Don’t Lose Sight of the Real Business of the IMF-World Bank Annual Meetings

Anyone who follows the media on development finance will not be surprised if the corridor talk at the upcoming Annual Meetings of the World Bank and International Monetary Fund (IMF) is affected by the recent World Bank decision to discontinue the Doing Business Index. These discussions will invariably include the implications for data management and integrity at the Bank as well as spillovers questions regarding the leadership at both institutions. However, it is essential that this issue does not distract from the urgent, consequential, and substantive agenda on which the Annual Meetings must make progress.

Most developing countries continue to struggle with the COVID-19 pandemic while waiting for meaningful numbers of people to be vaccinated. The loss of life and livelihoods is enormous and adding to the tragedy is the knowledge that much more could have been done globally to avoid it. Beyond that, developing countries face a long and uncertain recovery and a dangerous accumulation of risk on many fronts. The medium-term outlook for growth has been marked down, especially for lower-income countries, bringing with it with worsened and worsening poverty, inequality, health outcomes, and social tensions. To respond to these challenges here are four priorities for the Bank and the Fund to achieve in these meetings.

Provide vaccines and ensure adequate pandemic response

In the near-term, in these meetings and the G20 Summit in Rome which will follow, leaders should move from demonstrating their generosity by making additional—but inadequate—pledges of vaccine donations to a serious global plan for vaccine supply, distribution, and application. For the next few months, vaccine supply will continue to be the binding constraint and the Annual Meetings should deliver a disaggregated and time bound schedule of production and distribution for the different vaccines. Most immediately, surplus vaccines in the G7 countries—including 60 million doses that will expire by year end—need to be airlifted to the countries where they can be quickly administered. Beyond that, however, as vaccine production is ramped up to over 1.5 billion doses a month, the constraints will shift to the availability of financing for low- and middle-income countries to purchase these vaccines. To that end, a number of proposals have been made which involve more proactive financing availability from the international financial institutions (IFIs), multilateral development banks (MDBs), and regional development banks (RDBs). These meetings are the moment to implement these financing mechanisms. Among these proposals, CGD experts proposed the creation of a Vaccine Financing window within the IMF’s existing rapid financing facility, which could cover the total cost of vaccines for the entire population of most developing countries with only 3 percent of the IMF’s total lending capacity. That proposal could be put into place within weeks if ministers so agreed at the upcoming meeting. A second important constraint in many countries will be the inadequate physical and human resources to implement a large-scale vaccination program, particularly outside the principal cities. Ministers should encourage the World Bank and the RDBs, working in close concert, to support a strengthening of this capacity in all countries as a matter of urgency.

Beyond the current pandemic, the need to prepare for future pandemics is now well-recognized as a high priority, and a number of international panels have presented proposals to improve the global health and financing architecture for this purpose. A priority for the global community should be the establishment of a G20+ Global Health Threats Board to bring together the worlds of health and finance. Such a Board would focus on overseeing global public good investment in global health security. To complement the work of the Board, a Global Health Threats Fund could provide $10 billion per year to plug gaps in global public good funding for pandemic preparedness and response. The fund would cover the development of expanded global surveillance, alert, and research networks, the building of resilient systems, and scaling up of an end-to-end global supply chain for medical countermeasures. These proposed mechanisms would need to operate effectively within the existing landscape of global health and finance organizations. The World Bank, IMF, and other MDBs must also play expanded roles, including by scaling up funding for global public goods. These proposals are further outlined in the final report of the G20 High-Level Independent Panel (HLIP) on Financing the Global Commons for Pandemic Preparedness and Response. Other eminent panels have made broadly similar proposals. The upcoming Bank-Fund and G20 meetings are the occasion for translating these expert proposals into political decisions. The temptation to defer decisions for more study or to settle for half measures carries risks that will become gravely evident in the event of another pandemic.

Decide on the proposals to re-distribute Special Drawing Rights (SDRs)

The IMF has successfully distributed $650 billion worth of SDRs, and a lot of thinking has been done on how to go beyond the original allocation and channel additional SDRs from countries that don’t need them to those that do. After many months of deliberation two well-defined proposals are now ready for political decision. First, $25 -$35 billion worth of SDRs should be allocated for future lending through the Poverty Reduction and Growth Trust (PRGT) at the IMF, a straightforward and established channel to provide financing to low-income countries for their recoveries. Second, the green light should be given to establishing the Resilience and Sustainability Trust (RST) at the IMF, which would provide balance-of-payment and budget finance for macroeconomic policy and regulatory changes that support and incentivize public and private resilience investments. In this note and this note, CGD colleagues have described how the RST can be a useful addition to the global toolkit to support emerging markets and low-income countries. For impact, the RST must be of adequate size—at least $50 billion to be disbursed over 5 years—and designed in a way that would complement and work closely with the World Bank and other institutions involved in the investment side of climate change resilience.

Beyond these two immediately and near ready proposals, the Annual Meetings are an opportunity to show a clear signal of support for exploring more ambitious and innovative ideas for using SDRs. Other promising possibilities include using SDRs to leverage the financing provided through development banks, including multilateral, regional, or national. This would be more complicated but if ways can be found to add to the equity base of development banks, the SDR allocation could be leveraged four or five times through their financing models. This could also be a way to substantially scale up their financing for climate change-related projects. Other proposals to be explored include mechanisms to help mobilize private financing for emerging and frontier market economies, including by creating a facility to improve liquidity in the market for their sovereign debt. The upcoming Finance in Common Summit will be the next moment where these proposals can be further taken forward.

Sustain higher levels of official flows

It is widely recognized that the COVID-19 crisis will reverse years of development gains; elevated levels of financing must be sustained to help countries recover these losses and continue making progress. It is not likely that we will see any major decisions at the Annual Meetings on reimagining the IFIs, but it is feasible to send clear signals to the IMF and World Bank that their level of activity over the next five years needs to be closer to 2020 and 2021 than the preceding years. To this end, a successful, adequately sized IDA Replenishment will be key for the World Bank to deliver at this level for low-income countries, along with creatively leveraging its balance sheet for the IBRD. For the IMF, extra financing through the PRGT with the flexibility now available under the revamped access rules for PRGT lending needs to be fully utilized to support countries in the coming five years. The IMF must also rethink its facilities for support to emerging markets, which have gone largely unused during the pandemic.

Address unsustainable debt

Already an issue for some low- and middle-income countries even before the pandemic, the issue of unsustainable debt has not gone away. According to the latest World Bank and IMF debt sustainability analyses, 29 low-income countries are at high risk of debt distress while seven are already in debt distress. The Debt Service Suspension Initiative (DSSI) helped by deferring about $6 billion in 2020 and a further $7 billion in 2021 but it is coming to an end by December. In parallel, public and corporate debt has also increased to worrying levels in some emerging markets. If global interest rates increase through policy tightening, international credit tightens, and the SDR induced liquidity boost is used up, problems of debt sustainability will come to the surface not only in low-income countries but also emerging markets.

To address these problems for at least low-income countries, the Common Framework for Debt Treatments beyond the DSSI was launched nearly a year ago. Regrettably, not one country has benefitted yet from the application of this framework. The Common Framework’s first year shows that translating general principles into country outcomes is a much more arduous, complicated, and protracted process than envisaged. The case of Chad, the country most advanced in the process, shows that the ability to bring in private creditors still falls short. At best, we will complete 2021 with maybe two or three cases having been treated under the Framework. However, the underlying debt problem is much broader than these few countries, and this pace is too slow for these countries and discouraging for others. Going forward, the Annual Meetings are a moment for major shareholder countries to streamline the process under the Common Framework and strengthen the incentives for private creditors to participate. Also important will be a clear signal to strengthen standards in future sovereign debt contracts and contract enforcement that require full disclosure and transparency and that avoid abuse of legal systems by creditors seeking preferential treatment.

It’s worth noting in conclusion that none of these proposals are revolutionary; far from it. Rather, they represent the minimum set of outcomes that could be expected from such an international gathering at a time when the majority of the world’s countries face a hard road ahead. Together, they can be pivotal in accelerating recovery and response. Let’s not let this opportunity of the Annual Meetings go to waste.