By JAMES ANYANZWA
The World Bank has painted a grim outlook for the global economy. As a result, it has advised developing countries to be prepared for the worst this year.
The Washington-based institution notes that in the current highly uncertain environment, developing countries should evaluate their vulnerabilities and prepare contingencies to deal with both the effects of a downturn.
The Bank observes that the world economy has entered a very difficult phase characterised by significant downside risks and fragility.
According to its latest report titled: Global Economic Prospect, the financial turmoil generated by the intensification of the fiscal crisis in Europe has spread to both developing and high-income countries, and is generating significant headwinds.
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"Capital flows to developing countries have declined by almost half as compared with last year," says report, adding: "Europe appears to have entered recession, and growth in several major developing countries has slowed partly in reaction to domestic policy tightening."
Consequently, the Bank projects the world economy to expand by 2.5 and 3.1 per cent in 2012 and 2013, respectively against an earlier forecast of 3.6 per cent for both years.
The anticipated economic contraction is attributed to the mounting Euro area debt problems, and the weakening growth in several big emerging economies.
"Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time," says Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice-President for Development Economics.
Growth for developing countries has been revised downwards to 5.4 per cent (2012) and six per cent (2013) from the earlier forecast of 6.2 and 6.3 per cent, respectively.
According to the report, developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09 and as a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate "sharply."
"Developing countries should pre-finance budget deficits, prioritise spending on social safety nets and infrastructure, and stress-test domestic banks," said Hans Timmer, Director of Development Prospects at the World Bank.
The report notes that while prospects in most low-and middle-income countries remain favorable, the ripple effects of the crisis in high-income countries are being felt worldwide.
Already, developing country sovereign spreads have increased 45 basis points on average and gross capital flows to developing countries plunged to $170 billion in the second half of 2011, compared with $309 billion received during the same period in 2010.
An escalation of the debt crisis in the Eurozone is expected to have strong negative effects on global trade.