The COVID-19 pandemic is taking a huge economic toll in low-income countries. The IMF has provided prompt support to help mitigate it, but it could and should do much more. The political commitment of the international community will be essential for the institution to fulfill its potential.
“A global crisis like no other needs a global response like no other.” This is how IMF Managing Director Kristalina Georgieva underscored the unprecedented ramifications of COVID-19 for the world economy.
The pandemic could trigger a once-in-a-lifetime economic crisis in low-income countries. It has already created sizeable financing needs and daunting external stability risks, notably through capital outflows, reductions of remittances, foreign exchange shortages, and losses of commodity export revenues. In Africa alone, recent estimates of COVID-19-induced financing needs have hovered around $114 billion, with over the third of this amount yet to be secured.
In support of crisis-hit low-income countries, the IMF and other institutions are expected to provide a response like no other. Eighteen leaders of African and European countries and institutions have jointly called for the IMF and other multilateral and regional institutions to “revisit access policies and quota limitations so that low-income countries can fully benefit from their support.”
Encouragingly, the IMF temporarily doubled access limits under its emergency concessional financing instrument and its nonconcessional equivalent, to which some low-income countries (LICs) have limited access. It also granted 25 vulnerable countries a six-month debt service relief amounting to $213.4 million. These initiatives will help beneficiary LICs rapidly access a few tens of billions of much-needed emergency financing in these times of turmoil, in addition to financial resources secured through augmentations of existing IMF arrangements.
But if the countries that benefit from these initiatives, (which together represent about 40 percent of IMF membership) are to fully benefit from the institution’s $1 trillion lending capacity, it is obvious that much more needs to be done as the crisis unfolds. As a way forward, here are several financing solutions and reform options that could be explored.
Allocate the IMF’s special drawing rights (SDRs): The IMF has been called on to explore additional tools that could help resolve the ongoing crisis, drawing on past crisis situations. It should make an unconditional SDR allocation a key element of this toolkit—as was the case during the global financial crisis, when such a move provided welcome global liquidity. But the size of SDR allocations must be larger this time around since the pandemic crisis is much worse. In addition, it is critical that LICs benefit from a larger share of potential SDR allocations this time than in 2009, when they received just a little more than $20 billion out of the $283 billion general and special SDR allocations. The IMF should also work actively with large shareholders to ensure that unneeded SDRs are transferred to the IMF for the purpose of augmenting its concessional lending capacity.
Facilitate debt relief negotiations. To respond to several developing country leaders’ call for debt relief, the IMF and the World Bank are uniquely placed to develop a coordinated approach, building on their experience in the context of the Heavily Indebted Poor Countries and Multilateral Debt Relief initiatives. In this process, ensuring participation and equitable treatment of all creditors and transparent debt restructuring discussions will be of essence. Furthermore, it is important to avoid stigmatizing debtor countries by developing an effective communication strategy and refraining from limiting the benefits of debt relief only to countries that request forbearance. Debt relief schemes on the table must also account for the need to sustain market access on more favorable terms. Here the IMF should give due consideration to calls for exploring the use of the SDR system to contain the costs of LICs’ borrowing from international debt markets.
Boost the IMF’s concessional lending capacity. This should secure additional resources to help meet emergency and near-term pandemic-related needs in LICs to the fullest extent possible. In its current form, the concessional near-term financing window is designed to be financially self-sustaining and can support annual average lending of about $1.7 billion. The IMF is currently aiming to secure additional funding commitments from donors to triple this lending capacity. Reaching this goal will be a welcome achievement. Still, the level of annual average borrowing this could support may look like a drop in the ocean of LICs’ financing needs in the time of the COVID-19 crisis.
Enhance LICs’ access to other IMF financial resources. As the crisis-mitigation phase ends, LICs will continue to need more financing to support economic recovery and upgrade health infrastructure. Therefore, enhancing their access to other types of available resources from the IMF and other multilateral institutions will be imperative. Although access to nonconcessional resources is relatively more expensive, such lending is still generally associated with more favorable terms than many other loans made available to LICs, including at market rates. For the IMF this will require revisiting policies on access to the nonconcessional window. While concessional lending needs to be constrained given the scarcity of subsidy resources, access to other types of IMF financing for COVID-19 response should be uncapped for LICs with sustainable debt positions.
Accelerate quota reform. IMF quota reform continues to be critically needed to expand the institution’s firepower. But it requires political buy-in from the membership. If that support is secured, a quota increase funded by an SDR allocation could be a quick way to enhance LICs’ access to IMF resources under current policies, where access is in part a function of quota. Quota limitations could also be overcome by ensuring that IMF financing reflects the needs of LICs more than their economic size. Without strong political commitment, a quota reform process could prove ineffective in providing COVID-19-related support because of its contentious and time-intensive nature.
The focus of this analysis is the IMF, but it would be misleading to assume that the burden of enhancing LICs’ access to financing falls on the institution alone or, for that matter, any other institution. To come up with bold and innovative financing solutions for LICs, all international financial institutions and multilateral development banks will need to play their part, individually by revisiting internal policies and procedures and collectively by working as a system in a collaborative and coordinated way.
Ultimately, the bulk of the effort will remain with the governments that are the shareholders of the international financial institutions and multilateral development banks. Hopefully, they will rise to the occasion, out of global solidarity and self-interest, to help LICs play their decisive role in the fight against the COVID-19 pandemic.
Otherwise, the “global response like no other” could be a global failure like no other.