Building Back a Better Global Financial Safety Net
Edited by Kevin P. Gallagher and Haihong Gao，
Published by Global Development Policy Center, Boston University，April 2021
Table of Contents
ACKNOWLEDGMENTS
EXECUTIVE SUMMARY
1 ADDRESSING FINANCIAL RISK IN EMERGING MARKET AND DEVELOPING COUNTRIES IN THE COVID-19 ERA
2 TRANSFORMING SPECIAL DRAWING RIGHTS FOR INTERNATIONAL COOPERATION
3 CENTRAL BANKS AND THE GLOBAL FINANCIAL SAFETY NET
4 IMF QUOTA REFORMS AND GLOBAL ECONOMIC GOVERNANCE: WHAT DOES THE FUTURE HOLD?
5 ABANDONING AUSTERITY: FISCAL POLICIES FOR INCLUSIVE DEVELOPMENT
6 REGIONAL FINANCIAL ARRANGEMENTS AND IMF COORDINATION: AN ASIAN PERSPECTIVE
7 THE GLOBAL FINANCIAL CYCLE AND CROSS-BORDER CAPITAL FLOWS
8 AVOIDING TOO LITTLE, TOO LATE: DEBT RELIEF FOR A GREEN AND INCLUSIVE RECOVERY
9 SOVEREIGN DEBT RELIEF IN THE GLOBAL PANDEMIC: LESSONS FROM THE 1980S
10 THE IMF AND THE MACRO-CRITICALITY OF CLIMATE CHANGE
AUTHOR BIOGRAPHIES
EXECUTIVE SUMMARY
Kevin P. Gallagher and Haihong Gao
The year 2021 is the second year of the most important decade of the century where drastic reductions in carbon dioxide emissions and inequalities in a manner that raises standards of living is paramount to the survival of the world’s people and planet earth itself. Yet, 2020 saw the biggest economic downturn since the Great Depression, and pushed upwards of 124 million people into extreme poverty. 2020 was also the hottest year on record, triggering forest fires, hurricanes, droughts, and other extreme events that accentuated the economic shock the COVID-19 pandemic brought to the world economy.
In this context, many emerging market and developing countries started the decade desperate for liquidity and in fear of default. Even more will face a debt overhang that could take more than a decade to recover from. This is to be the decade where the world realizes the Sustainable Development Goals and raises the ambitions of the Paris Climate agreement, not one that is characterized by human suffering and economic instability.
The COVID-19 pandemic and associated economic crisis put great stress on the so-called Global Financial Safety Net (GFSN). The GFSN is comprised of Central Bank swap lines from key currency issuing nations, the International Monetary Fund (IMF), regional financing arrangements (RFAs), along with other central bank bilateral swap lines, individual countries’ foreign reserve holdings and capital flow management measures, and a loose ad-hoc system for sovereign debt restructuring.
Resulting from a number of formal and informal workshops throughout 2020 and 2021 this report spells out the following proposals that should be high on the agenda of the International Monetary Fund, G20, RFAs and in national capitals as the world community works to combat the COVID-19 virus, protect the vulnerable, and mount a green and inclusive recovery:
Specific to the IMF and the RFAs, the common recommendations made were the need to:
Issue more IMF Special Drawing Rights (SDRs) and expand the use of them through the IMF;
Establish a multilateral swap facility at the IMF;
Increase quota-based resources at the IMF with associated governance reforms;
Increase the resources, geographic coverage, and coordination of the Regional Financial Arrangements;
Initiate debt restructuring and relief initiatives that work toward a broader sovereign debt restructuring regime;
Reform the emergency financing such that they are counter-cyclical;
Coordinate on capital flow management measures.
Address macro-critical climate risks in IMF programming
When the crisis hit both the IMF and the United Nations Conference on Trade and Development (UNCTAD) separately estimated that immediate liquidity needs for emerging market and developing countries would be upwards of 2.5 trillion dollars, Yet, outside of those countries that gained access to swap lines from the Federal Reserve Bank of the United States, the GFSN fell short of having the financing needed for these countries, nor does it have an adequate tool kit to prevent and mitigate the COVID-19 shock and those that will follow.
Advanced economies with key currencies have been able to mount bold fiscal and monetary responses in the trillions of dollars, but emerging market and developing countries largely lack such options. In the midst of capital flight, exchange rate depreciation, volatile commodity prices, and ensuing recession, many emerging market and developing countries have had to pay back international creditors at the expense of addressing their essential needs in a time of crisis. In Latin America—the region hit
hardest by the pandemic economically—the United Nations estimates many countries are deploying 30 to 70 percent of government revenue just to service debt.
Meanwhile, sovereign credit rating downgrades in 2020 surpassed the peaks in all previous economic crises. Standard and Poor's downgraded upwards of 60 countries in 2020 and gave negative outlooks (which often lead to downgrades) for 31 more. Six countries — Argentina, Chad, Ecuador, Ethiopia, Belize, Lebanon, Suriname, and Zambia defaulted on their debt since early 2020, with Argentina and Ecuador having to restructure.
The nature of debt in the 21st century is quite complex. During debt crises of the 1980s and 1990s, most debt by developing countries was owed to a handful of Western governments and international institutions that could gather under the auspices of the Paris Club to renegotiate debt workouts. Early in 2020, there was a chorus of voices calling for new liquidity and debt relief for emerging market and developing countries, from IMF managing director Kristalina Georgieva, to the President of the People's Bank of China, European leaders, the United Nations, and outside experts. These calls fell in three categories—a major issuance of the IMF's 'Special Drawing Rights'(SDRs), debt relief, and new concessional finance. SDRs are international monetary assets issued by the IMF analogous to the way central banks issue currency, and can be sold or used for payments to other central banks and international financial institutions.
The G20 fell short in endorsing a new SDR allocation or new capital for international financial institutions as they had during the 2008 global financial crisis. Nonetheless, multilateral development banks and the IMF did pledge to mobilize their existing balance sheets and the IMF launched a fundraising appeal for the ‘Catastrophe Containment and Relief Trust’ that would allow certain low-income countries to pay back debts to the IMF.
And the G20 did respond on debt relief by establishing a ‘Debt Service Suspension Initiative’ (DSSI) that allows 73 low income countries to defer a portion of their debt payments through mid-2021. But close to half of the eligible countries would not participate, as they feared credit rating agencies would cut their access to further credit. For those countries that have participated, China has suspended the most payments thus far, engaging with over 23 countries and suspending just over $2 billion in payments. Realizing that some countries will need more than simply debt suspension, the G20 created a ‘Common Framework’ that goes beyond the DSSI whereby DSSI eligible countries can negotiate restructuring on a case-by-case basis. At this writing, Chad, Ethiopia, and Zambia have announced their intent to enter this scheme.
A number of times over the course of 2020 we convened a series of formal and informal workshops that led to a number of immediate analysis and proposals to the G20, IMF, and GFSN more broadly to help countries across the world cope with the worst stages of the virus and conduct more fundamental reforms in the intermediate term. Toward the end of 2020 we convened a diverse group of scholars and practitioners to fill out these proposals. They are from the centers and institutes, including the Institute for World Economics and Politics at the Chinese Academy of Social Sciences, the Global Development Policy Center at Boston University, the Center for Social and Economic Progress in India, the Center for International Finance Studies at Central University of Finance and Economics in China, and the Centre for Sustainable Finance at SOAS in the UK.
This report collects a number of more in-depth articulations of those proposals that are specific to the recommendations for the IMF and the RFAs. Liqing Zhang and Wen Qi from Center for International Finance Studies at Central University of Finance and Economics in China outline the some of the channels through which financial instability went global under the COVID-19 crisis and outline a broad set of avenues for mitigation. Jose Antonio Ocampo, a professor at the School for International and Public Affairs at Columbia University, and former finance minister and co-chair of the central bank in his native Colombia outlines the need for a new allocation of IMF Special Drawing Rights (SDRs) and how the use of SDRs could be expanded throughout the world economy. Edwin Truman, senior fellow at the Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School and former senior official in the United States Department of the Treasury outlines the need for and design options of a multi-lateral currency swap facility through the IMF. Rakesh Mohan, Director of the Center for Social and Economic Progress in India specifies the need for and implications of increasing quota-based resources at the IMF with associated governance reforms. Isabel Ortiz, also from the Initiative for Policy Dialogue at Columbia University and former Director of the Social Protection Department at the United Nations’ International Labor Organization (ILO) and colleague Matthew Cummins note the record of past IMF emergency financing and show how they should abandon socially harmful procyclical programs in favor of counter-cyclical recovery programs that protect the poor.
In addition to these proposals to reform the IMF, Aizong Xiong and Haihong Gao, both from the Institute for World Economics and Politics at the Chinese Academy of Social Sciences analyze the extent to which RFAs have played a role in the COVID-19 crisis and note ways that RFAs could be expanded and more coordinated. Xiaofen Tan, Center for International Finance Studies at Central University of Finance and Economics in China shows the role that capital flow volatility has played during the COVID crisis and outline routes for capital flow management in emerging market and developing countries. Finally, for those countries that face insolvency and debt distress Ulrich Volz, Director of the Centre for Sustainable Finance at SOAS in the UK summarizes a proposal for a global debt relief facility that links debt relief to a green and inclusive recovery. Edwin Truman closes the report with lessons that the restructurings of the late 20th century might be for current restructuring efforts. The last chapter is a forward looking one, also by Volz. Volz demonstrates how climate change is a global macro-critical issue and proposes how climate change should be mainstreamed across IMF activities.
The COVID-19 pandemic has greatly exposed the gaping holes in the GFSN. With a global recovery in sight, international policy coordination is much needed in face of possible short-term shocks and the long-term challenges. These detailed proposals go a step forward in helping policy makers identify and design pathways that will help the GFSN increase its scale and scope, reform its program, and gain better legitimacy and coherence moving forward.