The global economy will slow down in 2023 amid heightened financial turmoil, risking another "lost decade" for developing countries facing unprecedented levels of debt distress and interest rates hikes that will cost them $800 billion in foregone income, a UN agency has said.

Global economic growth will drop to 2.1 per cent this year, compared to an earlier projection of 2.2 per cent, from 3.1 per cent in 2022, assuming the financial fallout from higher interest rates is contained to the bank runs and bailouts of the first quarter, the UN Trade and Development Conference (Unctad) said in its latest Trade and Development Report Update on Wednesday.

Annual growth across large swathes of the world economy will fall below their pre-pandemic levels and well below the decade of strong expansion before the global financial crisis of 2008, it said. This will have a potentially devastating effect on developing countries, further deepen the cost-of-living crisis that their citizens are currently facing and magnify inequalities worldwide.

A decelerating economy with unaddressed long-term challenges "could set the world on to a recessionary track", Unctad said.

"The room for manoeuvre may be constrained given the heightened sovereign debt levels not seen since the global financial crisis, the expansion of central bank balance sheets and the growth of the large and unregulated shadow banking system. With the era of cheap credit coming to an end at a time of 'polycrisis' and growing geopolitical tensions, the risk of systemic calamities cannot be ruled out."

The dire warning comes as the Russia-Ukraine conflict continues, clouding major financial, investment and strategic decisions with geopolitical uncertainty and risks of economic insecurity.

The collapse of the crypto exchange FTX in November and a string of bank failures in Europe and the US in March, have also raised the possibility of financial contagion in an already slowing economy.

"How deep these financial stresses reach and how long they persist will determine whether advanced economies slip back into [a] recession in 2023," Unctad said.

For developing economies, the damage from unforeseen shocks, particularly where high debt levels are already a source of distress, will be "heavy and lasting", it said.

"Without the kind of financial safety net enjoyed by private actors in advanced economies, the year ahead will be a challenging one even for those developing countries not in immediate distress," the UN agency said.

"In this sense, inequalities, both within and across countries, that emerged with the lopsided recovery from the pandemic, are likely to increase."

The UN body found that 81 developing countries (excluding China) lost $241 billion in international reserves in 2022, an average decline of seven per cent, with more than 20 countries experiencing a drop of more than 10 per cent.

Meanwhile, borrowing costs, measured through sovereign bond yields, increased from 5.3 per cent to 8.5 per cent for 68 emerging markets.

Overall, external creditors' pressure on developing countries to reduce fiscal deficits is expected to increase, Unctad said.

Debt distress will lead to a development crisis and wider inequalities, with 39 countries paying more to their external public creditors than what they received in new loans, adversely affecting public investments and social protection, it added.

Even if financial conditions stabilise, the slowdown in economic growth in many developing countries combined with the end of the cheap financing era points to future rounds of debt distress, the UN body said.

Unctad called for a "bold agenda" to support developing countries that includes an overhaul of the global debt architecture, greater liquidity and more robust financial regulations.

It called for the establishment of a multilateral debt workout mechanism, a registry of validated data on debt transactions from both lenders and borrowers, and improved debt sustainability analyses that incorporate development and climate finance needs.

The growing dependence on debt will not only require "a return to responsible lending and borrowing, but a new institutional architecture to better manage debt distress and restructuring", Unctad said.