After some initial hiccups, G20 finally put together a joint Action Plan to combat the Covid-19 pandemic in a virtual meeting of its Finance Ministers and Central Bankers on 15 April 2020. IMF, which tends to take its cues from G20, concluded the Spring Meeting of its International Financial and Monetary Committee (IMFC) on 17 April, which involved finance ministers and central bankers of 24 countries. Unfortunately, both meetings had little to offer in terms of dramatic new announcements. The IMFC communique was a slim document of only 600 words.
The lack of international consensus, which has plagued global response to the pandemic so far, seemed to have infected IMFC as well. The committee was unable to adequately demonstrate that it was ready to do “whatever it takes” to stave off a global economic disaster. If the goal was to restore world’s confidence in the Global Financial Safety Net, the meeting fell short of it. In fact, it wasn’t even clear if the meeting participants themselves believed in credibility of such a safety net. During the meeting, Indian finance minister, Nirmala Sitharaman spoke of the “absence” of a global safety net which forces countries to rely on national reserves in the times of crisis.
Yet, there is little doubt that such a net – with the IMF at the center of it – will be critical to recover from the looming Great Lockdown Recession. According to the latest World Economic Outlook, the global economy is likely to shrink by 3% in 2020. There is a near-universal consensus that this crisis requires governments to spend unprecedented amounts of money – to provide health relief and prop up their national economies. The pandemic will likely stretch the resources of numerous countries to their breaking points. According to Kristalina Georgieva, IMF’s Managing Director, emerging markets alone will require US$ 2.5 trillion of financing, even by conservative estimates. By the time of the IMFC meeting, an unprecedented 102 countries had applied for IMF assistance.
The fund has moved quickly in response, employing new tools and techniques:
- It has doubled the limits of Rapid Financing Instrument and Rapid Credit Facility to give all countries access to bigger loans.
- It has introduced Short-term Liquidity Line to provide immediate liquidity backstop to countries with strong economies
- It has promised quick approval of lending requests
- It has activated its specialized fund called Catastrophe Containment Relief Trust to give debt relief to poorest countries. Since the onset of the pandemic, many countries have donated to this trust.
- Along with the World Bank, it is organizing a global debt service suspension for developing countries
However, it is clear that in coming weeks and months, the fund will have to do much more. More importantly, the international community will have to cooperate more closely to give direction and resources to the IMF for it to be an effective tool. Going forward, the international community and the fund need to address five challenges on an urgent basis – expanding and strengthening IMF’s resource envelope, a substantial SDR allocation, endorsing capital control measures, discuss governance reforms and organize debt-relief for poor nations.
IMF’s Resource Envelope
A crisis of this scale requires scaling up IMF’s resources. After the 2008 Financial Crisis, G20 had moved quickly to triple IMF’s lending resources to US$ 750 billion and support a general allocation of US$ 250 Special Drawing Rights (SDR). Today, the fund has a total US$ 1 trillion in lending capacity, of which less than US$ 800 billion is actually available. This stands against a potential global financial gap estimated to be at least US$ 2.5 trillion, likely more. In the run up to the April 2020 IMFC meeting, the IMF had called for doubling of its lending resources. However, during the meeting, while few countries raised the issue of maintaining an adequate resource envelope for the fund and no specific measures were suggested. So far, most countries appear to have taken a wait and watch attitude. Should IMF resources prove insufficient during the crisis, it will likely create a dangerous situation for the global economy.
Aside from the question of keeping the fund adequately resourced, it is also important to pay attention to how it is resourced. It is often said that a government has only three ways to raise money – tax, borrow or print. In a way, IMF has three similar options. One, it relies on the quota-based subscriptions from all its members. Two, it has standing borrowing arrangements with about forty countries called New Arrangements to Borrow (NAB) and Bilateral Borrowing Agreements (BBA). Finally, IMF can essentially print money by issuing its members new SDRs (more on this below). While ideally the fund should primarily rely on quota-based subscriptions rather than temporary borrowing arrangements, currently half of its lending capacity is dependent on NABs and BBAs.
During the 2008 crisis, while G20 green lit IMF’s borrowing for the short-term, it also recognized that this was not sustainable. In the same meeting, G20 also agreed to accelerate the revision of subscriptions by more than two years. In December 2010, 14th General Review of Quotas concluded, doubling quota-based subscriptions and thus permanently adding to the fund’s firepower. The current situation calls for not only increasing IMF’s resources but also committing to an early and substantial revision of subscriptions so that the fund doesn’t have to rely excessively on temporary borrowing arrangements.
One issue to see open disagreement in the April 2020 IMFC meeting was the question of SDR allocation. When IMF issues SDR to its members, it gives them “a potential claim on the freely usable currencies of IMF members”. A country can exchange its SDR for a basket of other currencies (Dollar, Pound, Yen, Yuan and Euro) with another country at a certain interest rate. In other words, SDRs are like cheap and unconditional credit lines for countries running low on foreign exchange reserves. SDR allocation is seen as a low-cost method to pump liquidity into the global economy in times of crisis. 2008 crisis witnessed a general allocation of SDRs worth US$ 250 billion.
During the current pandemic, calls for a substantial SDR allocation have been growing. In March, a group of Brookings scholars suggested allocating US$500 billion of SDRs. In April, Larry Summers, former US Treasury Secretary and Gordon Brown, former British Prime Minister, put the figure at US$ 1 trillion. During the IMFC meeting, a majority of Asian, European and African countries supported a substantial SDR allocation.
The proposals failed because of two holdouts – the US and India. Using its veto power, the US dismissed the idea saying that over 70% of the allocation will be given to the G20 countries which don’t need it. It is also likely that Washington’s position was also informed by its domestic politics. India rejected the proposal citing the “extraneous demands” it would put on its national reserve. Essentially, Indian position questioned the fundamental premise of a global financial safety net – that richer countries should spend their resources to help poorer nations and sustain global financial system. It is likely that armed with a relatively strong reserve position and access to US Fed swap line, India does not feel that it needs SDRs and is hence reluctant to support it.
Indian outlook is short-sighted. Maintaining global economic stability is in the interest of all countries. Moreover, since there is a healthy internal market for SDRs and the fund has never had to force anyone to buy or sell them, a new allocation is unlikely to put “extraneous demands” on India if it chooses not to participate in the market. The US criticism does have some truth to it. Since the allocation is according to quotas, rich countries end up with a lion’s share of it even though they don’t need SDRs.
However, the solution is not to reject SDR allocation altogether but reform the system. In the short-term, the IMF can encourage voluntary donation of SDRs from rich countries to the developing world, as proposed by George Soros in 2002. Or it may create a process of “designated” reallocation, taking unused SDRs from advanced economies and giving them to developing countries, as proposed by UNCTAD Secretary-General, Mukhisa Kituyi in the IMFC meeting. Even without such reforms, SDR allocation is necessary as a key tool in combating the financial fallout from Covid-19.
The IMF needs to endorse capital control measures as necessary and legitimate policy tools. As the world’s primary lender and financial policy adviser, the fund enjoys enormous norm-setting power by signaling what should or should not be considered a good economic policy. Since the onset of the crisis, Emerging Markets (EMs) have suffered unprecedented levels of capital outflows as panicked investors are pulling their money from riskier bets and putting it in safe refuges like the US. Institute of International Finance estimates that the overall 2020 non-resident capital flow to EMs will be less than half of what it was in 2019.
In these exceptional circumstances, EMs need to impose controls to restrict capital flight. However, given the stigma on these measures, any unilateral move to implement them risks scaring off investors. The fund can play an important role in overcoming this problem by legitimizing such measures and coordinating their implementation between countries.
It is important to note that the fund has already used norm-setting power in the current crisis, albeit to legitimize policies of Western countries. In March, faced with public health emergencies, many countries began employing highly interventionist policies. France seized medical masks and the US activated its Defense Production Act, forcing private companies to produce medical equipment. The fund was quick to endorse these moves, saying that the pandemic needed policies like “prioritization of public contracts for critical inputs and final goods, conversion of industries, or selective nationalizations.” The fund needs to condone capital control measures with similar alacrity.
IMF Governance Reform
The current crisis is an important moment to raise the issue of IMF governance reform, especially redistribution of its quotas. This has long been a source of contention within the international community. Majority of quotas, which translate to voting power in the fund, are held by Western countries. This doesn’t reflect the economic reality of the twenty-first century. Moreover, over half the quotas are concentrated among only eight countries. The US enjoys 17.46% of the quota, giving it veto power since IMF decisions require more than 85% of votes.
A crisis like this demonstrates why decision-making power for such a crucial institution cannot be left in the hands of so few countries, especially when they do not represent global diversity. While quota revisions are usually long-drawn processes, in moments of crisis they can be accelerated. In 2009, G20 called for bringing forward the 14th General Review of Quotas by more than two years and publicly committed to transferring 5% of the quota from European countries to Asian nations. The review, which was concluded nearly a decade ago, was the last significant revision of quotas. Since then, there hasn’t been any further movement on this issue, largely due to American intransigence.
In the April 2020 IMFC meeting, while Algeria, Brazil, Russia and UAE suggested concluding the next revision of quotas quickly, no firm decision was made. The 16th General Review of Quotas is still scheduled for December 2023, more than three years away. There is an urgent need to bring this review forward. It will not only allow a discussion on substantial governance reforms but also allow for increasing quota subscriptions, thus expanding and strengthening the fund’s resource envelope.
In late March, the IMF and World Bank jointly called for immediate suspension of debt service payments for the poorest countries. G20 endorsed the call quickly thereafter. Paris Club, a group of world’s leading creditor nations, issued a new term sheet on 15 April, suspending debt service obligations for the poorest countries until the end of 2020. The club is also trying to bring private creditors into this initiative.
As Achim Steiner, Administrator of UNDP noted in the IMFC meeting, this initiative should be seen as the first step in a much longer process to provide debt relief to the world’s vulnerable economies. Even before the pandemic, the world was witnessing a historically unprecedented debt wave. In 2019, global debt-to-GDP ratio was 322%, highest on record. By 2018, total debt in Emerging Markets and Developing Economies had reach a record-high 170% of GDP. About half of this debt is from external sources (excluding China). To add to this, the developing world is likely to face disproportionate economic consequences of Covid-19 due to mounting healthcare spending and lockdown costs, along with fall in demand for commodity exports and collapse of tourism.
Accordingly, the IMF needs to push for expansion of debt suspension for more than just the poorest countries of the world. Those middle-income countries that request it should be offered it as well. The fund should also assist in bringing onboard more private creditors to ensure comprehensive moratoriums. Finally, it should advocate more systematic and long-ranging debt relief efforts which go beyond the current suspension.