The World Bank released a press report last Monday titled ‘Global Economic Turmoil and Its Dramatic Impact on Financial Inflows to Developing Countries’. The report highlighted a sharp decline in financial inflows to these countries in 2008, dropping to $707 billion from $1.2 trillion in 2007. It also projected that these inflows would continue to decline in 2009, reaching just $363 billion.
The report warned that the world had already entered a phase of slowed growth, necessitating stricter policies and deeper insights into financial systems. It forecast that developing economies would grow by only 1.2% this year, a sharp drop from 8.1% in 2007 and 5.9% in 2008. Excluding India and China, the growth rate across developing nations was expected to contract by 1.6%, leading to rising unemployment and pushing more people below the poverty line. Meanwhile, global economic growth was projected to shrink by 2.9% in 2009.
Justin Lin, vice president for economic development at the World Bank, stated: ‘Developing countries could become the key drivers of economic recovery, provided their local investments pick up and they receive international financial support’. Hans Timmer, director of the World Bank’s Development Prospects Group, added: ‘To prevent another wave of economic turmoil, policies must urgently focus on financial sector reforms and support for the poorest nations’. The report also acknowledged that global integration and private sector involvement in international finance had been beneficial, but had also widened the scale of economic disruptions. It noted that developing nations were heavily reliant on non-governmental financial inflows, many of which had been severely impacted as private banks and companies struggled to stay afloat.
The report painted a bleak picture of financial prospects across different regions. It identified East Asia and the Pacific as among the hardest-hit due to their strong trade ties with high-income nations. Falling investment, declining exports, and reduced industrial output were expected to limit growth in the region to just 5% this year. A recovery was predicted to begin in the second half of 2009 and early 2010, driven by Chinese financial stimulus measures and an expected rebound in exports to wealthier nations. However, this recovery was expected to be gradual, with regional GDP growth reaching 6.6% in 2010 and 7.8% by 2011.
In contrast, developing countries in Europe and Central Asia were the most affected by financial policies and post-crisis developments. Many of these nations had plunged into crisis due to multiple deficits, particularly in trade balances. The report highlighted that those heavily dependent on foreign financial inflows were struggling, exacerbated by declining demand for their exports. Regional GDP was expected to shrink by 4.7% in 2009 before rebounding with 1.6% growth in 2010.
Latin America and the Caribbean had entered the crisis with relatively strong financial systems and better macroeconomic fundamentals than in previous years. However, they too were suffering due to falling commodity prices and rapid capital flight. The report noted that flexible exchange rates had helped absorb some of the impact, despite volatility in stock markets. The region’s GDP was expected to decline by 2.3% in 2009 before returning to 2% growth in 2010.
In South Asia, financial inflows and investment growth had both declined significantly. The region’s GDP was projected to grow by 4.6% in 2009, down from 6.1% in 2008, before rising to 7% in 2010 and 7.8% in 2011. However, the report warned that long-term growth prospects remained uncertain, particularly if the crisis persisted and fiscal deficits widened further.
Sub-Saharan Africa, the poorest region globally, had been hit hard by declining external demand for its exports, falling remittances, reduced tourism revenues, and a sharp drop in foreign direct investment. Growth was expected to slow dramatically to just 1% in 2009, compared to an average of 5.7% over the previous three years. A modest recovery was anticipated in 2010, with growth reaching 3.7%. The decline in remittances and foreign aid posed a serious threat to many economies in the region, which relied on these funds to balance budgets and mitigate poverty.
Meanwhile, the Middle East and North Africa were among the least directly affected regions, though financial markets had suffered significantly. The report predicted a decline in remittances, service exports, and foreign direct investment from high-income nations in the region to lower-income countries, as well as from Europe, impacting development projects. Economic growth was expected to halve this year to 3.1% before rising to 3.8% in 2010 and 4.6% by 2011, partly because the crisis had not hit the region as severely as others.
In a separate development, Fayza Aboulnaga, Egypt’s minister of international cooperation, met with Emmanuel Mbi, the World Bank’s representative in Egypt and the Middle East, to discuss financial agreements. The bank approved a $300 million loan to finance affordable housing projects for low-income citizens. Egypt’s current cooperation portfolio with the World Bank includes 15 ongoing projects worth a total of $1.753 billion. These cover sectors such as energy, infrastructure, health, education, finance, agriculture, and irrigation. The portfolio consists of 12 loans from the International Bank for Reconstruction and Development, amounting to $1.584 billion, as well as three concessional loans from the International Development Association, totalling $179.4 million. Additionally, Egypt has received 10 grants worth $63.6 million.
This article is originally published by AlBorsa in Arabic and later AI-translated by South Push.