The IMF will need more resources to fight the COVID-19 pandemic

The coronavirus pandemic is threatening to deliver its most lethal blows to the emerging market and developing economies, which are getting hit by large foreign financial outflows as well as health crises. Kristalina Georgieva, managing director of the International Monetary Fund (IMF), has pledged to mobilize its $1 trillion lending capacity to assist members if necessary. But in truth, the Fund’s capacity for new lending at maximum is $787 billion (table 1). The United States and other members will have to augment IMF resources for it to play a central role in this crisis. Curiously, the G-20 leaders’ summit statement on COVID-19 issued on March 26 failed to recognize this issue.

Only half of total IMF resources are available for lending—and continued availability not certain

Total IMF resources are $1.3 trillion, unchanged from the end of 2012. However, only half is available for lending. A portion has already been committed, and some members’ weak financial conditions do not allow them to lend hard currencies to the IMF. The Fund also sets aside prudential balances against the use of both quota and borrowed resources because the lenders acquire a claim on the Fund that may have to be honored. However, the $787 billion is the current maximum lending capacity because if a member whose quota is expected to be available for lending to another member instead borrows from the Fund, this not only increases the Fund's lending commitments but also reduces the amount of funds available to lend to other members.

Uncertainty also surrounds the continued availability to the IMF of the borrowed resources. Members must renew their reduced bilateral lending arrangements and  double their commitments to the New Arrangements to Borrow (NAB) by the end of the year. Because the US share of the NAB is 15.5 percent and the effectiveness of its renewal is conditional on agreement by participants accounting for at least 85 percent of the total, the United States had to reauthorize and double its participation in the NAB to maintain IMF resources at their current level. The US administration pledged to do so, and the Congress approved the request in the legislation passed on March 27 to their collective credit. Other countries should promptly follow suit.

Options to augment IMF resources

The IMF can ask members to increase their bilateral lending arrangements

Nevertheless, IMF resources are likely to be insufficient. To boost its resources, the Fund could request members to increase their bilateral lending arrangements, which otherwise will decline by $185.9 billion at the end of the year. The largest arrangements are those with Japan, China, Germany, and France, in that order, about 40 percent of the current total. Japan and China have substantial foreign exchange reserves followed by Switzerland. Any of these countries might not only restore their commitments but increase them.

Central banks can expand their swap arrangements

The global stock of non-gold reserves is fixed at $11.6 trillion. Beyond drawing on them, central banks are where the money is. The major central banks can and should cooperate with the IMF to take some of the pressure off its resources by expanding their swap arrangements.

On March 19 the Federal Reserve reactivated the temporary liquidity swap lines established with nine other central banks during the last global financial crisis and increased the maximum amounts that can be drawn by the central banks of Brazil, Korea, Mexico, and Singapore from their previous caps of $30 billion to $60 billion. These lines differ from the permanent reciprocal swap lines the Federal Reserve has with five other major central banks. As of March 25, foreign central banks had drawn $206 billion on these lines. The Federal Reserve should broaden its swap network further to include other major emerging-market countries. Other major central banks that have or had swap lines should do likewise.

Eligibility for countries to draw on this expanded multilateral network of swap arrangements usefully could be subject to three conditions:

1. Access would be triggered by the IMF declaring that it anticipates an excessive drain on its financial resources. No central bank would be required to respond or wait for this signal, but this action would provide cover for the central banks providing the temporary credit.
2. The minimum hurdle for receiving such credit might be a judgment by the IMF about the sustainability of a country’s debt as of December 31, 2019—in other words, before the COVID-19 outbreak. Central banks would be free to impose their own judgments.
3. If a country were unable to repay its swap drawings within nine months, it would have committed in advance to apply for an IMF program in order to do so. [1]

Under this cooperative approach the IMF’s limited financial resources would not need to be tied up on short-term credit commitments. They would be preserved for longer-term lending programs.

Countries can mobilize their holdings of foreign government securities

As an alternative to drawing on central bank swap lines, countries can mobilize their holdings of foreign government securities via repurchase agreement (repo) operations in the market or with the central bank of the issuing country. The advantage is that this method to raise liquidity can be executed quickly. The disadvantage is that any repos with the private market of securities not held at the foreign central bank do not add liquidity to the market. (If they were held at the foreign central bank and conducted with that central bank, bank reserves would increase.) If they are conducted on a large scale, they could have the potential to disrupt the securities market. But they also would not augment the countries’ foreign exchange holdings.

The $11.6 trillion in total foreign exchange holdings is excessive for the world as a whole, but their distribution is skewed toward large holders. Some of these countries have committed to lend a portion of their reserves to the IMF in connection with IMF borrowing arrangements and those amounts could be increased.[2]

The IMF should stand ready to issue $500 billion in SDR

If other countries, however, experience rundowns in their reserves in order to meet maturing debt obligations or to defend their currencies against excessive depreciation, a large one-time allocation of perhaps $500 billion in Special Drawing Rights (SDR) would be appropriate.

SDR are both assets and liabilities of the IMF and are allocated to members in proportion to their share of IMF quotas. A member can transfer SDRs to another member and receive credit in a convertible currency. The current interest rate on this credit is a minuscule 0.050 percent. The emerging market and developing economies as a group would receive 42 percent of a $500 billion SDR allocation. Low income countries eligible to borrow from the World Bank’s International Development Association (IDA) would receive $21.2 billion. This figure compares favorably with average IDA commitments over the past three years of $21.8 billion and disbursements of $14.9 billion. Members can also lend their SDRs to the IMF or to other members.

Stretching and supplementing IMF financial resources to help the emerging market and developing economies weather the COVID-19 pandemic is not the only challenge ahead. Flexible mechanisms to deliver financial assistance must be available to member countries in need, especially those with unsustainable external debt, private and official. These countries should not pile up more debt, and a standstill should be seriously considered. These other problems will also require a constructive, concerted approach.

Notes

1. Normally, countries drawing on swap arrangements repay within 12 months. Drawings to provide short-term credit for 90 days are subject to a maximum of three rollovers.

2. Technically a country that lends its reserves to the Fund obtains a claim on the Fund.