Rapid expansion of the Indian economy helped boost growth

Strong global conditions and domestic policy improvements helped developing countries record 6.6% growth, the Global Development Finance report said.

Global economic growth reached 3.8%, helped by US growth and the expanding economies of China, India and Russia.

Rising interest rates and a weaker dollar may hurt future growth.

Deficit fears

The report drew attention to the risks posed to developing countries by efforts to stem the US' $666bn current account deficit.

The rise in the US current account deficit has meant that many developing countries have run up larger current account surpluses and have increased their foreign currency reserves.

However, they may be vulnerable to higher-than-expected US interest rate rises or a greater-than-expected depreciation of the dollar.

"Pressures to address global imbalances are growing, exposing important risks facing both developed and developing countries as the needed adjustments occur," said the World Bank's chief economist Francois Bourguignon.

The key question is whether the pickup in flows witnessed over the last two years can survive under less favourable and stable global conditions Uri Dadush, World Bank

"Serious concerns remain about how the unwinding of global financial imbalances might affect the external financing conditions in which emerging economies operate," the bank said.

Growth to slow

Global economic growth reached 3.8% in 2004 but is expected to slow to 3.1% this year.

In developing countries, growth is forecast to slow to 5.7%, partly because of falling exports.

The bank expects global economic activity to stabilise in 2006 before picking up again the following year.

Increases in US interest rates, the appreciation of the euro and higher oil prices could potentially hurt developing market economies, it said.

Slowing growth could hurt developing countries' ability to service their debt, with external debt burdens having risen in more than half of emerging market economies, it added.

Investment up

For low-income countries, slower growth could also impact on aid and thus their ability to achieve the United Nation's Millennium Development Goals.

However, financial flows to developing countries last year reached levels not seen since the financial crises of the late 1990s.

Private investment increased by $51bn to $301.3bn, although the bulk was received by Brazil, China, Mexico and Russia.

"The key question is whether the pickup in flows witnessed over the last two years can survive under less favourable and stable global conditions," said Uri Dadush, director of the World Bank's Development Prospects Group.