38 5 cycles of capital flow stalls and surges complicate complicate surges and stalls flow macroeconomic managementinthesecountries. capital of such relief, cycles temporary provides this While dollar. the of weakening the and environment rate interest low global the to due inflows capital resurgent facing are countries, in advanced economies. Now many EMDEs, notably larger yields bond government in decline the to contrast sharp sovereigntheir spreadsin on as widened, tightened bonds sound relatively macroeconomic with fundamentals, financing countries conditions those for Even rates. exchange their pressures on downward and inflows capital of stops Atof thepandemic,EMDEsfaced theonset sudden even theadvanced economies. ought to shocks such withstand the interest bein of the worldeconomy,in better helping thesecountries such with faced devastating global shocks. Given when their rising importance maneuver to room little have times, in normal even pressures economic significant economies (EMDEs). which face These countries, developing and market emerging for protection more need for a better global financial safety net that provides wroughtthe worldeconomy, on has highlighted the The COVID-19 pandemic,and the carnage it has The issue Brookings Institution Senior Fellow, GlobalEconomy andDevelopment, Eswar Prasad Development, Brookings Institution Vice President andDirector, GlobalEconomy and Brahima Coulibaly purpose? system: Howto fititfor andfinancial monetary The international

39 REIMAGINING THE GLOBAL ECONOMY: BUILDING BACK BETTER IN A POST-COVID-19 WORLD EMDEs will remain subject to capital flow and exchange rate volatility as major advanced economies rely on monetary policy measures, both conventional and unconventional, for economic support and the spillover effects of these policies cause whiplash effects. Reliance on dollar funding remains a source of vulnerability for many EMDEs, with the Fed’s actions and the dollar’s trajectory, in particular, affecting them considerably as a result. Several EMDEs with high levels of external debt and balance of payments vulnerabilities have faced downgrades of their sovereign debt and lost access to global financial markets precisely at their time of greatest need to fight the pandemic and shore up their economies. Lowincome countries face even greater challenges. Their economies and export markets have collapsed, leaving many of them with crushing burdens of debt repayment. Sovereign debt levels were already high in many low-income countries and the pandemic is likely to make the situation worse as these countries have few other sources of domestic or foreign revenue to turn to. Even before COVID-19, the global financial architecture was due for reforms to keep up with the evolving dynamics of the global economy, but the pandemic has highlighted the extent of these weaknesses, underscoring the need for reforms. It will take some bold actions on the part of the international community to make the global financial system better fit for purpose in the post-COVID world.

Sovereign debt levels were already high in many low-income countries and the pandemic is likely to make the situation worse as these countries have few other sources of domestic or foreign “revenue to turn to.

40 to therecordof requests number forassistance. crises, but its limited resources have constrained its ability to respond financial global in countries to nets safety provide to system financial ofthe size the global economy. and the global in institution the important the most The IMFis system with financial the commensurate of level complexity in a increase to capacity a lending (IMF) incorporate Fund’s should system financial tomechanism Monetary the International bolster systematically global post-COVID-19 A f e SR o te il f odr o alctd n uue SDRs. unused and allocated of holders of will the or SDRs new of IMF’s the depends entirelyshareholders onthewill ofthemajority inthecase SDRs limits of deployment the which such, As voluntary,effectively. tool this largely use to ability is SDRs existing the of funding of forms alternative to more could be needy helpful aswell. countries The reallocation to access with countries resourced better from a reallocation large, sufficiently thatthe is SDRs the extent unused of To pool countries. beneficiary the by used been not have that SDRs created previously be may there SDRs, new Besides thatwasnecessary.lack ofsuper-majoritysupport the pandemic spread throughran theworld as agroundof the account on SDRs new issuing for proposal A EMDEs. all of share voting combined the than more significantly is which percent, 85 of majority crisis financial super requiresa activation Its G-20. the by call a toresponse in (GFC) global 2008-09 the during recently most history, its The ideas another tool in the global financial system’s arsenal that should lending facilities. that arsenal system’s financial deployed be systematically asneeded tothe existing complement global is the (SDRs) in Rights Drawing tool Special another new create to ability IMF’s The subscriptions shouldbethemainsource ofresources. resources withthe IMF’s isinconsistent that quota basicprinciple resources will decline to about $450 billion. The reliance on non-quota These facilities are set to expire renewed,soon and, unless the IMF’s which are temporaryand are atthediscretioncountries. donor of agreements, borrowing bilateral and (NAB) Borrow to Arrangements New the namely funding, resourcesfor non-quota overrelianceon the borrowerspotential for resourcesis source andamajor ofuncertainty resources as a share of GDP will decline. An additional risk to the IMF’s these rise, to continues GDP global as and, COVID-19 as such crises financing for a few country crises, it is insufficient to manage systemic percent of global GDP. While this amount might be sufficient to provide 1.1 only trillion, $1 around to amount institution’sresources available RECAPITALIZEIMF THE SYSTEMATICALLY DEPLOY SDRS 2 The IMFhasdeployedtool this in times four only 1 uuaiey the Cumulatively,

41 REIMAGINING THE GLOBAL ECONOMY: BUILDING BACK BETTER IN A POST-COVID-19 WORLD A mechanism that empowers the IMF to reallocate SDRs to where they are most needed will be an improvement. ESTABLISH SWAP LINES ACCESSIBLE TO A BROADER RANGE OF COUNTRIES A third reform would be to establish a framework to systematically expand access to temporary foreign exchange liquidity to a wide range of countries. The bilateral swap arrangements, which have become a common tool among central banks of advanced economies during global shocks since the GFC, are not available to most EMDEs to alleviate their foreign exchange liquidity shortages. During the COVID-19 pandemic, the swap lines offered by the Federal Reserve have helped provide dollar liquidity to global financial markets. However, most of these swap lines are with the central banks of other advanced economies. At the height of the pandemic, the Fed did offer dollar funding lines to more countries, collateralized by their central banks’ holdings of U.S. Treasury securities. But such ad hoc measures fall short of a more structured approach. Institutionalized mechanisms for emergency liquidity assistance would be more effective and would also reduce the incentive for EMDEs to undertake self-insurance through reserve accumulation, which is inefficient at both the national and global levels. IMPROVE DEBT RESTRUCTURING MECHANISMS In the absence of a sufficiently strong global safety net, the G-20 announced a debt standstill initiative (DSSI), calling on all creditors to grant delays in debt repayments for the least developed countries through the end of 2020. Full implementation of the DSSI is projected to mobilize $12 billion for the eligible countries. To date, at only $4 billion, the outcome has fallen significantly short. Among the key obstacles are the legitimate concerns from eligible countries that participation might trigger a sovereign downgrade and undo hard-fought-for efforts to gain access to international capital markets. Beyond the DSSI, several countries will emerge from the pandemic with unsustainable debt levels. Even such cases where debt restructurings are inevitable pose challenges for a financial system that is not well designed to address this issue. One reason is the evolution of the landscape for sovereign debt, notably the higher share of private sector creditor for several low-income countries, and a creditor base that is more diffuse with the emergence of bilateral official creditors including China. While the plurality of creditors brings several benefits, it makes it difficult to achieve the level of consensus required for debt restructuring.

42 system, especially weaknesses in the safetyin especially weaknesses system, EMDEs. for net financial international the in fractures highlighted has COVID-19 The Special sector debt. creditworthy and well-capitalized Purpose Vehicles, perhaps funded by SDRs, to help restructure private as such mechanisms bonds sovereign creativeother to consider ripe be might clauses. of time the The without stock sizeable a remains there restructurings, debt sovereign some in helpful proved and 2014 in enhanced were (CACs) clauses action collective While involved. are creditors private circumstancesand thecreditor when multiple especially landscape, altered economic substantially of prove light in otherwise difficult, will the comingyears.debt fora larger Restructuring of countries number over distress debt in countries of number the in increase anticipated one shouldbeakeyEstablishing to priority manage helpbetter the debt. external EMDEs’ of restructuring orderly an for system financial Finally, there iscurrentlymechanism inthe nowell-functioning oenne tutr, hc rmis oiae b te advanced the economies by dominated remains which structure, governance reformingin step the IMF’s would beanimportant calculations yet ambitious, The following reasonable, changesto thequota risks. that mitigatecounterparty such swap lines for a broad group of countries by providing guarantees to broaden their accessto more countries. The IMF could helpunlock and Japan) of Bank and ECB, (Fed, banks central G-3 the by offered from the IMF’s shareholders will also be toimportant support institutionalize swap lines Strong system. financial of global mission the its safeguarding fulfill to IMF the allow to imperative are mechanism resourcesin reform andaconcomitant the quotaallocation of who areEMDEs, of has becometooclients, themain wide. An increase institutions those and shareholders, dominant the the are who economies, advanced of realities financial the between divergence international The revamp. a of major need in is the of governance The The way forward the EUhas,inaddition,asinglemarket. internal, astheeurozone hasasinglecurrency andcentral bank; Considering intra-eurozone trade orperhapsintra-EU trade as modest weight. Adding populationasanothervariableinthequotaformula,witha 3 : 43 REIMAGINING THE GLOBAL ECONOMY: BUILDING BACK BETTER IN A POST-COVID-19 WORLD World leaders should chart a new course of action to improve the functioning of the international monetary and financial system and to better prepare it to cope with future crises. This requires not just a commitment of more resources but also political will on the part of the major economic powers. The legitimacy of the international financial institutions and the global governance system is at stake.

World leaders should chart a new course of action to improve the functioning of the international monetary and financial system and to better “prepare it to cope with future crises.

44 3. 2. 1. Endnotes

development/2019/07/01/the-governance-of-the-international-monetary-fund-at-age-75/ at age75,” Brookings Institution,July1,2019, Brahima CoulibalyandKemal “TheGovernance Dervis, System oftheInternationalMonetary financial-fallout-in-developing-countries/ future-development/2020/03/26/imf-special-drawing-rights-a-key-tool-for-attacking-a-covid-19- for attackingaCOVID-19,” Brookings Institution,March 26,2020, Kevin P. Gallagher, Jose Antonio Ocampo,andUlrichVolz, “IMFSpecialDrawing Rights:Akey tool institutions to cushiontheshockandto prepare theground foradurable economicrecovery. Admittedly, themulti-facetednature ofCOVID required, appropriately, from various financial support https://www.brookings.edu/blog/future- https://www.brookings.edu/blog/ 45 REIMAGINING THE GLOBAL ECONOMY: BUILDING BACK BETTER IN A POST-COVID-19 WORLD