IMF and World Bank must support recovery in developing countries
THE The Covid-19 pandemic continues to wreak unprecedented human and economic devastation, erasing years of modest and uneven progress towards the Sustainable Development Goals (SDGs).
Developing countries now need much more support, as progress towards the SDGs was “not on track” even before the pandemic.
By the end of 2022, average incomes are expected to be 18% below pre-crisis levels in low income countries (LICs) and 22% in emerging and developing countries excluding China, compared to 13% below in developed economies.
These lower incomes will push hundreds of millions of people into extreme poverty and hunger, surviving on incomes below $ 1.90 / day. The World Bank estimates that the number of poor increased from 119 to 124 million in 2020, and from 143 to 163 million more this year.
Fast growing budget gap
As the UN Secretary General noted, “the richest countries have benefited from an unprecedented US $ 16 trillion in emergency support measures,… the least developed countries have spent 580 times less in per capita terms for their response to Covid-19 ”!
Last year, the International Monetary Fund (IMF) and the United Nations Conference on Trade and Development (UNCTAD) estimated that developing countries need around $ 2.5 trillion to support families. and affected businesses and to accelerate economic recovery.
IMF Managing Director Kristalina Georgieva later admitted that developing countries needed much more.
The IMF’s April 2021 Fiscal Monitor estimates that only access to basic services by 2030 in 121 developing countries would require $ 3 trillion, of which up to half in LICs.
Most developing countries cannot do more because of financial constraints. As public spending needs increase, the pandemic has dramatically reduced their income.
Recent IMF research has found that “larger output losses are being suffered by countries with lower GDP per capita”, in part due to “weaker fiscal stimulus”.
With limited tax and other revenues, developing countries will need to borrow more, thus increasing their already high public debt.
As the IMF notes, “the international community (must) provide additional support through grants, concessional financing and, in some cases, debt relief”.
Too little, too late?
The Bretton Woods institutions (BWI) – the IMF and the World Bank – must mitigate further setbacks, enabling aid, recovery and reform. The fund but also the bank reacted, sometimes in an innovative way, but much too slowly. More importantly, the actual support from the two IBWs so far falls short of the needs.
The fund used its Containment and Disaster Relief Trust Fund to ease IMF debt payments owed by 29 LICs for six months. But last October, the IMF’s board rejected a new pandemic support facility with easier-than-usual terms.
Although the fund has committed around $ 250 billion, a quarter of its $ 1 trillion lending capacity, it has so far only deployed a tenth of its capacity, according to former senior official Ousmène. Mandeng.
Instead, he argues, the fund should offer a lot more support that countries need and want.
According to The Economist, since March 2020, the IMF has disbursed only US $ 32 billion in emergency financing while offering US $ 74 billion through other facilities, both “with more conditions”.
The 85 countries currently receiving IMF funds represent only about 5% of global GDP.
None of them were able to access the Fund’s new “short-term liquidity line” due to its strict conditions.
IBWs face the challenge
In April 2020, the Bank announced a new multi-donor trust fund, the Multi-Donor Fund for Health Emergency Preparedness and Response. This is supposed to complement the $ 160 billion that the World Bank Group has pledged to deploy by mid-2021.
Bank disbursements have been slow despite the urgency, with actual disbursements to needy countries totaling just $ 79 billion in June 2021, less than half of what had been promised.
The bank also abandoned its emergency pandemic financing mechanism, which was criticized for being too small and too slow.
However, the fast-disbursing budget support during the much deeper and more widespread pandemic crisis is actually less than during the CFM. The bank no longer offers emergency budget support.
Just as the fund lent more in 2009 during the global financial crisis (GFC) than since the start of the pandemic, new bank loan disbursements increased less during the first half of the pandemic than during the GFC.
The bank has committed US $ 19.5 billion to fund the G-20’s April-December 2020 Debt Service Suspension Initiative (DSSI). During this time, he refused to freeze any debt for the loans owed to him, arguing that it would jeopardize his credit rating and, therefore, his ability to borrow cheaply.
IBWs must be part of the solution
Blocked by the Trump administration, the likely issuance of $ 650 billion in Special Drawing Rights (SDRs) from the IMF still represents only half of the trillion SDRs ($ 1.37 trillion). The Financial Times deemed necessary.
SDRs do not need to be repaid and carry a very low interest rate (currently 0.05%), costing less than loans. They are often more attractive than grants, which are usually tied to conditions.
While the 75 LICs are expected to receive around US $ 62 billion in SDRs, poor countries could benefit much more if rich countries transfer their unused SDRs to BWIs.
In addition to debt relief, the bank could then interfere with longer-term development finance at the lowest possible cost to borrowing countries.
As UNCTAD has also argued, the multilateral system must lend much more to developing countries at a lower cost.
In 2019, the average interest rate on multilateral debt to LICs was 1.7%, compared to 2.5% for bilateral loans.
The rates of private creditors are much higher. With the status of “privileged creditor” (that is to say, being reimbursed before others), the bank can borrow – and lend – at the lowest rates.
This is more easily done by expanding bank loans and guarantees.
Bank for recovery and development?
Loans worth $ 500 billion, mostly to the poorest countries, are expected to be announced this week at the spring meetings of the IMF and the World Bank. As IBWs can offer much better terms, this will certainly help, but much more is urgently needed.
By borrowing at the current rate of 1.75% from the International Bank for Reconstruction and Development on a 20-year loan, total debt service in 2021 and 2022 would drop from $ 90 billion to $ 65 billion, for example. example, saving $ 25 billion for the LIC-eligible G20-DSSI.
If all developing countries benefited from it, the savings would be much larger, in the order of US $ 285 billion. But to do this, the fund and the bank would have to expand their lending capacities with additional resources.
Currently, too many developing countries are forced to adapt by cutting social and environmental programs. By reducing loan costs and other demands, IBWs can become part of the solution, rather than the problem. – IPS