The author is a professor at Harvard’s John F Kennedy School of Government and director of the Harvard Growth Lab.
Time is running out in a pandemic. ChinaThe slow response to the coronavirus in December and January cost the world dearly. The same was true for the slow response in Europe and the United States in February and March. But the world may not have learned the lesson: the mistake seems to be happening again, this time at the IMF.
By historical standards, the IMF reacted quickly and massively. In early April, it announced at its spring meetings that a major economic downturn was on the horizon. He quickly revamped his rapid financing instrument (RFI), which is designed for earthquakes and hurricanes, doubling in size and making it widely available with minimal conditionality and rapid disbursements.
However, with hindsight, this reaction now seems both slow and modest. The recession caused by Covid-19 is significantly larger than originally expected: probably by a factor of three or four in many countries. Colombia and Peru reported a doubling in unemployment, while Honduras suffered a 50% drop in exports in April. Tax revenues in April and May fell by 40% in several emerging economies, from South Africa to Jordan to Peru. The World Bank has just updated its 2020 growth forecast, with double-digit corrections for Argentina, Brazil, Peru and several Caribbean islands. It is now clear that this recession will be the biggest the IMF has faced in its 76-year history. Moreover, relative to countries’ financing needs, the enhanced RFI now appears low. It represents 100% of a country’s “quota”, a somewhat obscure figure that equates to less than 1% of gross domestic product in most countries.
It’s getting worse. According to the rules, the IMF is supposed to disburse no more than 145% of a country’s quota in a calendar year, not much more than the RFI. Moreover, it is not supposed to grant multi-year loans above 435% of the quota, unless it can argue that the case deserves “extraordinary access”. Such constraints mean that the IMF, which according to the Managing Director Kristalina Georgieva has $1 billion to lend, a big fire truck with a clogged hose.
The IMF board discussed loosening lending limits. But the emerging consensus is again: too little, too late.
There appears to be agreement on increasing the annual limit on the amount of RFI: to 245 percent of quota. But given deteriorating government revenues and the need to increase health spending, social transfers and business support, optimal deficits in most countries should be above 10% of GDP, as in the developed world. . Yet developing countries face more limited access to finance. Lack of funding translates into lower social transfers, leading to less effective and more painful lockdowns, bigger job slumps and more bankruptcies. Insufficient funding could well lead to a triple whammy: currency meltdowns, defaults and banking crises. These can set countries back a decade, like in Latin America in the 1980s.
The solution is for the IMF to provide more financial support. It did so during the European crisis of 2011, when it lent on a scale that dwarfs current limits. Greece, Iceland, Hungary and Portugal received many multiples of their quotas, although this crisis was smaller and arguably more local than the current one. Ironically, some European countries are now among the most conservative voices on the IMF board.
Three solutions are on the table. The first is a sharp increase in annual and total disbursement caps, at least for the pandemic years 2020-21. The second is to increase the size of the quotas. The third is a issuance of special drawing rightsas happened after the financial crisis of 2008. Ideally, everything should happen.
A concern raised by those who oppose such measures is that raising the limits could leave the IMF without sufficient resources and force it to expand its balance sheet by borrowing from its members under what is known as a “New Borrowing Agreement”. But that only means we need a bigger IMF to solve the problem.
At the same time, the issuance of special drawing rights is opposite because, by giving all countries unconditional access to larger reserves, it can benefit countries that are not friends of major members, such as the United States. It could also increase China’s relative power at the IMF.
Given what is at stake in terms of avoidable death and suffering, such arguments resemble those of a person who does not want to help the victim of a car accident for fear of having blood on his shirt. But if these arguments prevail, we will all have blood on our hands.