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IMF's difficulties from epic virus challenge have only just begun
EMERGING markets and developing countries are in dire economic plight amid the Covid-19 crisis. Eyes are turning to the world's first responder, the International Monetary Fund (IMF), but the pandemic raises fundamental challenges for the Fund.
The IMF is the world's premier balance of payments lender and macroeconomic institution. Yet, it cannot lend freely; its resources are limited. Furthermore, its operations intersect with other international financial institutions, official lenders and the private sector.
If a country is hit by temporary liquidity stress and recovers immediately, IMF liquidity support can perhaps bridge gaps. But conditions are far more complex. A V-shaped recovery is unlikely. The novel coronavirus will entail longer-term shocks. Commodity prices may stay down; tourism proceeds, remittances and other earnings will suffer. Low growth and health spending will hurt fiscal positions. Unlimited liquidity support is improbable.
The IMF could face three types of coronavirus country cases. First, countries with very strong fundamentals and buffers; second, those with illiquidity and questionable sustainability; and third, those with unsustainable finances. Categorisation ex ante is not easy. The distinction between illiquidity and insolvency is often blurred.
Financing gaps can be covered by adjustment, new money and debt relief. Even countries with very strong fundamentals could benefit from additional IMF buffers. For them, the Fund focuses on crisis prevention lending. Chile and Peru just signed up for the IMF's flexible credit line (FCL), joining Mexico and Colombia. The Fund recently created a short-term liquidity line (SLL) to offer "swaps" - so far, there have been no takers. Probable candidates would be South-east Asian countries long wary of certain stigma.
Fund actions on the FCL and SLL are laudable. But with the March-April sudden stop abated, crisis prevention lending is an unlikely focal point.
Illiquid and questionably sustainable countries are receiving IMF liquidity support through the rapid financing instrument (RFI) or rapid credit facility, but these nations may need to gravitate to IMF programmes. Given the exogeneity and severity of the crisis, the Fund's programmes should shift their traditional balance of adjustment and financing toward more generous financing and extended maturities. Existing programmes should be augmented. Annual access limits should be increased, to accommodate RFI lending. Greater case-by-case consideration could be given to exceeding cumulative access limits, depending on debt and sustainability.
THE PROBLEM OF SUSTAINABILITY
For unsustainable countries, beyond immediate liquidity support, debt relief is essential. In the short term, given economic uncertainties, the G-20/IMF/International Bank for Reconstruction and Development debt standstill makes sense. But it is limited to poor countries. Emerging markets too could benefit. Furthermore, the private sector is baulking as are countries fretting that a six-month moratorium is not worth possible market access consequences. China is a major bilateral lender, but its actions are mired in opacity.
In the longer term, sustainability must be restored. The Fund's financing should not be used to take out the private sector, nor should countries suffer under debt overhangs. These countries should restructure their debt, alongside Fund programmes to restore sustainability and market access.
A wave of restructurings could be imminent. The Fund's case-by-case approach to debt relief is not well-placed to handle a wave. Tackling this conundrum must be a priority. As the IMF's former general counsel Sean Hagan and the Peterson Institute for International Economics' Anna Gelpern and Adnan Mazarei suggested, the Fund should think creatively about supporting debt restructuring. A few ideas so far range from IMF sweeteners for debt operations (as took place with the Brady plan) or national laws based on the United Nations charter shielding assets from creditors (as was done for Iraq in 2003). All of these suggestions will raise complex technical issues for designing IMF facilities and conditionality.
Finally, there are legitimate questions about IMF resource adequacy, given the enormity of the coronavirus. One debate is about a special drawing right (SDR) allocation, perhaps under US$650 billion so as not to require US Congressional approval. Whether for or against, there is recognition that an allocation would only provide modest support to emerging markets in easing budget constraints. With a proposed new allocation not making headway, some analysts are adopting a welcome focus on redistributing existing SDRs, mostly sitting on advanced economy and strong emerging market balance sheets. Implementation may prove challenging, given national laws and enhanced credit risks. Surprisingly, member countries have only made extremely limited use of their SDRs this year - around US$3 billion net.
Another question is whether a quota increase is needed. That would strengthen resources, improve their composition between quotas, emergency and bilateral resources, and allow needed adjustment of select voting shares. The IMF still has US$220 billion in loanable quota resources and more than US$500 billion in emergency and bilateral resources. But financing needs will rise with time. Quota negotiations are arduous, and should be launched sooner rather than later.
The impact of the coronavirus on the IMF has only begun. It will play out over years, requiring difficult judgements, balanced against a restrained budgetary envelope and other actors. It will be an epic challenge. OMFIF
- The writer is US chairman of the Official Monetary & Financial Institutions Forum