IMF needs new tool to deal with pandemic – former officials

The International Monetary Fund should urgently develop a new lending tool to help emerging market economies during the pandemic, two of its former officials argue.

The IMF’s current programmes emphasis on economic adjustment leave them  “ill equipped” to help EMEs deal with the pandemic’s impact, say Matthew Fisher, former deputy director of the IMF’s finance department, and Adnan Mazarei, ex-director of its Middle East and central Asia department, who outline an alternative policy.

They argue the IMF should develop a dedicated “pandemic support facility” (PSF), which would have “more lenient” lending conditions and “less focus” on debt sustainability.

They outline their alternative in a proposal published by the Peterson Institute for International Economics. 

Fisher and Mazarei propose the IMF provides finance for up to three years, with early payments focused on supporting healthcare and vulnerable people. Progress should be reviewed semi-annually and quarterly disbursements subject to economic performance and quality of public health response criteria.

The facility would need to be approved by 85% of IMF voting members.

Appropriate structural reforms should be designed cautiously and only to be implemented at later stages of the agreement, once there is greater certainty about what might be required, they say. There should also be “less focus” on debt sustainability analysis, which again would be tentatively designed at the formation of the agreement and updated over time.

The IMF’s executive board would review the facility after one year and there would be a sunset provision after “say, four years”, they say. There would also be a presumption that the facility would be terminated one year after an effective vaccine becomes available, they add.

“Massive uncertainty”

Fisher and Mazarei argue there is an “urgent need” for EMEs to increase spending on health care and expanding social safety nets.

EMEs’ fiscal accounts and balance of payments are both under exceptional pressure from the impact of the pandemic, the authors note.

“If the crisis remains under-addressed, it will lead to significant changes in income distribution and increases in poverty because of employment losses and limited social safety nets,” they say. They argue that recent improvements in EME access to private sources of financing may not last. 

The “incalculable and massive uncertainty” surrounding the size and duration of the economic shock makes the IMF’s SBA and EFF arrangements less suitable, they say. “To the extent that the shock is expected to be largely self-correcting, it would be desirable to provide financing to avoid unnecessary changes in economic policies.” 

Fisher and Mazarei praise the IMF for co-ordinating a “nimble and effective response” to the pandemic thus far. But they say that EMEs are facing fiscal and balance of payments challenges that are “fundamentally different” to those the IMF’s programmes were designed to address.

The IMF’s stand-by arrangements (SBA) and extended fund facilities (EFF) require countries to work towards balance-of-payments equilibrium. This creates a stigma and may be discouraging EME from making use of the funds, they say.

“Fund lending in the current circumstances should help countries address an exogenous shock that could be largely self-correcting over the medium term – though not without some scars,” they say. “Consequently, fund programmes at this point should place less emphasis on adjustment than would be the case with the fund’s more traditional lending instruments.”  

The SPF could provide a transition from emergency financing to SBA and EFF arrangements once there is “greater clarity” around the need and type of balance of payment adjustment, they say.

Unprecedented demand

Since the pandemic’s onset, the IMF has provided financing of roughly $25 billion to 72 countries, and debt relief to 27 low-income countries. This is already an unprecedented level of demand for IMF funding. The IMF has said it expects further requests in the coming months.

On July 22, the IMF executive board raised the limits on several of its financial support facilities. It raised the limits on the facilities from 145% of a country’s IMF quota to 245% for the general resources account. The board raised the limit from 100% to 150% of quota for the poverty reduction and growth trust.