ISLAMABAD, April 9: The World Bank has warned that the countries that have accumulated large dollar-denominated reserve holdings can face acute pressures and potential investment losses from the weakening dollar, though their dollar-denominated debt burdens may ease.

In an overview and policy messages released on the eve of launching of Global Development Finance, 2005, entitled ‘Mobilizing finance and managing vulnerability,’ the World Bank said the countries that had failed to take advantage of recent favourable conditions to lighten their debt burden might face debt-servicing difficulties as conditions worsen.

Referring to the presence of significant global financial imbalances, it said that there was a need for adjustment as, according to the Bank, history had shown time and again that financial crises often took markets and policymakers by surprise.

“The Asian crisis that erupted in mid-1997 offers a striking example — large exchange-rate exposures on balance sheets in the corporate, financial and public sectors were not widely recognized until after the fact,” it added.

Valuable lessons, the Bank says, can be learned from these episodes. One is that there is a tendency for financial markets and policymakers to miss the warning signs and overshoot, making the necessary adjustment larger when it does occur.

Overshooting has contributed to ‘boom-bust’ cycles in global financial markets, which have impeded economic development in many regions. In the current context, the memory of past mistakes raises the question of whether the strong pickup in capital flows to developing countries over the last two years can be sustained over the medium term.

Emerging market economies with access to global finance are particularly vulnerable to changes in interest and exchange rates that may occur as markets anticipate and adjust to policy measures intended to relieve the yawning imbalances. All countries, whatever their circumstances, stand to benefit from a better understanding of the complex challenges that are changing the borrowing environment (both external and domestic) and the options open to policymakers.

The risks are somewhat different for low-income countries that are more reliant on official and concessional sources of external finance. Official aid flows are vulnerable to growing fiscal pressures in donor countries, while private flows will come to reflect tightening global conditions.

The themes of this year’s edition of Global Development Finance — mobilizing finance and managing vulnerability — embraces three key challenges:

*Managing the vulnerability inherent in global economic and financial imbalances,

*Confronting the risks posed by the new complexities in a developing country debt, and

*Mobilizing and diversifying sources of finance for low-income countries with more limited access to international capital markets.