World Bank Warns Developing Countries Will Struggle With COVID-19 Lasting Effects

(CMC) — The World Bank said Tuesday even as the global economy is expected to expand by nearly six per cent this year, many emerging market and developing economies will continue to struggle with the coronavirus (COVID-19) pandemic and its aftermath.

In its June 2021 Global Economic Prospects, the Washington-based financial institution, said that the growth will be 5.6 per cent this year, making it the fastest post-recession pace in 80 years, largely on strong rebounds from a few major economies.

It said despite the recovery, global output will be about two per cent below pre-pandemic projections by the end of this year.

“Per capita income losses will not be unwound by 2022 for about two-thirds of emerging market and developing economies. Among low-income economies, where vaccination has lagged, the effects of the pandemic have reversed poverty reduction gains and aggravated insecurity and other long-standing challenges,” the bank said.

World Bank Group President, David Malpass, said while there are welcome signs of global recovery, the pandemic continues to inflict poverty and inequality on people in developing countries around the world.

“Globally coordinated efforts are essential to accelerate vaccine distribution and debt relief, particularly for low-income countries. As the health crisis eases, policymakers will need to address the pandemic’s lasting effects and take steps to spur green, resilient, and inclusive growth while safeguarding macroeconomic stability,” he added.

Among major economies, US growth is projected to reach 6.8 per cent this year, reflecting large-scale fiscal support and the easing of pandemic restrictions. Growth in other advanced economies is also firming, but to a lesser extent. Among emerging markets and developing economies, China is anticipated to rebound to 8.5 per cent this year, reflecting the release of pent-up demand, the World Bank noted.

It said emerging market and developing economies as a group are forecast to expand six per cent this year, supported by higher demand and elevated commodity prices.

However, the recovery in many countries is being held back by a resurgence of COVID-19 cases and lagging vaccination progress, as well as the withdrawal of policy support in some instances.

The World Bank is also predicting that per capita income in many emerging market and developing economies is also expected to remain below pre-pandemic levels, and losses are anticipated to worsen deprivations associated with health, education and living standards.

It said major drivers of growth had been expected to lose momentum even before the COVID-19 crisis, and the trend is likely to be amplified by the scarring effects of the pandemic.

Growth in low-income economies this year is anticipated to be the slowest in the past 20 years other than 2020, partly reflecting the very slow pace of vaccination. Low-income economies are forecast to expand by 2.9 per cent in 2021 before picking up to 4.7 per cent next year. The group’s output level in 2022 is projected to be 4.9 per cent lower than pre-pandemic projections.

An analytical section of the Global Economic Prospects report examines how lowering trade costs such as cumbersome logistics and border procedures could help bolster the recovery among emerging market and developing economies by facilitating trade.

It said despite a decline over the past 15 years, trade costs remain almost one-half higher in these countries than in advanced economies, in large part due to higher shipping and logistics costs. Efforts to streamline trade processes and clearance requirements, to enable better transport infrastructure and governance, encourage greater information sharing, and strengthen competition in domestic logistics, retail, and wholesale trade could yield considerable cost savings.

“Linkages through trade and global value chains have been a vital engine of economic advancement for developing economies and lifted many people out of poverty. However, at current trends, global trade growth is set to slow down over the next decade,” World Bank Group Vice President for Equitable Growth and Financial Institutions Indermit Gill said.

“As developing economies recover from the COVID-19 pandemic, cutting trade costs can create an environment conducive to re-engaging in global supply chains and reigniting trade growth.

Another section of the report provides an analysis of the rebound in global inflation that has accompanied recovering economic activity.

The 2020 global recession brought about the smallest inflation decline and the fastest subsequent inflation upturn of the last five global recessions. While global inflation is likely to continue to rise over the remainder of this year, inflation is expected to remain within target ranges in most inflation-targeting countries.

In emerging market and developing economies where inflation rises above target, a monetary policy response may not be warranted provided it is temporary and inflation expectations remain well-anchored.

“Higher global inflation may complicate the policy choices of emerging market and developing economies in coming months as some of these economies still rely on expansionary support measures to ensure a durable recovery,” World Bank Prospects Group Director Ayhan Kose said. “Unless risks from record-high debt are addressed, these economies remain vulnerable to financial market stress should investor risk sentiment deteriorate as a result of inflation pressures in advanced economies.”