The IMF’s Covid crisis response

The International Monetary Fund’s (IMF’s) ability to mobilise emergency financing for the countries most in need during the Covd-19 crisis has been applauded, even by some of its toughest critics. The widespread economic shock of the pandemic has seen 102 countries approach the fund with critical financing needs for medical supplies, as well as to safeguard livelihoods.

“The fund was good at quickly getting liquidity out the door, which was clearly an appropriate response,” says Mark Sobel, US chairman of the Official Monetary and Financial Institutions Forum, and former US representative to the IMF.

Since the end of March, the IMF has:

• Approved more than $30bn for 75 countries, including over $10bn for 47 low-income countries;
• Doubled access to its emergency facilities — Rapid Credit Facility (concessional loans for low-income countries) and Rapid Financing Instrument (non-concessional) — which has facilitated $30bn in emergency financing to emerging markets and developing countries;
• Made $107bn in precautionary financing available via its Flexible Credit Line for countries with strong economic fundamentals; and
• Approved immediate debt relief to 29 poorest members under the Catastrophe Containment and Relief Trust (CCRT), providing $260m in grants.

“As someone who had tracked the IMF before coming here, I appreciate how hard it is to mobilise money for countries when the economic outlook is incredibly uncertain,” says Geoffrey Okamoto, first deputy managing director at the IMF, who joined in mid-March from the US Treasury. “To mobilise all of our country teams in the first weeks is very impressive, and then to move the financing requests through the board approval process in a way that keeps safeguards in place but also responds rapidly, was a huge, unprecedented challenge.”

Moreover, the IMF has launched new tools, such as the Short-term Liquidity Line (SLL). David Lipton, the previous first deputy managing director, had spearheaded this instrument a few years before but found limited interest from the membership at the time. “We made the case for the SLL in the context of this crisis and were able to put it into place within the first couple of months,” says Mr Okamoto. “We believe that the SLL fills a medium- to longer-term niche to relieve pressures that certain countries may face in terms of capital flows and being able to access an IMF revolving credit facility.” Countries will be able to draw repeatedly on the SLL without having to publicly apply to the fund.

In relation to financing more generally, the IMF is looking to the future. “We want to ensure that the fund is well placed to respond to an expected second phase of additional financing requests,” says Antoinette Sayeh, one of the IMF’s three deputy managing directors. She reports success in fundraising for its Poverty Reduction and Growth Trust, the concessional arm fund that lends to low-income countries. The fund is also raising resources to allow a continuation of CCRT grants beyond the initial six months, to April 2022, and recently decided to temporarily increase the annual access limits to financial support.

In addition to financing, capacity development work, such as technical assistance and training, is another important aspect of the IMF’s work. It has also made it possible for countries to learn from each other through a policy tracker that was put in place just as the crisis started.

Funding for Africa

Sub-Saharan Africa has been one of the hardest hit regions, given many countries’ constrained fiscal space and their debt levels coming into the crisis. In June, the IMF projected the region’s economy would shrink by 3.2% — double the contraction it outlined in April. To date, around 40 countries in sub-Saharan Africa have requested emergency financial assistance from the IMF, totalling close to $16bn; of this amount, the fund has already disbursed about $14.5bn to 30 countries.

“Given the limited ability for most sub-Saharan African countries to tap into domestic sources of financing, as well as their debt situation, it was critical for the fund to step up,” says Ms Sayeh. “We have much more work to do in the region to ensure it is supported through the initial stages of the crisis. We need to identify financing needs to help countries with the recovery as we move to the next phase; and we need to do so in a way that convinces potential donors to ramp up their support for the region.”

In addition to emergency lending, the IMF is providing relief on debt service payments under the CCRT, to help free up additional resources for the pandemic response, while alleviating debt sustainability concerns. Under the first wave approved in April 2020, 21 countries in sub-Saharan Africa have received relief amounting to $208m for debt payments falling due through October 2020.

“As important as support from the fund and international partners has been, countries in the region have a long road ahead of them,” says Mitsuhiro Furusawa, deputy managing director at the IMF, adding that the fund is “in this for the long haul”.

He continues: “Many countries will continue to have large financing needs. For some, that will mean seeking a second round of support and for others we’ll work toward resuming existing programme discussions. And for all our member countries, we’ll remain closely engaged in providing policy and technical advice to support their Covid-related policy responses, and broader macroeconomic policy frameworks, to navigate the crisis.”

Debt burden

However, despite the CCRT and the G20’s Debt Service Suspension Initiative (DSSI), under which the G20 agreed to suspend repayment of official bilateral credit from the poorest countries, debt sustainability remains a live issue. Even before the pandemic, a February IMF paper found that half of low-income countries were at high risk of debt distress or already in debt distress. “The pandemic has adversely affected both the solvency and liquidity indicators of most, if not all, low-income countries… [and] debt vulnerabilities have worsened in most countries,” says Mr Furusawa.

In July, the IMF reported that the global public debt has reached more than 100% of global gross domestic product — its highest level in recorded history. “The current debt framework is not sustainable, both globally as well as in many countries,” says Thomas Bernes, distinguished fellow at the Centre for International Governance Innovation. “Therefore, there needs to be a rethink and a new framework thrashed out and implemented.”

Luiz Fernando Vieira, coordinator of the Bretton Woods Project, an organisation critical of the IMF/World Bank’s model of development, agrees that debt sustainability is a grave issue and voices reservations around IMF’s “overly optimistic” debt sustainability assessments. “For some time, many organisations in our community, including the Jubilee Debt Campaign, have been highlighting that the debt profile of many countries, even prior to Covid, was quite worrying. We’ve been calling for a different approach, including more grant-based lending.”

He adds: “The Covid crisis has shown the need for debt consolidation and debt restructuring, something that developing countries have been asking for since the 1970s. And while the DSSI is welcomed as an immediate response, it is kicking the problem down the road. Instead, we call for debt cancellation.”

While some countries with unsustainable debt will need debt restructurings, Mr Sobel raises the issue of countries that are in a better position today, but may need support in the future. “The IMF can’t give out unconditional liquidity, hand over fist, repeatedly, because that puts the fund’s financing at risk. So those countries that are somewhat sustainable, or questionably sustainable, will need programmes. Therefore, the fund has to think long and hard about the appropriate mix of adjustment and financing in those cases,” he says.

According to Ms Sayeh, the IMF’s aim is to help countries withstand the crisis and get them back on the path of robust and more resilient growth, to help them deal with shocks in a way that makes it possible to have more sustainable debt. “We are aware that there may be a wave of restructurings in the future. The need for that is still to be seen, but we certainly don’t want to be surprised. And so, the fund is very busy in several work streams, looking at issues around sovereign debt restructuring,” she says, adding that this is likely to be a topic discussed during the annual meetings.

Edwin Truman, non-resident senior fellow at the Peterson Institute for International Economics, points to related measures that have not progressed, such as the augmentation of the proposal for debt service suspension to cover private sector lenders. “This means that if the situation arises where there is a need for large-scale rescheduling and debt reduction, it will take a while to get a consensus among all the players that it is feasible and desirable,” says Mr Truman. “And while we aren’t there yet, I think that the global economy is likely to be in bad enough shape over the next 18 months that it will force many countries into some form of debt rescheduling at least, if not more.”

Swelling the coffers

The IMF’s lending commitments currently stand at around $270bn, out of a lending capacity of $1tn. But will this be enough? Many, including the UN, predict that more than $2tn will be needed to come through the Covid-19 crisis. “As we move out of the current phase, which was to plug the leaks in the boat, we’re beginning to see that there’s going to be a lot more resources needed,” says Mr Bernes.

The proposal for an increase in special drawing rights (SDRs) was floated in April; however, to date, there is no consensus among the membership to move forward, with the US being the most powerful opponent. “One of the reasons for [a lack of consensus] is only about 3% of the newly issued SDRs would go to those countries that could make immediate use of them, with most ending up in the coffers of more developed countries which have no practical use for them in a crisis like this,” says Mr Okamoto.

So instead the IMF team quickly mobilised to figure out how to replicate the benefits of a general SDR allocation. “We are trying to make better use of the SDRs that are currently sitting idle in the coffers of more developed countries and mobilise them for the benefit of our poorest members,” explains Mr Okamoto. “This is a good way of addressing a similar challenge without needing to invite all the countries to bless this broader general SDR allocation, which today just hasn’t attained a sufficiently broad consensus.”

A proponent of an SDR expansion, Mr Truman says: “If things get substantially worse, then I think that the proposal will be put back on the table. And this US administration, if it continues, or the next administration will endorse it.” He emphasises that even the current US administration has not categorically ruled it out.

The current debate around SDRs links to ongoing governance and quota reform discussions, and the extent to which the IMF is able to operate as a truly multilateral institution with equal footing for all its members, says Mr Vieira. He believes that the crisis has highlighted the need for urgent governance reform.

During the IMF’s most recent quota reform, the slight change in voting weights mainly benefited China; so the G20 gained, but at the expense of the poorer, less developed nations, according to Mr Vieira. “So while there has been some progress in representation, unsurprisingly it has reflected geopolitical dynamics and I’m not convinced that it has benefited the countries that have the most pressing need to have their voices placed on a more equal footing with the global powerhouses,” he says.

The next planned quota review is in 2023, but the crisis may speed things up. “Many previous crises have been an impetus to either having ad hoc quota increases, or some level of redistributions of voting power, and, logically, the same thing could happen this time if there are pressure on IMF resources,” says Mr Truman.

Building resilience

The upcoming virtual annual meetings will most likely focus on the post-Covid recovery, as many economies reopen gradually. “We have entered a new phase of the crisis — one that will require further policy agility, action, and co-operation to secure a durable and shared recovery,” says Tao Zhang, IMF deputy managing director.

“The key will be for members to come out of this crisis with a smarter, fairer and greener economy,” Mr Zhang adds. “The fund is looking into how it can further adapt its policy advice, lending policies and capacity development to assist members in this transition.”

Mr Sobel believes that debt sustainability and the DSSI, which is expected to be extended into 2021, will be a main area of debate. “But it’s one thing to have debt stand still and another to have debt reduction,” he adds. In addition to gender, climate and inequality, he thinks that good governance and fighting corruption will also be discussed at the meetings.

However, politics may rudely interject. Mr Truman, for one, believes that the US election will dominate the meetings. “The world is going to tread water until November 3rd, and probably beyond,” he says.

The US’s retreat from multilateralism certainly calls into question a robust recovery. And Mr Bernes warns that, even if the election results in an administration change, US re-engagement with the world is not simply going to return to the way things were. “The nature of the debate has changed and the Covid crisis has shifted people’s mindset to the need for more self-sufficiency and repatriating supply chains. Yet the big global problems — climate change and public health — can only be resolved with collective, international action,” he says.