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Elevated debt, trade fragmentation among ‘substantial’ challenges to be tackled: World Bank

By Rhea Nath
5 minute read

The international organisation has highlighted a number of challenges warranting a closer look in global economies.

The World Bank has called for global policy efforts to tackle a number of “persistent and substantial” challenges facing economies, such as elevated debt, climate change, the digital transition, and trade fragmentation.

In its latest global economic prospects report published this month, it noted that policymakers faced down subdued global growth and still-elevated inflation this year; however, “forceful” responses are necessary to also support areas like the green and digital transitions, international trade, and food and energy security.

“Addressing many of these issues is likely to require increased investment in the provision of public goods in an environment of rising debt and high debt servicing costs,” the report stated.


“To meet development goals and bolster long-term growth prospects, reforms at the national level are needed to enhance the efficiency of public investment, boost human capital, and strengthen resilience and inclusion.”

Among these challenges, the World Bank observed that many emerging and developing economies (EMDEs) could be at risk of debt crises as they battle elevated debt against the backdrop of weak growth and significant borrowing costs.

“EMDEs with weak credit ratings – many of which are middle income – face interest rates more than 10 percentage points above the global benchmark rate, leaving them effectively locked out of commercial markets and highly vulnerable to debt crises.

“Decisive action by the international community is needed to address developing risks to avoid the economic costs of debt crises,” it said.

Debt restructuring so far, which has made little headway in solving the issue, will need to be upgraded, according to the report, and this could be complemented with domestic reforms to prevent escalating these vulnerabilities.

Additionally, while economies seek to increasingly decarbonise, the World Bank cautioned policies remain inadequate to meet global climate goals. Presently, current global commitments are estimated to reduce emissions by only about 10 per cent by the end of this decade, though reaching 2050 targets will require cutting emissions by between one-fourth and one-half by 2030 relative to 2019.

To address this, it suggested mobilising public resources, including through subsidy reforms and carbon pricing, and measures to attract private investment. Moreover, trade policies can be integrated more closely with climate initiatives to accelerate the transition, it said.

“Reducing restrictions on trade in green energy technologies is crucial for facilitating investment in energy transitions and the implementation of climate action plans, particularly in EMDEs with limited access to finance and technologies domestically,” it explained.

Looking further into trade, it flagged the proliferation of trade-restricting measures and global value chain disruption could lead to significant welfare losses.

“To reinvigorate trade growth and guard against trade fragmentation, it is key to restore the rules-based multilateral trade system, mitigate the adverse effects of geopolitical tensions on trade networks, foster a level playing field for international commerce, and reduce trade policy uncertainty,” it said.

“At the multilateral level, measures are needed to reinstate and reform the dispute settlement system, and enhance transparency, especially regarding distortions from industrial policy measures.”

It added countries could also resume efforts to expand trade agreements to bolster trade, noting an average of just five agreements have been signed each year in the 2020s so far.

Finally, considering the digital transition, the World Bank elaborated that facilitating digital adoption and diffusion will be crucial to narrow the existing global digital divide, which aggravates development challenges in economies and constrains their ability to embrace new technology like AI.

In 2023, around one-third of the global population, or 2.6 billion people, remained offline, with the majority in EMDEs.

“Governments can play a role by catalysing private investment in digital infrastructure. This can be achieved by rationalising restrictions on foreign participation and ownership in internet service providers, promoting infrastructure sharing, ensuring competition, and monitoring the quality of internet services,” it said.

Particularly while AI could foster greater productivity and automation, the report warned of risks posed to low-and-middle-income countries, especially if their workforces lack the skills to take advantage of new roles created by AI.

“This may lead to a deterioration in their terms of trade, and eventually widening productivity and income gaps with advanced economies,” it pointed out.