Most observers gave the IMF high marks for its initial response to the COVID-19 crisis. It responded quickly with emergency financing to 86 countries, including a fivefold increase in its concessional lending to low-income countries (LICs). And its leadership was quick to recognize that the unprecedented nature of the crisis warranted a different approach to macroeconomic and financial policy. “Spend what you can, and then a little bit more” was the right message for the time but a different one than expected from the head of this traditionally conservative institution.
A good initial response now needs to be stepped up and sustained for the protracted, uneven, and uncertain recovery that lies ahead for much of the developing world. The already muted 2021 growth projections for sub-Saharan Africa, for example, are likely to be revised downwards as delays in vaccine delivery hold back the resumption of economic activity. And the current human catastrophe in India, as well as continuing high infection and mortality rates in several other countries, are a stark reminder that this crisis is far from over.
The simple fact is that developing countries will take many years to recover from the setbacks of 2020 and from the further setbacks that are still to come. It is also the case that for many LICs, a binding constraint to recovery will be the availability of adequate financing on terms they can afford. The IMF’s own analysis estimates that these countries need at least $450 billion in external financing over the next 5 years. For some of the more creditworthy among them, private financial markets can provide part of this amount. But for the next few years, the bulk of this financing will have to come from official sources—the IMF, development banks, and bilateral assistance.
A start has already been made with the agreement to issue $650 billion in special drawing rights (SDRs), which will provide LICs with $21 billion in urgently needed liquidity. This is good news. The IMF now needs to build on this start with four additional measures which together can provide a $150 billion financing package to LICs over the next five years. These measures are set out below.
Fifty billion dollars by stepping-up lending through the IMF’s concessional lending window, the PRGT. The PRGT is the workhorse of the IMF’s support to LICs, providing zero interest loans for up to 10 years. Last year the IMF was able to increase PRGT lending to $9 billion, a fivefold increase from the average of recent years. Going forward, this level of lending needs to be sustained for at least five years as LICs gradually return to their pre-pandemic economic development trajectory. Financing for this higher level of PRGT support can continue to come from the risk-free loans made to the IMF by rich countries, including from the SDRs that they will be receiving as part of the new SDR allocation. And the subsidies entailed in lending to countries at zero interest can be covered by existing resources in the near term and by donor grants or the sale of IMF gold being used to replenish the PRGT subsidy and reserve accounts in the medium term.
Ten billion dollars to be made available to LICs through a new vaccine financing window which should be urgently introduced in the IMF’s rapid response facilities. As high-income countries quickly vaccinate their populations, developing countries lag far behind due to insufficient vaccine production and the inability to make firm financial offers for advance purchase of vaccines. At the same time, COVAX, the cooperative international mechanism set up to buy vaccines for these countries, has lacked the financing to make large enough advance purchases. This means that billions of people in developing countries will go months if not years without vaccines. As proposed in a CGD note, by introducing a Vaccine Financing window in its existing rapid financing facility, the IMF could cover the total cost of vaccines for the entire population of most developing countries with only 3 percent of its lending capacity. The proposed vaccine window would provide $31 billion in emergency financing to 76 low- and middle-income countries, with PRGT-eligible countries being able to draw up to $8 billion. Delaying vaccination will slow global growth and increase financial vulnerabilities; these countries and the world cannot afford to wait for enough donor money to be mobilized on their behalf for vaccine purchases.
Sixty billion dollars for the more creditworthy LICs from the IMF’s regular lending facilities. The IMF has traditionally been very reluctant to provide LICs with access to its much larger regular financing pool on the legitimate grounds that they should target concessional flows but also to limit the risk to the IMF’s own balance sheet. As this CGD note points out, one unwelcome consequence of this approach has been to drive the more credit worthy LICs to much more expensive private market borrowing. Over time, these expensive loans have contributed to debt sustainability problems for some countries and the IMF has then had to step back in to deal with a worsened situation. A better alternative would be for the IMF to be a little less rigid in its own approach to extending credit to these countries. The terms of regular IMF loans—currently five years maturity at 1 percent interest—are well below the rates at which countries like Ghana or Ivory Coast have accessed private markets. And the risk to the IMF of extending $60 billion to these countries over the next five years, out of its trillion-dollar balance sheet, is clearly both marginal and comparable to the same amount often being lent to just one or two middle-income borrowers dealing with a capital account crisis.
Thirty billion dollars for a facility to increase liquidity in the market for sovereign bonds issued by LICs and held by private financial institutions. The high interest rates that LIC sovereigns pay for private market borrowing is partly based on the higher perceived country risk, but it also reflects a premium stemming from the limited liquidity of these assets.
A proposal by the Economic Commission for Africa aims to reduce this liquidity premium by creating a repo facility that would operate for these loans in much the same way that central banks operate a repo facility for advanced country markets. The IMF could house such a facility and thus help to expand the pool of potential investors in the sovereign debt of these countries. The technical details of this proposal still need to be worked through, in particular to ensure that any contingent liabilities and risks are properly accounted for and covered. The facility could, however, form part of a more ambitious and creative approach by the IMF at a time when bringing private capital back to LICs at affordable rates is a high global priority. If this approach is found to be feasible for low-income countries, other regional funds, such as FLAR in Latin America could benefit from similar arrangements.
Taken together, these proposals could provide LICs with an additional $150 billion, on top of the $21 billion that will accrue from their share of the proposed SDR allocation. They will not all happen at once. The SDR allocation is nearly done. The PRGT expansion can happen quickly since it will use existing mechanisms for both financing the PRGT Trust and on-lending the money. The vaccine facility is urgently needed and can also take advantage of existing financing mechanisms. Taking on more risk on the IMF’s own balance sheet by expanding access to GRA resources will need more discussion as will support for a liquidity facility. But with political leadership by the major shareholders and the support of IMF management, all of these initiatives could be in place in the next 12 months.
Importantly, stepped up financing by the IMF needs to be part of a broader package of enhanced international support to LICs, including through commensurate action by the multilateral development banks and bilateral agencies. And extra financing needs to be accompanied by measures to ensure that the funds are being used transparently to address urgent priorities and support the development agenda beyond COVID-19.
As part of this broader approach, these actions by the IMF would go a long way to helping LICs meet their balance of payments needs for the coming years. They would also ensure that five years from now the IMF would get an even better score on its ability to adapt and respond to the urgent needs of its poorest member countries.