While the world is still grappling with the economic and social fallout from the Covid-19 pandemic, the upcoming G20 summit in Rome presents an important opportunity to lay the foundations for a more robust and resilient global financial system. To this end, we propose the creation of a new global liquidity insurance mechanism (GLIM) which would expand the financial safety net to encompass emerging market and developing economies (EMDEs).
During the pandemic, even solvent EMDEs faced severe liquidity crunches as tourism and export revenues dried up. They also encountered, to varying degrees, sudden stoppages in capital inflows, downward pressure on their exchange rates and widening interest rate spreads on their sovereign bonds. EMDEs have long been subject to such capital flow and exchange rate volatility, while their reliance on foreign currency funding remains a source of vulnerability.
