Rewriting the global financial rulebook: Background Paper (8 November 2020) - World - ReliefWeb

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Introduction

The coronavirus pandemic continues to unfold as an unprecedented global crisis. The pandemic has created devastating rates of infection, mortality and lasting health impacts, exacerbated the fragility in health systems, and disrupted the provision of primary healthcare. Beyond these health impacts, the global pandemic has severe socio-economic consequences, including the broadest collapse in per capita incomes since 1870, the loss of 495 million jobs in Q2 2020, protracted school shutdowns, and now the risk of famine and violent conflict. The direct and secondary effects of the pandemic are disproportionately affecting the poorest and most vulnerable populations, with the level and depth of poverty rising for the first time in three decades. It is likely that the worst effects of the pandemic are yet to be seen.

The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) estimates the need for an additional $90 billion in financing for low-income countries – less than 1 per cent of the stimulus packages currently being implemented in OECD countries. It is cheaper, more effective and more dignified for people in crisis to act now. Further delays in the global response will increase the cost of the crisis. In an interconnected and globalized world economy, the effects of the crisis, if left unaddressed, are likely to cascade and reverberate for years to come.

The current existing funds and commitments from International Financial Institutions (IFIs) fall short of what is needed to overcome this crisis. While OECD countries are rewriting the rulebooks when it comes to their own public finances, the financial instruments available to the most vulnerable countries are more limited. Based on publicly available information compiled by the Centre for Disaster Protection and OCHA , IFIs have committed $87 billion in COVID-19 response financing worldwide, as of 8 October.6 This still falls short of the needs of the pandemic response, with the financing also not well targeted at those countries that need it most. Approximately 12 per cent ($10.6 billion) of all COVID-19 financing has been committed to low-income countries. Nearly all financing has taken the form of loans rather than grants (95 per cent). After peaking in June, new monthly financial commitments for COVID-19 have fallen, with a total of $1.87 billion committed in September – only 6.6 per cent of that in June ($28 billion).

IFIs need to act ambitiously and act now – and to boldly use creative solutions to expand the use and capability of existing resources. There is a strong moral and economic case for the international community to coordinate an immediate scale-up of financial resources to respond to the COVID-19 crisis. Against this backdrop, this report calls for shareholder support for four policy options that IFIs and multilateral development banks (MDBs) can use to meet the financing needs of the COVID-19 response:

1. Use existing commitments and limits fully. MDBs should deliver on all commitments to increase the speed of disbursements and the transparency of reporting. MDBs should recognize the value of callable capital commitments to increase their lending capacity to an estimated $1 trillion. Countries should deliver on their ODA commitments. These additional resources could be used to replenish the IDA window ahead of schedule and would provide an important signal to the market of future financing needs.

2. Expand Special Drawing Rights. A new general allocation of SDRs equivalent to $500 billion would result in an allocation of $22 billion to low-income countries – equivalent to a 9 per cent increase in international reserves. There is also scope to reallocate unused SDRs concurrently to funds that support low-income countries, such as the Poverty Reduction and Growth Trust. However, member states must achieve the necessary political support to enable this option.

3. Rethink outstanding debt and new debt relief packages. There should be a coordinated effort between private and official creditors to (1) implement a universal debt standstill and (2) to initiate concrete and systematic efforts towards debt restructuring for longer term debt sustainability. International financial regulatory bodies should play a coordinating role to ensure creditors and debtors have the breathing space to take meaningful steps to rethink debt and mitigate fear of downgrades due to participation in the DSSI. The DSSI should be extended to at least the end of 2021 and steps should be taken now to put in place a mechanism for debt relief in the future.

4. Leverage differential pricing to improve the terms of lending. Differential pricing should be leveraged to improve the terms of lending for low- and lower-middle income countries. While this option may not generate the same magnitude of funding as the aforementioned options, it is an important step towards building a sustainable international financial system.

These options are technically feasible and non-mutually exclusive. They can and should be implemented in tandem, to expand the support for low and lower middle-income countries in their response to the COVID19 pandemic. Clear and unified support from IFI shareholders will be key to delivering on the promise of these options. An increase in liquidity, especially in the form of direct budget support, would help vulnerable countries navigate through the crisis. IFIs should use real-time data to ensure this financing reaches the most vulnerable populations. We recognise the challenge in this, but it is clear that an injection of liquidity now will undoubtedly reduce humanitarian need later.

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