The IMF’s new economic forecast offers encouragement to the world’s rich countries. They’re on track to recover strongly from the pandemic. For many poorer countries, the opposite is true: The end is not in sight, the pandemic is still getting worse, and their economic losses are mounting. Their debts, in many cases, will prove unsustainable.
Rich countries should be doing more to help in all kinds of ways, above all with the production and distribution of vaccines. But designing a more resilient system of financial cooperation, through the International Monetary Fund and other institutions, remains an essential part of the task.
Up to now, improvisation has played a bigger role than systemic innovation. With the agreement of President Joe Biden’s administration, for instance, governments have decided that the IMF should issue a big new tranche of special drawing rights (SDRs) to its members. That will give valuable financial help to many countries struggling to cope with the pandemic. But it isn’t ideal.
SDRs are a reserve asset created by the IMF and allocated to its members broadly in proportion to their weight in the global economy. They can be cheaply converted into dollars or other hard currency — acting, in effect, as a low-cost line of credit that financially stressed governments can access quickly. Their original purpose was to ensure that a shortage of dollar liquidity wouldn’t constrict international transactions. At the moment, that concern is beside the point: There’s a glut of global dollar liquidity, not a shortage. Even so, an injection of new SDRs will bolster the finances of many poor countries.
The new allocation of $650 billion is, to be sure, a scattershot device. It’ll boost the reserves of all IMF members. In absolute terms the poorest will get least, though as a proportion of their diminished reserves, they’ll feel a bigger benefit. The maneuver is also technical and opaque. For many governments, that’s a virtue, because they hope what might otherwise be a controversial plan will fly below the political radar. Relatedly, the U.S. has a veto on SDR allocations, and $650 billion is (roughly speaking) the biggest injection that the Treasury Department can agree to without seeking approval in Congress.
In addition to promoting the SDR plan, the IMF and some of its member governments have cobbled together other relatively modest arrangements. One idea gaining support is worth adding to this list. The new SDR allocation could be improved if the rich countries agreed to donate some of their new reserves to COVAX — the United Nations-led effort to accelerate vaccine distribution in the developing world — and similar initiatives.
Yet off-the-cuff flexibility only goes so far. The IMF and its partner institutions should also create new facilities capable of delivering substantial assistance under extreme circumstances — like today’s — where financial distress isn’t the result of irresponsible economic policies. The fund’s standard operating procedure is to make loans conditional on programs of economic reform. Negotiating those schemes is often a protracted and politically fraught process. The economic-policy response to a pandemic needs to be broader, faster and less concerned with prescribing new fiscal strategies.
Arrangements for sovereign debt relief also need work. They have for years, in fact, but the pandemic underlines the point. Covid-19 rightly led the G-20 governments to devise the Debt Service Suspension Initiative — but this is temporary and partial. Efforts are underway to build on this scheme, but for now the world still lacks a system that’s comprehensive, fair to creditors, transparent and capable of delivering sufficient relief when necessary. It’s a complex job, but it should be a priority.
Starting with their discussions this week, the world’s finance ministers should look into more deliberate changes to their arrangements for international financial cooperation. With a couple of bolder innovations, they could handle the consequences of Covid-19 a lot more effectively — and they’d do well to remember that this pandemic is unlikely to be the last.
The Editors, MDT/Bloomberg
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