Capital inflows to plunge - World Bank

Brian Benza
Staff Writer | Friday June 26, 2009 00:00

Quoting World Bank manager responsible for international finance, Mansoor Dailami, international capital inflows to developing countries will fall to $363 billion in 2009, down from the $707-billion in 2008 and a sharp decline from the $1,2 trillion in 2007.

'Many corporations will be hard-pressed to service their foreign currency liabilities with revenues earned in depreciating domestic currencies at the same time that export demand has plummeted,' Dailami, who is also chief author of the report, added.

The Global Development Finance report says developing countries will grow by only 1,2 percent this year but will contract by 1,6 percent if developing giants, China and India, are excluded, the bank forecast. This will lead to continued job losses and an increase in poverty in many regions.

'To prevent a second wave of instability, policies have to focus rapidly on financial sector reform and support for the poorest countries,' World Bank prospects group director, Hans Timmer, said in a statement.

The IMF earlier estimated that Botswana's economy is likely to shrink by 10 percent this year, the highest in the SADC region as diamond sales plunged by 50 percent in 2009 and 25 percent in 2010.While global integration and the expanding role of private actors in international finance have brought huge benefits, scope for turmoil has also widened, the bank said.  'Today, developing countries rely heavily on private flows and many countries are being hit by a collapse in corporate finance, with big companies and banks that were powering growth now in distress,' it said.

The risk of balance of payments rises and corporate debt restructurings in many countries warrant special attention, the report cautioned. A worldwide economic recovery will require quick implementation of detailed reforms and an eventual shift away from governments having high stakes in the financial system to a resumption of private sector control of the banking system, the report stated.

In addition, the World Bank noted that a big expansion of money supply in advanced countries will need to be unwound and fiscal deficits cut in the medium-term to maintain debt sustainability and avoid another debt crisis as seen in the 1970s and 1980s.

Global gross domestic product (GDP) is expected to rebound to 2 percent in 2010 and to 3,2 percent in 2011, the bank forecast, adding that GDP growth in developing countries will be 4,4 percent in 2010 and 5,7 percent in 2011.

GDP growth in sub-Saharan Africa will 'decelerate sharply' to 1 percent in 2009, compared with the average of 5,7 percent over the past three years. 'Sub-Saharan Africa has been hit hard by reduced external demand, plunging export prices, weaker remittances and tourism revenues, and sharply lower capital inflows, notably foreign direct investment,' the bank stated.

The report warned that the world is entering an era of slower growth that will require tighter and more effective oversight of the financial system.

'The need to restructure the banking system, combined with emerging limits to expansionary policies in high-income countries, will prevent a global rebound from gaining traction,' said Justin Lin, the World Bank's chief economist and senior vice president responsible for development economics.

'Developing countries can become a key driving force in the recovery, assuming their domestic investments rebound with international support, including a resumption in the flow of international credit,' he said.