Global debt overhang worries World Bank

BENJAMIN UMUTEME, Abuja -‎The World Bank has warned that except 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 encourages business investment and discourage debt financing will help curb financial risk taking is the only solution out of a potential crisis.

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 normalisation 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 sector.

“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.