High interest rates to complicate investments, says World Bank chief Ajay Banga

New Delhi: World Bank president Ajay Banga on Wednesday said interest rates will stay higher for longer, likely complicating investments across the world.

Addressing a press conference at the World Bank's annual general meeting event at Marrakesh, Banga said ongoing wars are proving to be extremely challenging for central banks, apart from impacting trade flow and investments globally.

"I do think that interest rates will stay higher for longer, that can be complicated both for investment, as well as for people who, over the years, had got used to low interest-rate environments," Banga said.

"I believe that wars are extremely challenging for central banks who are trying to find their way out of a very difficult situation to a relatively soft landing," he added.

Elevated inflation has caused many central banks to keep monetary policy rates higher than anticipated. This stretches the capacity of borrowers to repay their debts and make bigger investments.

In September the US Federal Reserve chose to keep the policy rate in its current 5.25%-5.50% range while signalling another rate hike would likely be needed before the year's end.

From an Indian perspective, the Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.5% since April after raising it by 250 basis points (2.5%) since May 2022. A rise in interest rates hampers private investment as borrowing becomes more expensive.

Meanwhile, World Bank's chief economist Indermit Gill said countries like the US and India are bright spots in the slowing global economy. On 10 October the International Monetary Fund (IMF) raised its growth forecast for India to 6.3% for 2023-24 from its July forecast of 6.1% owing to “stronger-than-expected consumption” during the April-June quarter. The IMF also revised its 2023 growth projection for the US by 0.3 percentage points to 2.1%.

For comparison, the agency expects advanced economies to grow at 1.5% and 1.4% in 2023 and 2024, respectively.

Gill said the World Bank expects the impact of interest-rate tightening to be felt beyond the next couple of years, and countries with high bilateral/multilateral debt to face further challenges, including bankruptcy.

"The big problem is that growth is slowing down to a much lower level than we had seen during the crisis," Gill said. “Even countries that are not in debt trouble but have high levels of public debt (are seeing) those debts crowding out private investment.”

Banga, who took over as president of the World Bank in May, said he has outlined measures to make the agency bigger, better and more output-focused, which will give it an incremental lending capacity of $150 billion, 15-20% higher than current levels, over the next decade. About $40-50 billion of this will come from loan to equity contributions of donors, and $100 billion from portfolio guarantees, hybrid capital and other initiatives.

"A great deal of work has gone into capital adequacy of the bank. The bank was able to move its loan into equity ratio that generates $40 billion additional lending capacity in the coming decade," he said.

Banga said hybrid capital and portfolio guarantees, which could help donor countries pump in capital into the World Bank without altering shareholder base, could be leveraged six to eight times over a decade.

The World Bank under his leadership is focused on addressing the triple challenges of pandemic, climate change and food insecurity, he said.

According to the IMF, emerging-market economies will need a five-fold increase in climate mitigation investments to $2 trillion by 2030 to achieve net-zero emissions by 2050. “There is a desire to make the global south feel that their voice is being heard,” Banga added.