As the coronavirus pandemic reaches the developing world, governments are turning to the IMF for help in record numbers — and warnings are mounting that multilateral institutions will need to bolster their resources to meet demand.
Low and middle-income countries have already been hard hit by record capital outflows, a falling oil price, a collapse in tourism revenues and a steep fall in demand for their exports; few have fiscal space to cope with the health and economic crisis that is unfolding.
Eighty-five countries have approached the IMF for short-term emergency assistance in recent weeks — around double the number that called on the fund in the immediate aftermath of the 2008 financial crisis.
Then, the IMF tripled its lending capacity to $750bn and allocated just over $270bn in special drawing rights (SDRs), a proxy for foreign exchange reserve assets that are made available to IMF members in proportion to their share of the global economy.
Last week Kristalina Georgieva, IMF managing director, said a “very conservative, low-end estimate” of emerging economies’ financial need was $2.5tn. Even if emerging economies burnt through all their foreign exchange reserves to tackle the crisis, they would still need at least $700bn in additional funding.
Analysis by Morgan Stanley shows that many large emerging markets — from Colombia and Egypt to already-stressed countries such as Pakistan and Ecuador — could struggle to meet their external funding needs in a scenario in which cross-border travel stopped, remittance inflows fell, oil prices stayed low and a third of foreign portfolio investment fled.
Low income oil producing economies such as Angola, Mozambique and Bolivia are also highly exposed, according to the consultancy Oxford Economics.
The main concern for the IMF and World Bank is the large number of very poor countries — many in the Sahel and sub-Saharan Africa — that cannot access international markets and do not have fiscal space to ramp up health spending or protect people from an economic shock.
More than 40 per cent of the world’s poorest countries — and half of those active in international bond markets — were already in or at high risk of debt distress before the crisis hit. The IMF can provide $50bn of emergency financing, including $10bn for low income countries to borrow at zero interest, and hopes to double the amount available through those facilities at its spring meetings in two weeks’ time. The World Bank has approved $14bn of fast-track financing; it aims to make a further $160bn available over the next 15 months.
These measures could provide emergency relief until more complex, longer term facilities are put in place.
The IMF and World Bank last week called for a moratorium on debt payments to official bilateral creditors, which could free up $14bn due in 2020 — much of it likely to be owed to China. The IMF has also suspended repayments by the poorest countries which receive support through its Catastrophe Containment and Relief Trust.
But Gabriel Sterne, at the consultancy Oxford Economics, argued that the bigger issue was how quickly the multilateral institutions could channel much larger amounts of funding to countries that could be frozen out of international markets.
A former senior IMF official who did not want to be named said debt relief was desirable since payment difficulties could stand in the way of new borrowing, but “you need actual transfers at this point in time”.
He added: “If I were at the IMF at the moment I would be looking at my resources and asking . . . do I have enough?”
Before the crisis struck, about a fifth of the Fund’s $1tn lending capacity was taken up by existing programmes. Much of the remainder cannot necessarily be deployed at speed, because it involves complex arrangements with member countries that take time to activate.
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But this week, Ms Georgieva said the full $1tn had been restored. “The US recently approved the doubling of [the Fund's borrowing arrangements] and our executive board yesterday agreed on a new round of bilateral borrowing to secure the IMF’s $1tn lending capacity," she said on Tuesday.
The UN called on Monday for the IMF to make a further $1tn available through SDRs, which can be a near equivalent to hard cash for low income countries. It also argued that an extra $500bn of aid, largely in grants, should be earmarked for emergency health services and social relief.
This looks unlikely to happen quickly. Allocating SDRs requires cumbersome approvals by national governments — including the US Congress — and poor countries’ allocations only comprise a small proportion of the total.
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Arvind Subramanian, a fellow at the Peterson Institute for International Economics, said the IMF and World Bank could do more to bolster their lending capacity under existing rules, whether by borrowing on international markets or through SDR issuance. “It depends on the political will you can put behind this,” he said.
But so far there has been little public response to the multilateral lenders’ call for debt relief or the IMF’s warning of the need to bolster its resources; many draw a contrast with the push to help poorer countries spearheaded by the G20 in 2009. And some fear this year’s IMF and World Bank meetings being held online may make it harder to bring pressure to bear.
“If you have a virtual IMF meeting, are you going to get decision-making, or get advanced countries to grasp the urgency the developing countries feel?” the former IMF official asked. “It needs leadership in the west . . . but everybody is thinking about themselves.”
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