What about rate cuts? WB says emerging economies must grow 'much faster' for debt repayment
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The warning comes as the IMF is forcing countries like Pakistan to maintain monetary tightening
LONDON (Web Desk) – The World Bank warned that high borrowing costs have "changed dramatically" the need for developing nations to boost their sluggish economic growth, Reuters reported.
The multilateral lender's latest warning comes as international bond sales from emerging market governments hit an all-time record of $47 billion in January, led by less risky emerging economies such as Saudi Arabia, Mexico and Romania.
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However, some riskier issuers have started to tap markets at higher rates. Kenya recently paid more than 10 per cent on a new international bond – the threshold above which experts often consider borrowing unaffordable, Reuters added.
HOW CAN AN ECONOMY GROW WHEN INTEREST RATES ARE HIGH?
The statement by the World Bank officials is self-contradictory given the fact that the top financial institutions, especially the International Monetary Fund (IMF) current pressing hard for keeping the interest rates high, which makes it impossible for the businesses to expand and grow while discouraging the establishment of new ones.
It is the reason political leadership in multiple countries is at loggerhead with the central banks and has been calling for interest rate cuts.
Read more: Thailand interest rates conundrum: Economy shrinks, as PM wants cuts but central bank doesn't
Pakistan is an example where economy has been crippled by high interest rates after the higher cost of doing business made new investments in productive sector the least attractive option for a businessman.
By the accepting that the high borrowing cost has made increase in growth rate more imperative for emerging economies, the lenders like IMF must think about revising their strategy and should stop forcing Pakistan and other countries to keep the interest rates high.
GROW FASTER
"When it comes to borrowing, the story has changed dramatically. You need to grow much faster," Ayhan Kose, deputy chief economist of the World Bank, told Reuters in an interview in London on Tuesday, though he declined to comment on individual countries.
"If I had a mortgage with a 10pc interest rate, I would be worried," he added.
Kose added that faster growth, especially a real growth rate higher than the real cost of borrowing, could prove elusive.
Data published by the Institute of International Finance on Wednesday showed global debt levels had touched a new record of $313 trillion in 2023 while the debt-to-GDP ratio – a reading indicating a country's ability to pay back debts – across emerging economies also scaled fresh peaks, indicating more potential strains ahead.
The World Bank warned in its Global Economic Prospects report published in January that the global economy was set for the weakest half-decade performance in 30 years during 2020-2024, even if recession is avoided.
Global growth is expected to slow for a third consecutive year to 2.4pc, before ticking up to 2.7pc in 2025.
Those rates are still well below the 3.1pc average of the 2010s, the report showed.
Read more: Buckle up! Interest rates are here to stay for longer: IMF chief
The growth slowdown is particularly acute for emerging economies, around a third of which have seen no recovery since the COVID-19 pandemic and have per capita income below their 2019 levels. Kose said this throws many education, health and climate spending goals into question.
"I think that it's going to be difficult to meet those objectives, if not impossible, given the type of growth we have seen," Kose said.
An escalation of the Middle East conflict is a further downside risk, adding to concerns over tight monetary policy and weak global trade.
"Trade has been a critical driver of poverty reduction, and obviously for emerging market economies, a critical source of earnings," Kose said.
DEBT RESTRUCTURE
If growth remains low, some emerging economies might face having to restructure debt, Kose added, by reprofiling maturities or agreeing haircuts with creditors.
"Sooner or later you need to restructure the debt and you need to have a framework. That has not happened in the way the global community was hoping for."
G20 nations launched the Common Framework in 2020, when the pandemic upended nations' finances. The programme aimed to speed up and simplify the process of getting overstretched debt-distressed countries back on their feet.
But the process has been beset by delays, with Zambia locked in default for more than three years.
"If growth remains weak and financing conditions remain tight, you will not see an easy path out of this problem," Kose said.
"But if growth magically goes up, it's like a medicine."
