POLICY BRIEF | APRIL, 2020 What the IMF can do now to confront COVID-19 By Ramin Toloui KEY TAKEAWAYS The IMF projects that COVID-19 will cause the worst economic downturn since the Great Depression. A crisis of that n Forceful actions by the IMF and World Bank are imperative magnitude demands a commensurately forceful response. to address the worst global As the IMF and World Bank convene this month, will global economic shock since the financial leaders rise to the challenge? Great Depression. The good news is that the IMF has already expanded existing rapid financing n A new IMF Systemic Liquidity mechanisms to make available an expected $100 billion to countries in need, Facility could provide $100-200 as well as extended debt relief to 25 of the most vulnerable nations. billion in critical financing to Unfortunately, other IMF initiatives being developed are simply not ambitious cushion the blow to vulnerable enough. emerging markets. A case in point is the short-term liquidity line currently under consideration. n By calibrating borrowing The goal is to expedite support to countries with strong policies coming limits on a sliding scale into this crisis. Rather than having to negotiate programs with detailed proportional to credit risk, conditionality, such countries could draw IMF assistance swiftly to help such a facility could disburse manage the fallout from sharp capital outflows, which reached an estimated funds rapidly, equitably, and at $80 billion in March alone. scale. Emergency liquidity lines are the right initial response. Early action in an incipient crisis can forestall avoidable damage. But it appears the framework n Rapid action commensurate being discussed is based on a proposal developed by IMF staff several years with the emergency can ago. Under that plan, only a small number of countries would qualify, and limit unnecessary collateral those that do could only draw a modest 145 percent of their IMF quotas. damage, making the larger job of stabilization and recovery It is time to think bigger. The IMF should create a Systemic Liquidity Facility easier. (SLF) that would allow a broader number of countries to borrow and increase the amount the IMF makes available. Under the SLF, eligibility would be determined by objective criteria—namely, market-based credit default swap spreads for each country in the period preceding the crisis. The best-quality borrowers would be eligible to draw John A. and Cynthia Fry Gunn Building siepr.stanford.edu 366 Galvez Street, Stanford, CA 94305-6015 @siepr facebook.com/SIEPR/ 1 POLICY BRIEF | APRIL, 2020 250 percent of their IMF quotas, with access calibrated While similar to swap lines that the Federal Reserve so that it phases out in line with the market’s prior has established with individual central banks, this assessment of the country’s credit risk. Financing terms arrangement would have the benefits of sharing would be at a penalty rate and short repayment period to the burden of liquidity provision multilaterally and discourage excessive use and encourage countries to tap harnessing the IMF’s institutional expertise in emerging capital markets as soon as possible. markets. To illustrate, Indonesia would be eligible to draw Many countries will not be eligible for the SLF, and approximately $16 billion under the SLF to bolster some that are may ultimately require financial its $120 billion in foreign reserves. That represents a assistance beyond what is available under this facility. meaningful addition to its first lines of financial defense In those cases, traditional IMF programs with policy to meet near-term demands for U.S. dollar liquidity. conditionality reflecting the unique attributes of this shock are appropriate. There are several advantages to this approach. Objective criteria mitigate the potential that judgments are While a systemic liquidity facility is no cure-all, it does clouded by political or bureaucratic considerations. provide a key tool for addressing the first wave of this The sliding scale of access prevents an “all-or-nothing” crisis. Acting quickly and at a scale that reflects the cliff, making eligibility decisions less fraught. Calibrated emergency can limit unnecessary collateral damage, access also makes it possible to simultaneously increase making the larger job of stabilization and recovery easier. borrowing limits for the platinum-quality countries and That job starts with bold action this month. include a larger number of other high-quality borrowers in the program. The facility is designed to be executed rapidly yet Ramin Toloui is a professor of the equitably at scale, which is exactly what is needed during practice of international finance systemic shock. A heavy-use scenario would translate and the Tad and Dianne Taube into $100 billion of additional IMF support through the Policy Fellow at SIEPR. His research SLF. In an extreme case—where large borrowers such as and teaching are focused on India tap the facility—demand could increase to around financial crises, international economic policy, and $200 billion. the economic impact of artificial intelligence. He served previously as an assistant secretary at the A new Systemic Liquidity Facility of $100 to $200 billion U.S. Treasury Department and global co-head of is large, but well below the roughly $1 trillion in lending emerging markets at PIMCO. capacity the IMF has pledged to mobilize. Moreover, sizable potential usage is a feature not a bug of such a facility. A diminutive footprint doesn’t move the needle in meeting the needs of the global financial system. The Stanford Institute for Economic Policy If overall IMF resource constraints do become a concern, Research (SIEPR) catalyzes and promotes evidence- policymakers could consider special mechanisms for based knowledge about pressing economic financing the SLF that reflect its exceptional and short- issues, leading to better-informed policy solutions term nature. For example, the world’s major central for generations to come. We are a nonpartisan banks—United States, Eurozone, China, Japan, and research institute, and SIEPR Policy Briefs reflect United Kingdom—might explore dedicated funding the views and ideas of the author only. for the SLF via special swap transactions with the IMF. John A. and Cynthia Fry Gunn Building siepr.stanford.edu 366 Galvez Street, Stanford, CA 94305-6015 @siepr facebook.com/SIEPR/ 2