021, with growth projected at 4 percent, still 5 percent below the pre-crisis trend, adding that there was a “significant risk” that reversals in containing the pandemic could lead to a much weaker recovery at a time when financial difficulties were rising in countries. Several nations have already defaulted on their debts and, Malpass said, more are at risk of debt distress. “The debt burden, which was already at record levels before the pandemic, has been made much higher by the devastating drop in incomes in emerging and developing countries,” he said. To counter what the bank called a fourth wave of debt, Malpass said, a comprehensive set of policies is required.

The Latin American debt crisis of the 1980s and the Asian financial crisis of the 1990s resulted in similar episodes in the past. Efforts to put together a comprehensive debt relief plan have been thwarted by the reluctance of private sector creditors and some countries to participate, particularly China.

Malpass said there is a need for greater involvement by both private and official bilateral creditors, along with a deep reduction of debt for countries in distress; improved debt transparency practices that address confidentiality and debt contract restrictions; and regulatory changes to accelerate the restructuring of private sector debt. “The global community must act quickly and forcefully to ensure that the recent de-debt contracts are overcome.”

The World Bank added, however, that the pandemic, in addition to causing many deaths, plunged millions of people into poverty and could have a prolonged effect on incomes and economic activity. The pandemic is likely to have long-lasting negative effects on global economic activity and per capita income, as with previous economic crises.’

The decline in the growth of global output potential – the level of productivity that can be maintained by the world economy at full employment and capacity utilization – that had previously been expected for the decade just begun is likely to worsen.

If history is any indication, the global economy is heading for a decade of disappointing growth results without significant and successful changes, advanced economies are likely to undergo a “slow and difficult recovery” as a result of new waves of infection, the bank said. The U.S., the largest economy in the world, was projected to expand 3.5 percent in 2021, following an expected contraction of 3 percent in 2021.

The bank said that China, which grew 2 percent in 2020, is expected to grow 7.9 percent this year.

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