Developing countries need to tighten their monetary and fiscal policies and make exchange rates more flexible to avoid overheating and keep inflation in check, the World Bank said in its latest edition of the of Global Economic Prospects.

Developing countries need to focus on tackling country-specific challenges such as achieving balanced growth through structural reforms, coping with inflationary pressures, and dealing with high commodity prices, the bank said.

Developing countries have been resilient despite tensions in high-income countries, said World Bank director of Development Prospects Hans Timmer. Many developing economies are operating above capacity and at risk of overheating, most notably in Asia and Latin America.

Timmer noted that though monetary policy has responded, fiscal and exchange rate policy need to play a bigger role to keep inflation in check.

According to the report, growth in developing economies is likely to slow this year, as majority of them regain full-capacity activity levels. The rate of growth, nonetheless, will remain strong.

The lender upwardly revised its 2011 growth forecast for developing nations to 6.3 percent from the 6 percent predicted in January. This was, however, slower than the 7.3 percent growth in 2010.

China's economy is forecast to grow 9.3 percent in 2011 and at a slower pace of 8.7 percent next year. The Indian economy is projected to expand 8 percent this year and 8.4 percent in 2012.

High-income countries will see GDP growth slow from 2.7 percent in 2010 to 2.2 percent in 2011 before picking up to 2.7 percent and 2.6 percent in 2012 and 2013, respectively. This is a downward revision from the previous estimate of 2.4 percent for 2011 and 2.7 percent from 2012.

The world economic growth for 2011 is revised down to 3.2 percent from 3.3 percent expected in January. Meanwhile, the global GDP outlook for 2012 is maintained at 3.6 percent. World Bank's chief economist Justin Yifu Lin warned that further increases in already high oil and food prices could significantly curb economic growth and hurt the poor.

The report said that the recent events in Japan and the political turmoil in the Middle East and North Africa have affected domestic growth, but spillover effects to other economies are expected to be modest.

The GDP of Japan is expected to stagnate in 2011, the report said. Among developing Middle-East and North African countries, 2011 GDP growth will be the weakest in Egypt.

Meanwhile, the prospects for high-income countries and many of Europe's developing countries remain clouded by crisis-related problems such as high unemployment, household and banking-sector budget consolidation, and concerns over fiscal sustainability.

RTTNews