Near-term IMF funds are ample, but more may be needed
The IMF is the world’s first responder to economic crises, and low-and-middle-income nations are under severe stresses.
The disruption caused by the COVID-19 pandemic is putting emerging markets (EMs) and low-income Countries (LICs) under economic and financial stresses. The IMF has long served as the world’s first responder to crises, and some 90 countries have already turned to it, raising fears of whether it has adequate resources to play a systemic role in helping to support these countries.
What next
The IMF has ample resources to meet immediate financing challenges. Whether current resources ultimately will be adequate depends on the severity and duration of the crisis; its impact on commodity prices; the extent to which countries seek IMF financing; the degree to which existing measures cover financing needs; and how much of the residual financing gap the Fund is prepared to take on. There is a good case for increasing Fund resources. It can pursue a range of options to do so.
Subsidiary Impacts
- A second wave of COVID-19 infections and deaths would prolong the economic crisis and could sharply raise demands for IMF resources.
- The organisation needs a quota increase but the fastest way to raise more resources for EMs is by increasing bilateral borrowing.
- For low-income countries, additional IMF funding is being mobilised.
Analysis
Countries can address external financing needs by undertaking economic adjustments, raising new finance and securing debt relief. Typically, when EMs and LICs face stresses, these are often associated with inadequate domestic policies. The global disruption caused by and in response to COVID-19 is an exogenous shock, however, warranting immediate liquidity support.
Longer term, the crisis may raise questions about countries' financial sustainability (see INTERNATIONAL: The GDP fall will herald crowding out - April 27, 2020). The IMF is willing to support countries that are illiquid, or of questionable sustainability, but not countries that are clearly insolvent and require debt restructuring. The Fund also sees its role as catalytic -- it will not extend an inordinate share of a country's gross financing needs.
Mechanisms
Financing categories fall into three areas.
General resources
Lending under general resources is largely used for EMs and advanced economies (for example in the euro-area crisis). Members' quotas, the Fund's first line of resources, finance this. If quota resources run low, the IMF can tap its New Arrangements to Borrow (NAB). If these run low, it can tap its bilateral borrowings.
The Fund touts its lending capacity of 1 trillion dollars and has close to 800 billion dollars to hand -- 264 billion from quotas; 182 billion from the NAB; and 341 billion from bilateral borrowings.
$800bn
Resources the IMF currently has to hand
The Poverty Reduction and Growth Trust (PRGT)
The PRGT finances the bulk of loans to LICs and relies primarily on bilateral contributions. Contributing countries often provide loans to the PRGT at a commercial rate. Commensurate subsidy resources, bolstered by other IMF funds, cover the interest cost between the commercial loan rate and the borrower's interest rate (now zero for countries borrowing from this mechanism).
Uncommitted PRGT resources of 13 billion dollars are available and subsidy resources are adequate, consistent with self-sustained annual lending of around 1.7 billion dollars. The Catastrophe and Containment Relief Trust (CCRT) is a pot of resources for debt relief. Including grant commitments recently pledged from Japan and the United Kingdom, the CCRT can provide around 500 million dollars.
Special drawing rights (SDRs)
The Fund membership can also allocate SDRs to members in proportion to their quotas to supplement reserve assets. Countries can sell SDR holdings to other members in return for foreign exchange. Around 275 billion dollars have been allocated, 250 billion in 2009.
COVID-19 crisis response
The Fund is ramping up disbursements and the modalities for providing support.
Using its general resources, the Fund has promoted its Rapid Financing Instrument, which disburses funds quickly with little conditionality. The IMF has further created a Short-Term Liquidity Line -- a swap facility -- for countries with strong macroeconomic fundamentals; it estimates that demand could reach 50 billion dollars.
For LICs, the IMF has bolstered PRGT lending and access to its Rapid Credit Facility. It modified the CCRT eligibility criteria in March and has extended debt relief to 25 countries for six months. At the G20 Finance Ministers meeting this month, the IMF and World Bank secured agreement on a six-month standstill on official bilateral debt for around 76 low-income countries. China will be most affected as it is the largest official bilateral creditor.
Fund-raising
Whether these resources are sufficient depends on the severity and duration of the crisis; its impact on the prices of commodities; the extent to which countries choose to seek help; the degree to which existing measures and recipient countries' adjustments cover financing requirements; and how much of the residual financing gap the Fund is prepared to cover (see INTERNATIONAL: COVID-19 to challenge developing states - April 8, 2020).
Existing funds might last the duration of the crisis. However, more may be needed, especially if there is significant economic damage, or a second wave of COVID-19 infections. Further financing is likely to be raised.
There is a critical compositional dimension to the Fund's resources. The Fund's quotas are its primary resources -- but only 265 billion dollars remains. The last increase, agreed in 2010, was implemented in 2016. The NAB (182 billion dollars) and bilateral borrowings (341 billion) are supposed to be back-up resources.
General resources
Quota resources will need to be increased, not only given the recurrence of global crises but to remain the IMF's primary financing source. Negotiations will conclude at end-2023 but are moving slowly.
Fund members will need to agree on the increase and distribution of voting power. China is 6% of the Fund's voting power, but more than 15% of global GDP. Many EMs and LICs desire more voting power as a matter of fairness.
However, the United States will remain reluctant to see China's share rise. Much will hinge on the attitude of the US administration. European nations do not wish to see their voting power reduced.
NAB
Last year, the Fund agreed to double the NAB -- from 250 dollars to 500 billion by end-2020. The United States already secured legislative consent to increase its part. Countries could consent to the additional funding coming onstream ahead of the scheduled date of January 2021.
Bilateral borrowings
As part of the NAB agreement last year, it was agreed to keep the Fund's lending capacity constant at 1 trillion dollars, implicitly paring back bilateral borrowings given the NAB expansion that was agreed. The Fund could undo this and allow more bilateral borrowing, which is the quickest to mobilise.
Bilateral borrowings are the quickest to mobilise
LIC resources
The IMF is calling for donors to contribute 17 billion dollars more in PRGT loan resources, and for contributions for PRGT subsidies and the CCRT. Even if more loans are extended without compensating subsidy funds, existing subsidy resources could be run down quicker than the pace the PRGT's self-sustained lending capacity allows and augmented later. Consideration could be given to selling limited amounts of the Fund's 90 million ounces of gold holdings.
SDRs
There is much debate about a 500-billion-dollar or even 1-trillion-dollar SDR allocation. Proponents argue that there was a 250-billion-dollar allocation during the global financial crisis, and another allocation up to 650 billion would not require US legislation.
However, Washington opposes an SDR allocation -- arguing that most would go to countries with little need as LICs only receive 3% of the total. Insofar as an SDR allocation requires the support of 85% of the Fund's voting power and the United States holds more than 15%, a large-scale SDR allocation is unlikely to occur anytime soon.
