The International Monetary Fund is at the centre of the international financial safety net, but countries have failed to take up its support during the pandemic. If not during COVID, then when, asks Ousmène Jacques Mandeng (LSE)

Mandeng, Ousmene

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LSE Research Online

The	IMF	has	the	firepower,	but	it’s	going	unusedThe	International	Monetary	Fund	is	at	the	centre	of	the	international	financial	safety	net,	but	countries	have	failed	totake	up	its	support	during	the	pandemic.	If	not	during	COVID,	then	when,	asks	Ousmène	Jacques	Mandeng(LSE).The	IMF	saw	early	on	the	need	for	pandemic	support.	During	its	spring	meetings	in	April	2020,	managing	directorKristalina	Georgieva	advertised:	“[W]e	have	$1	trillion	lending	capacity	—	4	times	more	than	at	the	outset	of	theglobal	financial	crisis	[and]	have	taken	exceptional	measures	[…]	sought	to	maximise	our	ability	to	provide	financialresources	quickly	[…]	to	ease	liquidity	constraints	and	provide	space	for	priority	outlays	[…].”Sure	enough,	annual	world	GDP	fell	by	3.3	percent	year-on-year	in	2020,	and	an	emerging	markets	debt	crisis	islooming.	These	conditions	should	have	catapulted	the	IMF	into	action.	Yet	it	has	been	struggling	to	deploy	itsresources	at	scale,	and	its	latest	attempt	to	make	a	Special	Drawing	Rights	(SDR)	allocation	of	about	US$650billion	may	go	the	same	way.Kristalina	Georgieva,	Managing	Director	of	the	International	Monetary	Fund,	at	the	WorldEconomic	Forum	in	January	2020.	Photo:	World	Economic	Forum	via	a	CC	BY	NC	SA	2.0licencePut	simply,	IMF	resources	are	not	being	used.	The	IMF	lent	only	about	US$100	billion	—	about	10	percent	of	itsresources	of	about	US$1,000	billion	—	during	2020	and	early	2021.	During	that	time,	emerging	markets	anddeveloping	countries	have	mobilised	just	0.1	percent	of	their	total	SDR	allocations.	This	crisis	should	affordcountries	a	mix	of	financing,	in	which	IMF	resources	ought	to	be	critical.	While	the	IMF	may	argue	that	it	standsready	to	supply	assistance,	it	needs	to	ensure	countries	actually	take	it.	An	international	financial	safety	net	that	noone	uses	serves	no	purpose.IMF	lendingBetween	the	end	of	January	2020	and	January	2021,	the	IMF	extended	lending	commitments	based	on	mycalculation	by	gross	US$97	billion	(Figure	1).	During	that	period,	a	record	111	arrangements	were	approved.Excluding	flexible	credit	lines	(FCL)	that	are	normally	not	activated,	total	new	lending	commitments	were	US$52billion.	The	average	amount	approved,	in	percent	of	IMF	quotas,	countries’	financial	stakes	in	the	IMF,	excludingFCLs	has	been	76	percent	(or	US$481	million),	the	lowest	since	the	global	financial	crisis.	By	contrast,	at	the	outsetof	the	global	financial	crisis	(September	2008	–	September	2009),	the	IMF	approved	34	arrangements	totallingUS$153	billion	(and	US$75	billion	excluding	FCLs)	at	on	average	340	percent	of	quota,	or	US$2,415	million.LSE Covid 19 Blog: The IMF has the firepower, but it’s going unused Page 1 of 4		Date originally posted: 2021-05-04Permalink: https://blogs.lse.ac.uk/covid19/2021/05/04/the-imf-has-the-firepower-but-its-going-unused/Blog homepage: https://blogs.lse.ac.uk/covid19/Figure	1:	IMF	credit	outstandingFor	some	time,	the	IMF	appears	to	have	under-utilised	its	resources	(Figure	1).	Rarely	has	it	lent	at	half	of	itscapacity,	gross	of	some	prudential	buffers.	While	some	capacity	constraints	were	alleviated	through	additionalmultilateral	and	bilateral	borrowing	arrangements,	the	IMF	has	mostly	not	been	able	to	mobilise	its	resources	fully,even	in	acute	major	global	economic	crises.Special	Drawing	Rights	allocationSDRs	are	issued	to	IMF	member	countries	and	represent	a	perpetual	credit	line	for	freely	usable	currencies	of	IMFmember	countries.	They	are	considered	a	supplement	to	foreign	exchange	reserves.	If	countries	face	an	externalshock,	SDRs	can	be	exchanged	for	dollars	and	used	towards	countries’	external	debt	services.LSE Covid 19 Blog: The IMF has the firepower, but it’s going unused Page 2 of 4		Date originally posted: 2021-05-04Permalink: https://blogs.lse.ac.uk/covid19/2021/05/04/the-imf-has-the-firepower-but-its-going-unused/Blog homepage: https://blogs.lse.ac.uk/covid19/There	are	SDR204	billion	(US$294	billion)	in	SDRs	outstanding.	SDR	allocations	are	‘cost	free.’	Their	distributionrests	on	the	distribution	of	IMF	quotas.	Emerging	markets	and	developing	countries	(including	China	and	excludingthe	EU)	have	been	allocated	37	percent	of	SDRs.	In	each	allocation	every	country	is	given	an	SDR	asset	(holding)and	an	SDR	liability	(allocation).	If	a	country	holds	fewer	SDRs	then	allocated,	its	net	holding	is	negative.	Changesin	net	holdings	show	to	what	extent	countries	use	them.Figure	2:	SDR	usageLSE Covid 19 Blog: The IMF has the firepower, but it’s going unused Page 3 of 4		Date originally posted: 2021-05-04Permalink: https://blogs.lse.ac.uk/covid19/2021/05/04/the-imf-has-the-firepower-but-its-going-unused/Blog homepage: https://blogs.lse.ac.uk/covid19/Between	January	2020	and	February	2021,	emerging	markets	and	developing	countries	including	China	reducedby	SDR0.1	billion	their	net	SDR	holdings,	out	of	a	total	of	SDR76	billion	in	allocations	(Figure	2).	During	the	globalfinancial	crisis	the	mobilisation	of	SDRs	(after	a	large	allocation	in	August	2009)	was	similarly	modest.The	IMF	keeps	insisting	it	wants	a	big	bazooka.	Yet	it	has	failed	to	show	it	can	use	it.	To	be	a	central	pillar	of	theinternational	financial	safety	net,	it	needs	to	ensure	its	resources	can	be	deployed	fast	and	at	scale	in	times	ofheightened	distress.	New	arrangements,	the	Rapid	Credit	Facility	and	Rapid	Financing	Instrument,	have	alreadyattempted	to	do	that	but	are	available	only	for	relatively	small	amounts.SDRs	need	to	change	if	they	are	to	be	used.	Allocations	should	be	allowed	to	deviate	from	quota	shares	to	enablecountries	in	distress	to	get	them,	and	be	made	more	flexible	—	through,	for	example	a	large	allocation	envelope.They	need	to	become	more	attractive	as	financial	instruments	and	to	go	digital	to	leverage	new	technologies,making	them	more	accessible	for	an	expanded	holder	base,	including	private	market	participants.The	IMF’s	recent	track	record	suggests	that	it	has	fallen	behind,	becoming	less	visible	and	less	used.	Reforms	areneeded	to	ensure	the	IMF	can	play	a	more	prominent	role	in	the	global	economy.	If	it	is	not	used	during	apandemic,	then	what	is	it	for?This	post	represents	the	views	of	the	author	and	not	those	of	the	COVID-19	blog,	nor	LSE.LSE Covid 19 Blog: The IMF has the firepower, but it’s going unused Page 4 of 4		Date originally posted: 2021-05-04Permalink: https://blogs.lse.ac.uk/covid19/2021/05/04/the-imf-has-the-firepower-but-its-going-unused/Blog homepage: https://blogs.lse.ac.uk/covid19/

The IMF has the firepower, but it’s going unused

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The IMF has the firepower, but it’s going unused

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