14 April 2020

The COVID-19 crisis is now a global one that has also morphed into larger and more global economic and social crisis than the financial collapse of 2008-2009. High income countries have done well to backstop their financial systems and have also begun to advance bold stimulus packages for recovery. However, emerging market and developing countries lack the wherewithal for such a response and worse—they are experiencing flight of portfolio capital like in no other period in their memories.

Until the COVID-19 virus and the economic crisis that has ensued is contained everywhere, it can spread anywhere. As the UN-led Inter-Agency Task Force on Financing for Development just called for in its new Financing for Development Report, a global and multilateral response is needed that attacks the virus and puts the global economy back on a path to achieve the Sustainable Development Goals (SDGs) and the Paris climate agreement. That effort should start this week at the annual spring meetings of the International Monetary Fund (IMF) and the World Bank.

Since the crisis began to unfold, Emerging Markets and Developing Economies (EMDEs) have experienced a withdrawal of at least $95 billion and over 85 countries have gone to the IMF for support. This is disastrous. At just the moment when they need the fiscal space to attack the virus, buoy their economies, and protect the vulnerable, they are faced with significant devaluation of their exchange rates and a ballooning of debt. Such a situation is wreaking immediate havoc and derailing efforts to meet the SDGs.

We call on the governors of the IMF and World Bank to mount a bold emergency response to stem the crisis in the developing world in order steer their economies toward the SDGs.

Separate estimates by the IMF and the United Nations Conference on Trade and Development (UNCTAD) see the immediate need for EMDEs to be at least $2.5 trillion. But the financing isn’t there. The currently available resource base of the IMF and the Regional Financing Arrangements only amounts to $1.5 trillion, with a maximum of $700 to $971 billion available to EMDEs, and is thus inadequate to meet the immediate needs for these countries identified by the UN and the IMF.

In a new working paper with colleagues Haihong Gao and Ulrich Volz, we call on the governors of the IMF and World Bank to mount a bold emergency response to stem the crisis in the developing world in order steer their economies toward the SDGs. First and foremost, we call for an issuance of the IMF’s Special Drawing Rights of at least $500 billion and for the advanced economies to put their shares into a trust fund that can be made available to finance programs for the EMDEs.

We also urgently call for debt restructuring and relief for developing countries.

We also call for the establishment of a multilateral currency swap facility within the IMF. The Federal Reserve Bank of the United States has been swift and smart to backstop the dollar system in the advanced economies and in a small handful of emerging economies. However, this protection has not been extended to developing countries, but has rather accentuated the capital flight from these countries.

Among other proposals, we also urgently call for debt restructuring and relief for developing countries. Even with a rapid and significant expansion of liquidity and balance of payments support to EMDEs, a substantial amount of debt will need to be written off or rescheduled.

The IMF has already noted that Argentina – the recipient of the largest IMF program – will need a significant debt restructuring, and the World Bank and IMF have called for bilateral debt relief for the poorest countries. UNCTAD suggests that $1 trillion in developing country debt will need to be alleviated in 2020 across multilateral and bilateral debt classes. The United Nations has agreed upon a resolution setting forth a set of principles for sovereign debt restructuring processes that can be built upon.

The IMF should also assure developing countries and markets alike that the coordinated use of capital controls (what the IMF calls ‘capital flow management measures’) as a stop gap until the rest of the world puts these multilateral efforts in order.

These measures will enable the world to contain COVID-19, save lives and jobs, calm markets, and steer finance toward a more adept, sustainable, and inclusive world economy. The world shares a common but differentiated responsibility to prevent destructive unilateral economic actions that prevent other nations from realizing these common goals, while maintaining the right to pursue national development strategies, advance global public goods and protect the global commons. We have to act now.