International capital inflows to developing economies would fall to $363-billion in 2009, down from the $707-billion in 2008 and a sharp decline from the $1,2-trillion in 2007, the World Bank reports in its ‘Global Development Finance 2009' report.

Developing countries would grow by only 1,2% this year, but would contract by 1,6% if developing giants, China and India, were excluded, the bank forecast.

This would lead to continued job losses and an increase in poverty in many regions.

"To prevent a second wave of instability, policies have to focus rapidly on financial sector reform and support for the poorest countries," World Bank prospects group director Hans Timmer said in a statement.

The bank explained that while global integration and the expanding role of private actors in international finance have brought huge benefits, it has also widened the scope for turmoil.

"Today, developing countries rely heavily on private flows and many countries are being hit by a collapse in corporate finance, with big companies and banks that were powering growth, now in distress," it said.

"Many corporations will be hard-pressed to service their foreign currency liabilities with revenues earned in depreciating domestic currencies, at the same time that export demand has plummeted," World Bank manager of International Finance Mansoor Dailami added.

The risk of balance-of-payments rises and corporate debt restructurings in many countries warrant special attention, the report cautioned.

A worldwide economic recovery would require the quick implementation of detailed reforms and an eventual shift away from governments having high stakes in the financial system to a resumption of private sector control of the banking system, the report stated.

Further, the World Bank noted that the big expansion of the money supply in advanced countries would need to be unwound and fiscal deficits would need to be cut in the medium term, to maintain debt sustainability and avoid another debt crisis as seen in the 1970s and 1980s.

REGIONAL GROWTH

Global gross domestic product (GDP) was expected to rebound to 2% in 2010 and to 3,2% in 2011, the bank forecast, adding that GDP growth in developing countries would be 4,4% in 2010 and 5,7% in 2011.

GDP growth in sub-Saharan Africa would "decelerate sharply" to 1% in 2009, compared with the average of 5,7% over the past three years.

"Sub-Saharan Africa has been hit hard by reduced external demand, plunging export prices, weaker remittances and tourism revenues, and sharply lower capital inflows, notably foreign direct investment," the bank stated.

Sharp cuts in remittances and official aid flows also represented a risk for the region, because many sub-Saharan countries relied on aid flows for budget support, it said, noting that remittances were also a vital cushion against poverty.

The region's growth would, however, improve to 3,7% by 2010.

The Middle East and North Africa region would likely see GDP growth of 3,1% in 2009, 3,8% in 2010 and 4,6% in 2011, as the slowdown has been "less pronounced" in this region.

South Asia, meanwhile, has seen "considerably diminished" capital inflows and a falloff in investment growth, noted the bank, adding that the region would see a 4,6% growth in GDP in 2009, which was down from the 6,1% in 2008.

The region's growth would improve to 7% in 2010 and to 7,8% in 2011.

Further, because of its close trade links with high-income countries, as well as declining investment and a drop in exports and industrial production, the East Asia and Pacific region has felt the "full brunt of the crisis".

While the region would see only a 5% growth in GDP this year, its economic recovery would start in the second half of the year. GDP growth would improve to 6,6% in 2010 and 7,8% in 2011, the bank projected.

Large current account deficits and domestic overheating made many countries in Europe and Central Asia vulnerable to the abrupt reversal of capital flows and the weaker export demand that the crisis generated, the World Bank highlighted.

The region's GDP would likely fall by 4,7% in 2009, but would recover to about 1,6% growth in 2010.

Meanwhile, while Latin America and the Caribbean had entered the crisis supported by stronger fiscal, currency, and financial fundamentals than in the past, it, too, had been affected by the global economic crisis, owing to falling commodity prices, but also owing to the fact that foreign funds were withdrawn quickly.

Regional GDP would contract by 2,3% this year, but would grow by 2% in 2010.