Many advanced economies are now racing to vaccinate a sizeable share of their populations against the COVID-19 pandemic. The progress in low- and middle-income countries, however, has been frustratingly slow because of a shortage of vaccines and the infrastructure for administering them. Unless these challenges are overcome quickly, not only will people living in less affluent countries suffer but so will those in rich nations. Epidemics anywhere pose a threat to people everywhere.
Low- and middle-income countries need more financing to fight against the pandemic itself and its economic effects. Yes, some direct help is being provided to low-income countries through COVAX, an initiative set up by the Coalition for Epidemic Preparedness Innovations (CEPI), the Global Vaccine Alliance (Gavi), and the World Health Organization (WHO) to get vaccines to countries in need. But this initiative is short of funds and will also need more resources to cope with future pandemics.
The Group of Twenty (G20), the International Monetary Fund (IMF), and multilateral development banks have taken additional steps to help, providing financing and temporary debt relief. There is also good news from the global financial markets: The sudden stop in capital flows to the developing countries that occurred in March and April of 2020 has been reversed, with considerable capital flowing to many of those countries in late 2020 and early 2021. The feared wave of sovereign defaults has not materialized—at least not yet.
The international community’s emergency financing and other actions taken so far, coupled with the reversal of capital outflows, have helped mitigate many countries’ liquidity problems. But because of the uncertain duration of the pandemic, liquidity problems are likely to continue and possibly worsen for some countries. A number of countries could face sovereign insolvency, requiring debt restructurings. Many developing countries still require greater support to acquire and distribute vaccines and to address the economic fallout of the pandemic. With new viral variants emerging around the globe, these needs could well expand, exacerbating their financial problems.
To guard against worst-case scenarios, the international community should not only take several steps to address immediate pressures but also prepare today for future pandemics. What is needed are new facilities and processes that could be invoked quickly, thus avoiding ad hoc responses and costly delays between the emergence of a crisis and the introduction of new remedies. Minimizing the human and economic costs of future pandemics is a critical collective good, and the international financial architecture needs to be much better prepared for it.
This essay presents four ideas for improving the global financial safety net to tackle immediate pressures from COVID-19 and prepare us to rapidly confront future pandemics.
1. Using the new issuance of special drawing rights by the IMF for pandemics
Special drawing rights (SDRs) are an international reserve asset created by the IMF, derived from a weighted average of various convertible currencies. The G20, with support from the United States, is now considering issuing a new amount of SDRs, expected to reach $500 billion. This would be a potent tool for immediately augmenting the international reserves of the 190 member countries of the IMF, with significant benefits for poorer countries (Collins and Truman 2020). This lifeline would help countries to improve their liquidity without raising their debt levels.
But the traditional approach to issuing SDRs to member countries in proportion to their shares (quotas) in the IMF has two problems. First, this arrangement implies that close to 60 percent of the new SDRs would be allocated to high-income countries, requiring a mechanism to enable them to transfer their new SDRs to an IMF trust fund for the benefit of lower-income countries. As a technical matter, a mechanism would not be too difficult to put in place, but some member countries would likely resist such a step. Second, left to themselves, individual countries are likely to spend less on vaccination and health than is socially optimal for the whole world.
A better alternative would be for high-income IMF shareholders to donate part of their new SDRs to COVAX to support its vaccine distribution efforts. Working through COVAX would be more effective in ensuring that resources are devoted to fighting the pandemic than a direct allocation of SDRs to low-income countries (or debt relief). Given the global nature of the pandemic, following such an approach would serve the interests of affluent as well as developing nations.
2. Fixing the mechanisms for debt relief
The efforts of many low- and middle-income countries to mitigate the impact of the pandemic are limited by their existing obligations to official and private creditors. Recognizing this problem, the G20 established the Debt Service Suspension Initiative (DSSI), which provides 73 eligible low-income countries with the option to request a temporary standstill on their sovereign debt service payments until June 2021. Thus far, 60 percent of the eligible countries have sought debt service relief under the initiative.
But the DSSI has several shortcomings: (1) It covers only low-income countries, leaving out middle-income ones; (2) it is temporary, while low-income countries’ financing needs to fight the pandemic will certainly go beyond June 2021; (3) it requires that there be no change in the net present value of countries’ debt, thereby providing only liquidity support to countries rather than relief on the existing stock of debt, which some countries may need; (4) it has no mechanism to ensure that private creditors, who had signed on to participate in the initiative on a voluntary basis, follow through; and (5) it does not clarify some aspects of participation by China—a major creditor to many developing countries—especially with regard to its private and hybrid (semiofficial) creditors. To date, the total postponed debt service under the DSSI is estimated at only $5 billion—leaving much room for further supportive measures.
Some of the shortcomings of the DSSI are now being addressed by the G20 Common Framework for Debt Treatments beyond the DSSI, announced in November 2020. This is a positive development. The Common Framework: (1) recognizes the possible need for restructuring of public and publicly guaranteed debt; (2) includes all G20 official bilateral creditors, even those that are not members of the Paris Club such as China; and (3) requires any participating debtor country to seek from all other non-G20 official bilateral and private creditors a treatment at least as favorable as the one agreed to with the creditors participating in the G20 restructuring agreement. The Paris Club, the group of officials from major creditor countries involved in debt resolution agreements, will serve as the secretariat for this G20 initiative. While the Common Framework does not explicitly prescribe how to address a country’s debt to multilateral development banks, it calls for options to meet the financing needs of the developing countries.
The Common Framework is a potential game changer, but implementation will not be easy. Much will depend on whether the IMF plays its usual central role in sovereign debt restructurings. And much depends on whether the debtors are willing to declare the entire amounts and terms of their debts, especially to Chinese creditors. In this regard, the IMF’s policies aimed at discouraging misreporting could help ensure all such information is provided by the borrowing country to the IMF. The proper transfer of information should enable the Fund to conduct its debt sustainability analysis and determine the amount a country is able to pay in debt service.
To ensure participation by non-G20 official bilateral and private creditors, including Chinese private and hybrid creditors, the framework relies on the Paris Club approach on comparability of treatment. Unlike the DSSI, participation by private creditors would be mandatory. The IMF’s lending into private and official arrears policies are needed to ensure that non–Paris Club and private/hybrid creditors participate in the debt restructuring (Hagan 2020).
The IMF’s lending into private arrears policy allows it to lend to a sovereign with arrears to external private creditors only if the member is making a good faith effort to reach a collaborative agreement with its private creditors. The IMF’s lending into official arears policy allows it to lend into unresolved official arrears that will be restructured in the context of an IMF-supported program when any of the following criteria are met: (1) The creditors consent; (2) there is a representative Paris Club agreed minute; or (3) if there is no representative Paris Club agreed minute, the debtor is negotiating in good faith with the creditor to resolve the arrears, and the IMF’s decision to provide financing despite the arrears would not have an undue negative effect on its ability to provide financing in the future (Buchheit, Chabert, DeLong, and Zettelmeyer 2019).
Thus far, Chad, Ethiopia, and Zambia have sought to restructure their debt under the Common Framework. These countries will provide important test cases for the participation of China and private sector creditors on terms that are comparable with those to be offered by the G20/Paris Club creditors.
3. Setting up pandemic financing facilities at international financial institutions
In addition to the DSSI, the IMF, the World Bank, and other international institutions have provided significant emergency financial support to low-income countries to combat the public health and economic consequences of the pandemic. But these efforts were not designed to address the fiscal and balance-of-payments needs of emerging-market economies, especially when significant policy changes may not be needed in the initial stages of potential IMF-supported programs. There have been proposals to remedy this shortcoming, and the IMF has considered setting up a temporary pandemic support facility. The IMF, however, eventually decided to work within the framework of its existing lending instruments.
Because of the uncertain path of the pandemic and the likelihood of other pandemics in the future, and the extent of policy adjustments needed in those circumstances, the IMF should reconsider such a facility for use in the future. In a world of pandemics with significant uncertainties about the extent of policy adjustments needed, a dedicated pandemic facility would be helpful.
4. Selling IMF gold
Various suggestions have been made to sell part of the IMF’s holdings of gold to finance the institution’s support for low-income countries (Andrews 2021). This may be a good idea, but getting agreement from IMF shareholders on gold sales and possible uses of the proceeds could easily take several years. In the event of agreement on such a sale, it would be helpful for some of the proceeds to be used for upgrading the infrastructure in developing countries for the purchase and delivery of vaccines, as well as for expanding their weak healthcare infrastructure for combating future pandemics.
The international financial architecture has often evolved in response to prevailing economic difficulties, and it needs to do so again. In the past, reforms to international institutions and policies have helped lower future risks and vulnerabilities. For example, changes made in the aftermath of the Asian financial crisis of 1997 and the global financial crisis of 2008, including improving financial regulations and oversight, have arguably helped lower global vulnerability to economic crises.
We are in a similar critical moment when changes in policies and institutions—such as SDR issuances, more effective sovereign debt restructuring frameworks, and a pandemic financing facility at the IMF—could not only help to remedy the current public health crisis but also make the world less vulnerable to the inevitable scourge of future pandemics. Beyond saving precious individual lives, such investments would yield a high return in reducing future pandemic-related economic losses in communities and countries across the globe.
1. COVAX has thus far raised $6.3 billion out of its target of $7 billion needed to vaccinate 20 percent of the populations of the funded countries by 2021. The World Health Organization’s broader Access to COVID-19 Tools (ACT) Accelerator program has secured $11 billion out of a targeted $38 billion.
2. For example, the World Bank has approved an envelope of $12 billion to finance developing countries’ acquisition and deployment of COVID-19 vaccines. That said, the Bank’s response to the COVID-19 crisis is lagging considerably behind its own target (Duggan, Morris, Sandefur, and Young 2021).
3. This point draws on a forthcoming PIIE Policy Brief with Martin Chorzempa, “Steps to Facilitate the Restructuring the Debt of Developing Countries to China.”
4. The amount of debt restructuring needed will be based on an IMF–World Bank debt sustainability analysis.
5. This would likely be done through a multilateral development bank maintaining its net exposure to countries by providing financing so that they could cover at least their debt service to that bank.
6. Private sector participation could also be enhanced through the use of debt service standstills and creditor committees by countries that seek financial support from the IMF (Gelpern, Hagan, and Mazarei 2020).
7. The facility that the IMF considered was similar to the one proposed by Fisher and Mazarei (2020). In light of the significant, unprecedented uncertainties about the course of the pandemic and the need for long-term economic adjustment, the facility proposed by Fisher and Mazarei prescribed limited use of policy adjustment and conditionality at least in the initial stages of programs under that facility.