MercoPress. South Atlantic News Agency

Bleak prospects for poor countries with global contraction of 3%

World Bank president anticipates waves of economic pain and financing gap of 350 to 635 billion for developing countries.

The world economy is set to contract this year by more than previously estimated, and poor countries will continue to be hit hard by multiple waves of economic stress, said World Bank Group President Robert B. Zoellick.

Even with the stabilization of financial markets in many developed economies, unemployment and under-utilization of capacity continue to rise, putting downward pressure on the global economy.

According to the latest World Bank estimates, the global economy will decline this year by close to 3%, a significant revision from a previous estimate of 1.7%. Most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.

“Although growth is expected to revive during the course of 2010, the pace of the recovery is uncertain and the poor in many developing countries will continue to be buffeted by the aftershocks,” Zoellick said ahead of the Group of Eight finance ministers meeting in Italy.

“Waves of economic pain continue to hurt the developing world’s poor, who have fewer cushions to protect themselves. There is much more we need to do in the coming months to mobilize resources to ensure that the poor do not pay for a crisis that is not of their making.”

Zoellick noted that, according to revised Bank estimates, the overall financing gap for developing countries will be between 350 billion to 635 billion US dollars in 2009, down somewhat from earlier estimates due to improved current account outturns, but still huge amounts.

“Low-income countries that have limited borrowing capacity due to low reserves and drained national budgets will face particular difficulties in getting sufficient finance in the next few years,” Zoellick said.

“Because of this, lending from the World Bank, the IMF and other sources will become increasingly important as the crisis rolls across low-income countries.”

Zoellick added: “There is not enough public sector money to solve the global crisis, so the recovery strategy needs to encourage private business and financing too.”

The crisis implications for poor countries are stark, and driving expanded use of World Bank resources. Requests for assistance are up at the International Development Association (IDA), part of the World Bank Group that focuses on the 78 poorest countries.

For fiscal year 2009, which ends on June 30, IDA grants and interest-free loans are expected to total more than 13 billion US dollars, a record high, and an increase on last year’s 11.2 billion. Anticipating the needs of the poorest countries, the World Bank created a fast track facility in December to provide rapid funding for social safety nets, infrastructure, education, and health.

Demand has also grown rapidly at the International Bank for Reconstruction and Development (IBRD), the part of the World Bank Group that supports creditworthy low and middle-income countries. Loan volume is expected to increase to around 33 billion this fiscal year, compared to 13.2 billion US dollars last year.

Zoellick said it was important that the G8 meetings this month and in July follow-up on the promises made at the Group of 20 meeting in London in April to restore domestic lending and the international flow of capital.

The World Bank president said some of the main risks still remaining included the need to clean up the balance sheets and recapitalize banks, address the unique financial risks in Central and Eastern Europe, guard against a rise in protectionism, and roll over large amounts of private sector debt in developing countries.