Debt Threatens The Economic Recovery of Poor Countries

When the world was hit by a global health crisis, the global debt reached $226 trillion, with Kenya’s public stock debt increasing by 16.82 percent between March 2020 and March 2021.

According to a New World Bank report, developing countries are facing increasing risks as a result of their financial fragility caused by the Covid-19 crisis and non-transparent debt. Rising interest rates and inflation are posing challenges to the recovery of developing countries’ economies, so they must focus on creating healthier financial sectors.

According to David Malpass, President of the World Bank Group, financial fragility may lead to an economic crisis characterized by higher interest rates and inflation, as well as tighter global financial conditions, and shallow domestic debt markets in many developing countries are crowding out private investments and impeding economic recovery.

“It is critical to work toward broad-based credit access and growth-oriented capital allocation,” Malpass said. This would allow smaller, more dynamic firms to invest and create jobs, as well as sectors with higher growth potential.”

Choosing optimal policies in situations where low-income economies are primarily involved is influenced by external factors such as limited fiscal space and weaker institutions. The likelihood of an inequitable and uneven recovery increases, as evidenced by disparities in the ability to recover losses in income, assets, human capital, and jobs.

Following a Geopoll survey, a World Bank report indicates that three out of every four small businesses have used solely their founders’ own funds to finance their businesses out of the Covid-19 bind.

As a result of the social-economic disruptions caused by the Covid-19, commercial lenders prefer to lend consciously or fund after being pushed to bear the burden of debt after borrowers fail to make loan repayments.

According to Geopoll’s latest Africa SME Pulse Report, MSMEs are having difficulty obtaining financing, with only 11% receiving bank loans. The banking sector’s net earnings fell significantly as a result of a higher loan provision rate.

As governments scrambled to provide adequate funding for the health sector in order to manage the pandemic and stabilize the economy, public debt reached new highs. The International Monetary Fund noted one of the largest one-year debts since World War II, with global debt rising to $226 trillion as the world entered a deep recession and health crisis.

“Debt was already elevated prior to the crisis,” according to the IMF, “but now governments must navigate world record-high public and private debt levels, rising inflation, and new virus mutations.”

According to the Institute of International Finance, “it’s also affordable in a world where rock-bottom interest rates have kept debt costs manageable.” However, if interest rates rise faster and higher than expected, the end of the Covid-19 crisis could signal the start of a reckoning.”

Kenya’s public debt increased by 16.82 percent between March 2020 and March 2021. Policymakers’ attention has been drawn to debt servicing, debt sustainability, and the composition of the public debt stock.