IMF Works to Speed Support for Record Developing-Nation Requests

(Bloomberg) -- The International Monetary Fund is going into overdrive heading into its spring meetings next week as the global pandemic spurs urgent aid requests from a record number of developing countries.

IMF Managing Director Kristalina Georgieva is focused on winning board approval for tools to lend money as quickly as possible. One plan would double the $50 billion available through two emergency financing mechanisms because countries have requested about half the existing resources already. Another would make available short-term loans to a small group of strongest nations to avoid a cash crunch.

Georgieva has pledged to deploy the IMF’s $1 trillion lending capacity to counter a recession that she says will be far worse than the 2008-09 global financial crisis. The IMF last month approved changes to provide up to two years of debt relief on its lending to low-income countries via grants from donor nations.

“The challenge to the fund is to provide money quickly,” said Brad Setser, an economist at the U.S. Treasury Department during the Obama administration who is now at the Council on Foreign Relations. “There’s a need for more reserves throughout the world in the face of a bigger than expected and truly global shock.”

Debt Standstill

A third plan championed by Georgieva and World Bank President David Malpass calls on in wealthier governments who have lent to poorer nations to place a temporary pause on demands for debt repayment. That would help poor nations and make sure IMF resources are used for crisis response rather than to pay off creditors, according to Anna Gelpern, Sean Hagan and Adnan Mazarei at the Peterson Institute for International Economics.

The World Bank last month estimated that $14 billion in service payments are due this year, with less than $4 billion owed to the Paris Club of nations that coordinate sustainable solutions in times of trouble for debtor countries. That means getting cooperation from China, the biggest official creditor not in that group and a major lender to poor nations through its Belt and Road Initiative, is key to getting an agreement among the G-20, who represent 85% of global gross domestic product and a vast majority of lending.

“China to date has not been willing to do so within a Paris Club context, but may be willing to do so in the context of a broader coordination framework,” Hagan said in a phone interview. “I’m relatively optimistic.”

Private creditors also would need to be included to make sure governments don’t simply end up supporting repayment to investment firms that hold bonds from poorer nations, Hagan said.

Drawing Rights Debate

The IMF is currently looking at various options. One which Georgieva supports is to create a short-term lending or liquidity line, much like the Federal Reserve’s dollar swap lines for foreign central banks, to provide greenbacks where the Fed cannot.

Another idea that’s proving more controversial: boost fund resources by creating more reserve assets called special drawing rights, or SDRs, as the IMF did in the 2009 global financial crisis. While Georgieva has called on the G-20 to back it, experts disagree on the idea’s efficacy.

For one thing, it isn’t the most targeted way to get money to the neediest countries, because the assets are automatically granted to all IMF members in proportion to their voting stake. Top shareholders including the U.S., Japan and China would automatically get the most SDRs, with few going to the low-income nations most in need.

“It’s not particularly practical or efficient, because the money ends up where you don’t need it,” said Mark Sobel, a longtime Treasury official and former U.S. IMF executive director.

The short-term liquidity line, however, would be better targeted. And it has the support of the U.S. Treasury. Georgieva said Friday that the IMF board will be reviewing it urgently.

With emerging markets facing “substantial liquidity problems,” the swap line “seems a more relevant tool for the moment in that it is better targeted, theoretically would provide more liquid assets, and is probably more usable,” according to Tim Adams, a former Treasury undersecretary in the George W. Bush administration and president of the Institute of International Finance, a lobbying group of the world’s biggest banks..

©2020 Bloomberg L.P.