Developing countries, including Botswana, should take steps to plan for a global economic meltdown on a par with 2008-09 if the European sovereign debt crisis escalates, the World Bank has warned.
“The risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains,” the World bank said in its Global Economic Prospects 2012 report.
“Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic could not be ruled out. The world could be thrown into a recession as large as or even larger than that of 2008/09,” the report said, adding that, “Although such a crisis, should it occur, would be centered in high-income countries, developing countries would feel its effects deeply.”
In the midst of the continuing European fiscal crisis and weakening growth in several big emerging economies, the World Bank significantly lowered its economic forecasts. It noted the global economy has “entered a very difficult phase characterized by significant downside risks and fragility”.
The GEP 2012 projected global growth at 2.5 percent and 3.1 percent for 2012 and 2013, respectively, and lowered its growth forecast for developing countries in 2012 to 5.4 percent.
“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics.
For developing countries, the World Bank cut its 2012 growth forecast to 5.4 per cent, from its June forecast of 6.2 per cent. For high-income countries, 2012 growth is now seen at 1.4 per cent, compared to 2.7 per cent forecast in June.
“Even achieving these much weaker outturns is very uncertain. The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome,” it said.
The possibility that political tensions in the Middle East and North Africa could disrupt oil supply may also affect economic outlook. The report also noted that unresolved high deficits and debts in Japan and the U.S, and the slow trend growth in other high-income countries, may trigger sudden adverse shocks.
“A severe crisis in high-income countries could put pressure on the balance of payments and incomes of countries heavily reliant on commodity exports and remittance inflows. A severe crisis could cause remittances to developing countries to decline by 6.3 per cent a particular burden for the 24 countries where remittances represent 10 or more percent of GDP,” it said.
Moreover, the GEP 2012 noted that for Sub-Saharan Africa , the risk of a serious downturn in the global economy is very real and would carry with it serious implications, reducing global demand for the region‘s exports, yielding potentially sharp declines in commodity prices and, therefore, government revenues, and potentially large declines in remittance and tourism flows.