Part of a series of proposals for the G20's* agenda on the COVID-19 pandemic.
The World Bank and the International Monetary Fund (IMF) have performed impressively in confronting a global pandemic undreamed of when these two institutions were established at Bretton Woods 75 years ago. But the G20 leaders now have an obligation to harness them still further to deal with the health and economic fallout of the COVID-19 crisis.
The challenge is staggering. The IMF puts a conservative estimate on the financing needs of emerging-market countries at $2.5 trillion. This amount is in addition to an estimated $5.6 trillion of emerging-market economies’ syndicated loans and bonds coming due in 2020. Already more than 80 countries have sought assistance from the IMF, a significantly higher number than in previous crises.
Crisis management in emerging markets is more difficult than in advanced economies. Existing health infrastructure is usually deficient, resources for COVID-19 testing and treatment are scarce, the large share of the informal economy means a higher cost of the lockdown on households, and food production and distribution are more easily disrupted because of border closures. The support of the IMF and the World Bank is sorely needed.
There is also another difficulty in emerging markets. In advanced economies, fiscal expansion may not be an issue as near-zero interest rates imply that higher levels of debt are sustainable now and that the cost of higher debt for future generations is small. If anything, interest rates are likely to be lower in the future than they were expected to be before the COVID-19 crisis. This is not the case for most emerging markets, where debt sustainability concerns were present before the crisis. Several—Somalia, Sudan, and Zimbabwe—were already in arrears to the IMF and the World Bank and were denied further funding.
The two Bretton Woods institutions have demonstrated the right mindset and are providing liquidity at a brisk pace. The IMF has shown a “whatever it takes” resolve with an initial $50 billion allocation, and the World Bank has made available $14 billion in immediate support. The G20 should now
- encourage the two institutions to set priorities for financing liquidity constraints throughout all developing countries, ensuring that their resources do not get siphoned off to existing clients,
- help develop their institutional capacity to meet the flood of borrowing requests to avoid a systemic risk to the global financial system, and
- encourage an advisory program for countries facing genuine insolvency as opposed to liquidity constraints.
What the IMF and the World Bank Have Done
The IMF’s Rapid-disbursing Emergency Financing Facilities address COVID-19 directly. The IMF has used this instrument to extend liquidity assistance (an estimated $50 billion) to member countries without needing to have a full-fledged program in place for the Rapid Credit Facility ($10 billion) or Rapid Financing Instrument ($40 billion). Disbursements have begun, with the Kyrgyz Republic the first country to benefit.
The IMF can provide grants to countries with outstanding obligations to address disasters through the Catastrophe Containment and Relief Trust. This Trust was created in the aftermath of Haiti’s earthquake in 2010 and used to support Guinea, Liberia, and Sierra Leone during the 2014 Ebola outbreak. But with only $200 million ready for use, its funding is insufficient to address a pandemic such as COVID-19.
Total IMF resources currently available are estimated at $787 billion. In normal times, the IMF uses its quota-based resources to finance lending. A portion of those resources has already been committed, however, and some quota resources are not available because the financial conditions of several members are not strong enough to allow lending and for debt to be sustainable. If quota resources fall short, the IMF can activate the New Arrangements to Borrow, through which some member countries and institutions lend additional resources to the IMF, up to $226 billion. As a third line of defense, the IMF has access to bilateral borrowing agreements up to $424 billion.
To address sector-specific challenges, the World Bank Group has prepared a package to strengthen the COVID-19 response in developing countries. The International Bank for Reconstruction and Development and the International Development Association are making an initial $6 billion available for the health response. The World Bank has approved 25 projects worth $1.9 billion and redeployed $1.7 billion from existing projects. For example, in countries ranging from Afghanistan and Haiti to India, Mongolia, and Tajikistan, the financing is used to recruit more medical staff and ensure that they are equipped to deliver emergency care. In Romania, a redeployed loan from a Catastrophe Deferred Drawdown Option facility finances crisis-related equipment purchases.
The World Bank’s crisis response goes beyond health care. In Pakistan, the Bank finances remote learning for 50 million children whose schools had to close. As the crisis enters its third month, more operations focusing on education, social insurance, and support for the private sector are envisioned. On the latter, the International Finance Corporation, the World Bank’s private sector arm, is extending $8 billion in trade finance and working capital to its clients.
The Big Issues Are Operational
Two major issues require the G20’s attention. First, there needs to be a priority algorithm for extending IMF and World Bank liquidity to developing economies, so that resources do not get rapidly appropriated by existing clients or on a first-come-first-served basis. This tendency has been evident during previous crises, when redeployment of existing projects meant money was directed to larger countries with more fiscal space. Prioritization is critical to target the most-needy emerging-market economies.
Second, a system is needed for the IMF and the World Bank to process simultaneously multiple borrowing requests. One idea is to process countries with similar characteristics in groups, akin to a no-objection approval of projects, with a view toward expediency. This approach can be taken with emerging-market economies whose exposures do not represent a systemic risk to the global financial system.
Much More Has to Be Done
First, IMF and World Bank operations should emphasize immediate prevention efforts, in particular travel restrictions (for example, banning international travel) and strict quarantines of those recently returned from abroad. Knowledge is still limited, but policymakers in emerging-market economies may have some reasons for optimism: Low connectivity, especially in Africa, may slow the import and spread of the virus; warm weather may help (although this is highly speculative); and large young populations, which appear to be less susceptible to the novel coronavirus, may help to reduce the overall health consequences. Unfortunately, once the virus is introduced, lockdowns and social distancing seem nearly impossible in many developing countries.
Second, the Bretton Woods institutions can provide resources for people hit by the crisis. Households that lose their income directly or indirectly because of containment measures or other impacts need government assistance. Cash transfers are needed for the self-employed and those without jobs or in the informal sector. The latter category accounts for the majority of people in emerging-market economies—and limits the applicability of containment measures. More emphasis should be given to creating or strengthening social safety nets, especially in low-income countries. The increase in poverty in sub-Saharan Africa and other parts of the developing world implied by a global recession may ultimately take more lives than the virus itself.
Crises increase income inequality. This will be even more acute with COVID-19, as workers in both the formal and informal sectors stay under lockdown at home. Recovery from the crisis will require progressive income policies, through tax reform and expanded access to social security. The potential costs of wider inclusion are substantial, outweighed by even larger benefits. Achieving a more equal income distribution is one of the twin goals of the World Bank, which has a wealth of experience of which programs work.
Third, projects can be developed to prevent excessive economic disruption. Policies should safeguard workers and employers, producers and consumers, lenders and borrowers, so that business can resume in earnest when the COVID-19 emergency abates. Company closures would cause loss of organizational know-how and termination of productive long-term projects. Disruptions in the financial sector would amplify economic distress. Governments need to provide exceptional support to private firms, including wage subsidies. Large programs of loans and guarantees have already been put in place in most countries, with the risks borne largely by taxpayers.
As with the World Bank redeploying resources from existing projects, the IMF can frontload its programs and expand them to cover these new tasks. But frontloading will make it more difficult for the Fund to finance initially planned development projects to support growth. It also risks exhausting IMF resources by giving money to existing clients or first-come-first-served borrowers.
Some steps require coordinated action between the World Bank and IMF. Businesses that experience liquidity problems should be kept as going concerns. Yet a number of countries have insolvency laws that trigger foreclosure or receivership procedures after just weeks of illiquidity. Countries that do not have reorganization procedures in their bankruptcy law need to temporarily freeze the possibility of distressed businesses closing down. The World Bank and IMF have significant experience in advising governments on insolvency reform. The G20 can require additional efforts, akin to the financial sector assessment programs that originated during the East Asian financial crisis in the late 1990s, while supporting these with additional resources.
The virus crisis has exacerbated existing vulnerabilities in some industries, which will slow their recovery rates. As supply chains around the world are severely disrupted, trade in intermediate goods may take a different shape, which will depend largely on the trade restrictions that various countries have imposed during the crisis. Reconstituting global integration is of first-order importance. The World Bank and the IMF are flag bearers in this area.
Debt Sustainability Discussions Must Wait
For many countries, the IMF needs time to make a better-informed determination regarding the sustainability of their indebtedness. This determination will be informed by investigation into contingent liabilities (e.g., by state-owned entities or provinces), which are likely to materialize in a time of crisis and could represent substantial additional debt.
For others, the IMF has already made a judgment that, irrespective of the depth and duration of the crisis, their debt is unsustainable. For these countries, there is an opportunity to engage in discussions of meaningful restructuring to restore sustainability. Rules and thresholds on sustainability are likely to require revision (or at a minimum, temporary relaxation for some). This exercise requires coordination among diverse private creditors as well as between official and private, bilateral and multilateral institutions, to give borrowing governments adequate relief in the aggregate. These creditors have different priorities and constraints.
Should official creditors agree to a moratorium of debt payments during the crisis months, the next step involves restructuring of payments to private creditors. Over $5.6 trillion of debt from emerging markets comes due in 2020—i.e., within a period when economies will not have fully recovered. As finance ministers are already overwhelmed with other urgent matters linked to the crisis, a disorderly handling of debt restructuring is likely to result into a lose-lose situation for both borrowers and investors. Borrowers may be pushed into default, which will—even if capital markets have short memories—affect their future access to funding. Lenders may be tempted by litigation.
These outcomes are of particular concern as private bondholder identification (knowing who actually retains a country’s debt) is not precise: Some, if not most, countries would not know today with whom to negotiate. Disorderly handling of debt negotiations is likely to increase inequalities between countries, as developing countries—hampered by lack of information and resources—may be slower to prepare for such negotiations.
An orderly dealing of private debt discussions, in a similar spirit to what has been proposed by the public sector, should be favored. This process takes time, which is why debt sustainability discussions must wait for the health crisis to be over.
The Bretton Woods institutions have withstood the initial pressure of assisting emerging-market economies in dealing with the health and economic fallout of the COVID-19 crisis. Huge challenges remain. To effectively use the IMF and the World Bank to deal with these challenges the G20 should
- require a priority algorithm for financing liquidity constraints in developing countries, so that IMF/World Bank resources are not rapidly appropriated by existing clients or on a first-come-first-served basis,
- assist the IMF and World Bank in developing instruments to process simultaneously multiple borrowing requests from emerging-market economies whose exposures do not represent a systemic risk to the global financial system, and
- lend its support for a World Bank/IMF advisory program on insolvency reform, akin to the financial sector assessment programs that the two institutions run jointly.
Important questions remain. Expanded World Bank and IMF resources will be stretched thin in the first months of the crisis. How will they be replenished? And what will happen if the virus returns before either an effective vaccine or cure is found? We have just weeks to answer these questions.
* The members of the G20 are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, Japan, India, Indonesia, Italy, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.