How has the IMF fared during the pandemic?

A YEAR AGO, crisis gripped the global economy. The world’s multilateral lender of last resort swung into action. Speaking ahead of the spring meetings of the IMF and World Bank, which start on April 5th, Kristalina Georgieva, the fund’s managing director, hailed its “unprecedented” actions, including new financing for 85 countries and debt-service relief for 29 poor countries. More help is on the way. But is it enough?

The IMF offers its members a financial lifeline when they run out of cash. Its support typically comes with demands for policy reforms and debt restructuring where needed, to ensure that borrowers’ debts are sustainable. Such conditionality helps guard the fund’s resources and avoid bailing out other creditors. Going easy on borrowers today could encourage laxity in future, inviting more crises.

But covid-19 was not a normal crisis. The need for assistance was broad-based and urgent; meeting it was unlikely to encourage bad behaviour in future. So the IMF raised limits on cheap emergency financing facilities, which lend to countries with sustainable debts and attach relatively few strings; it offered poor countries debt-service relief; and it set up a “short-term liquidity line” (SLL) for fundamentally sound economies.

Since March 2020 the fund has doled out $32bn in emergency financing and offered $74bn through other schemes. Yet the support pales in comparison with the scale of the covid-19 crisis. The fund lent more in the year to September 2009, during the global financial crisis; the 85 countries receiving help today make up only around 5% of global GDP. The fund had expected an early wave of rapid financing to give way to more structured programmes with more strings attached. But so far only 12 new deals have been approved. Last April the IMF thought take-up of the SLL could be up to $50bn. It has, in fact, been zero.

That is partly because, while the IMF was drip-feeding credit to poor countries, America’s Federal Reserve brought out the firehose, blasting liquidity through its dollar swap lines. That coaxed back investors who had fled emerging markets, reducing the need for support. And in some cases the mere offer of help from the IMF may have bolstered investors’ confidence.

But part of the low use of the IMF’s schemes has been of its own making. Some governments were ineligible because of existing debt problems; others got less than they asked for, say, because of a perceived lack of need. Other potential borrowers decided that the political stigma of turning to the IMF was too great, or that doing so could raise doubts about their ability to service their private-sector debts.

The seeming lack of demand for the IMF’s services has led to some hand-wringing. One question is whether the fund should alter its schemes. In July Adnan Mazarei of the Peterson Institute for International Economics, a think-tank, and Matthew Fisher, a former IMF official, proposed a special pandemic support facility, both to avoid setting awkward precedents for future borrowing and to reduce the stigma of turning to the IMF.Ousmène Mandeng, another former official, argued in the Financial Times that conditionality should be “recalibrated...to reduce the political cost”. The IMF’s board has considered a new pandemic facility, but so far has decided against it.

Instead, on March 22nd it extended the higher limits on its rapid-financing facilities and increased borrowing limits for poor countries. It seems to be nudging those that have sought emergency financing towards more structured programmes, where normal conditionality and oversight apply. Indeed, since September such programmes and precautionary support have accounted for around half of all approvals, and a higher share of requests.

The IMF’s board has also expressed support for a new allocation of $650bn-worth of special drawing rights (SDRs), a special IMF currency that members can exchange for cash with no strings attached. Most low- and middle-income countries would receive more help than they have obtained from covid-related IMF lending so far. The poorest could benefit even more, if the fund works out a way to reallocate SDRs from rich countries. Once drawn, SDRs would not need to be repaid, but would incur interest (currently 0.05%), making them not quite as good as a grant, but better than a loan.

All told, the fund’s approach may seem a muddle. On the one hand, it is encouraging borrowers to sign up for programmes with more conditions. The SDR allocation, on the other, rejects strings entirely (though regimes under sanctions might struggle to swap their SDRS for cash). It could help borrowers repay Chinese creditors who perhaps should suffer write-downs. For now, though, the muddle helps some of the countries in need. And the fund may have lots of time to forge a more consistent approach. It took until 2011 for IMF lending to peak after the global financial crisis. ■