The Global Financial Safety Net: Lessons for the COVID-19 Crisis
Laurissa Mühlich, Barbara Fritz, William N. Kring, and Kevin P. Gallagher call for an urgent upgrading of global institutions for short-term crisis finance.
The ongoing COVID-19 pandemic represents the greatest stress test for national health systems since the 1912 Pandemic Influenza. COVID-19 and the ensuing economic hardships brought on by the pandemic and government response it necessitates will especially impact emerging markets and developing countries. These countries are forced to confront an erosion of global demand, a dramatic fall in commodity prices, and a capital flow reversal of a magnitude that will put downward pressure on exchange rates and increase debt levels across the world. The estimated USD 100 billion (Georgieva 2020a) outflow of capital from emerging markets and developing countries occurred in less time than during the 2008/09 global financial crisis or the Asian financial crisis.
Beyond the IMF: The patchiness and complexity of today’s global financial safety net
Since the 2008/09 crisis, the so-called Global Financial Safety Net (GFSN) of institutions for short-term crisis finance has evolved into an uncoordinated patchwork of global, regional, and bilateral sources of support that lacks the resources to adequately prevent and mitigate the kinds of financial instability we are now witnessing. For a long time, the IMF was the only available source of financing for the majority of the world’s countries. Today, the GFSN includes a large number of increasingly voluminous RFAs in all continents, bilateral currency swaps between central banks, crisis lending by multilateral development banks, bilateral short-term loans, repo agreements, and hedging instruments by central banks (see figure 1).
Source: Mühlich et al.
According to our estimates (for a more detailed analysis see our recent policy brief and an interactive tracker of the current GFSN) from a new database compiled by the Latin American Institute at Freie Universität Berlin (LAI) and the Global Development Policy Center at Boston University (GDP Center), the financing available from the fledgling GFSN has reached approximately USD 3.5 trillion in 2018, or 4 percent of global GDP. Today, the IMF’s estimated USD 1 trillion in maximum lending capacity is by far not the only actor to provide emergency liquidity. We find that RFAs can provide up to an additional USD 1 trillion in liquidity and bilateral currency swaps can provide an additional USD 1.5 trillion.
While this represents a significant increase in liquidity resources available, it might not be enough to respond to a systemic financial crisis like the current one. Our calculations show that out of the USD 3.5tr in liquidity across the GFSN, about three quarters or USD 2.5 trillion, are designated for advanced economies. The same is valid for the highly irregular network of swap arrangements, whereof more than three quarters is the liquidity of currency swaps between advanced economies. This means emerging markets and developing countries can only access a quarter of the total lending capacity. Hence, the GFSN currently does not meet the requirements to adequately respond the financial necessities of emerging markets and developing countries resulting from COVID-19 that the IMF estimates (Georgieva 2020b).
Moreover, the distribution of availability of the GFSN is highly uneven and unequal, with many countries only having access to a relatively small portion of the GFSN, and some having few options altogether (Mühlich/Fritz 2018). Our data (see figure 2) show that in 2018, access to emergency liquidity is largely concentrated in a handful of countries in Europe, Eurasia, and Southeast Asia, which have access to powerful regional funds and/or have access to currency swaps. In contrast, about half of the IMF member countries have access only to the IMF. This concerns predominantly Sub-Saharan Africa and most parts of Latin America; and among these, only the poorest will gain from specific rapid emergency finance or debt relieve by the IMF, while most of them will have to resort on standard credit lines with their contested conditionality.
Source: Mühlich et al. 2020.
Rising to the task of COVID-19
The present crisis of COVID-19 highlights the importance of a more robust, inclusive, and equitable GFSN.
- Our data for 2018 figures suggest the need to level out the geographic coverage of the GFSN, increasing coverage especially for African and Latin American countries.
- We see a need to expand the resources of the GFSN. The COVID-19 pandemic is likely to lead to the need for a significant increase in IMF and regional fund’s lending volumes, especially for emerging markets and developing countries. As the anchor of the GFSN, the IMF should increase its lending volume through issuing a large volume of Special Drawing Rights (Gallagher et al. 2020a, 2020b). Smaller regional funds will need a stepwise scaling up as well.
- There is an urgent need to coordinate the different components of the GFSN (Kring/Gallagher 2019, EPG 2018, ESM 2018). The status quo fire power of the GFSN can be used in a fruitful manner only if the diverse actors can begin to cooperate on different levels, while preserving their respective policy autonomy and comparative advantages.
Laurissa Mühlich accomplished her PhD in economics at Freie Universität Berlin and Yale University. She is Research Associate and Lecturer at the Chair of Economics at the Institute for Latin American Studies and the School of Business & Economics of the Freie Universität Berlin.
Barbara Fritz holds a joint appointment as Professor at the School of Business & Economics and the Institute for Latin American Studies at the Freie Universität Berlin. Her fields of expertise are development economics and international macroeconomics, money and finance, with regional monetary cooperation as one research focus.
William N. Kring PhD is the Assistant Director of the Global Development Policy Center, a university-wide center in partnership with the Frederick S. Pardee School for Global Studies. He previously was the Assistant Director and Research Fellow at the Global Economic Governance Initiative (GEGI). @WilliamNKring
Kevin P. Gallagher is Professor and Director of the Global Development Policy Center at Boston University’s Pardee School of Global Studies. He serves on the T20 Task Force in the International Financial Architecture and the UN Committee on Development Policy. He is the author of Ruling Capital: Emerging Markets and the Reregulation of Cross-border Finance (Cornell University Press, 2014).
Kring N W and K P Gallagher (2019) ‘Strengthening the Foundations? Alternative Institutions for Finance and Development’, Development and Change, 50(1), 3-23.
Mühlich L and B Fritz (2018) ‘Safety for Whom? The Scattered Global Financial Safety Net and the Role of Regional Financial Arrangements’, Open Economies Review 29(5), 981–1001.
Mühlich, L and B Fritz, B Kring, K Gallagher (2020) The Global Financial Safety Net Tracker: Lessons for the COVID-19 Crisis from a New Interactive Dataset, Boston University, Global Development Policy Center, GEGI Policy Brief 010.