The World Bank has warned that unless countries across the globe address issues relating to borrowing, the world could be heading for another financial crisis.
In its World Economic Outlook report for October 2017, it noted that discouraging further debt build-up through measures that encourage business investment and discourage debt financing will help curb financial risk taking is the only solution out of a potential crisis, news outlets reported.
In its ‘Africa’s Pulse’ report released earlier this month, the financial institution had warned on the growing debt overhang and how it was impacting negatively on development. Interestingly, there are fervent calls for the federal government to cut down on its borrowing which many economic watchers say is sustainable.
The report also noted the need for monetary and fiscal authorities to provide clear paths for policy changes as it will help anchor market expectations and ward off undue market dislocations or volatility.
According to the World Bank, central banks should ensure a smooth normalization of monetary policy through well-communicated plans on unwinding their holdings of securities and guidance on prospective changes to policy frameworks.
“Financial authorities should deploy macro-prudential measures, and consider extending the boundary of such tools, to curb rising leverage and contain growing risks to stability.
“For instance, borrower-based measures should be introduced and/or tightened to slow fast-growing overvalued segments, and bank stress tests must assume more stressed asset valuations. Capital requirements should be increased for banks that are more exposed to vulnerable borrowers to act as a cushion for already accumulated exposures and incentivize banks to grant new loans to less risky sectors.
“Regulation of the nonbank financial sector should be strengthened to limit risk migration and excessive capital market financing. Transition to risk-based supervision should be accelerated, and harmonized regulation of insurance companies—with emphasis on capital—should be introduced. Tighter micro-prudential requirements should be implemented in highly leveraged segments,” the report added.
Unlocking FDI
The report also said that reducing risks in the Caribbean and other developing countries is key to spurring investment and growth. The report says a stable business environment, effective regulations and political stability are among significant drivers of foreign direct investment into developing countries.
The survey of 750 executives of multinational corporations is part of the Global Investment Competitiveness Report 2017–2018, the first of a biennial series exploring the drivers of investment competitiveness in developing countries, the World Bank said.
The report was launched earlier this week at the World Bank’s Investment Competitiveness Forum in Vienna, Austria, that brought together corporate executives, donor partners, and academics and senior policymakers of developing countries that have implemented significant investment policy reforms.
The report finds that international investors prioritize political stability, security, macroeconomic conditions and conducive regulatory environment when deciding where to make investments that can spur growth and create jobs.
“A business-friendly legal and regulatory environment—along with political stability, security and macroeconomic conditions—are key factors for multinational companies making investment decisions in developing countries,” said Anabel Gonzalez, senior director of the World Bank Group’s Trade & Competitiveness Global Practice.
“Combining a survey of global investors with analysis of investment policy issues makes this report a powerful contribution to our understanding of how developing countries—including fragile states—can de-risk their economies and unlock FDI,” it adds.
The World Bank said the effort to increase FDI flows into developing countries reflects the importance of the private sector in meeting global development goals.
New Poverty Lines
Living on $1.90 a day might seem impossible in a developed country, but the World Bank estimates that 10.7% of the world's population, or about 760 million people, face this reality. These people live in what the World Bank calls "extreme poverty", Business Insider reported.
In an attempt to be more precise with its classifications, the organization recently added new standards of poverty for people living in middle- and high-income countries. They are the first additions since the poverty line was initially set in 1990, then at $1 a day.
The new standards are set at $3.20 a day for people in "lower-middle-income" countries, such as Egypt or India, and $5.50 a day for "upper-middle-income" countries, such as Jamaica or South Africa. The World Bank also released a third standard for high-income countries, like the US, at $21.70 a day.
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