The Role of IMF in the Fight Against COVID-19: The IMF COVID-19 Recovery Index
In the August 2020 issue of Covid Economics, published by the Centre for Economic Policy Research, Global Development Policy Center Director Kevin P. Gallagher and Research Fellow Franco Maldonado Carlin developed an IMF COVID-19 Recovery Index that attempts to quantify the extent to which International Monetary Fund (IMF) communications and guidance on the pandemic response has become operationalized in the IMF response to the COVID-19 crisis. The paper discusses the methodology and preliminary results of the analysis covering 75 IMF programs from March to July 2020, and outlines a research agenda for using this new variable to examine IMF policy behavior and social outcomes.
The COVID-19 pandemic came as an unprecedented shock to the world economy and many countries had to quickly resort to aid of the IMF. The central banks and finance ministries of most advanced economies swiftly advanced swap lines, domestic liquidity support, and expansionary fiscal measures to shore up dollar markets and provide lifelines to the vulnerable. Few emerging markets and developing countries had access to these measures and lacked their own monetary or fiscal space to confront the virus, protect the vulnerable, and mount a sustainable recovery.
Indeed, the pandemic panic and very act of securing dollar markets resulted in a ‘flight to safety’ in the form of the largest levels of capital flight from emerging market and developing countries recorded. Exchange rates subsequently plummeted and external debt ballooned across the developing world at a time when tourism dropped alongside commodity prices—leaving fewer sources of export revenue to pay foreign debt. At exactly the time when many developing countries needed the fiscal space to fight the virus and protect their economies, they were faced with mounting external debt. Both the IMF and the United Nations Conference on Trade and Development (UNCTAD) estimate that liquidity needs for emerging markets and developing countries in 2020 alone was least $2.5 trillion and that over 100 countries went to the IMF for emergency support (Wheatley, 2020; Georgieva, 2020a; UNCTAD, 2020)
On April 9, 2020, IMF Managing Director Kristalina Georgieva said that ‘These are the times for which the IMF was created – we are here to deploy the strength of the global community, so we can help shield the most vulnerable people and revitalize the economy’ and committed the IMF to a four point ‘all hands on deck’ approach to the crisis that would focus on supporting health systems, protecting vulnerable firms and people, containing financial panic, and mounting a recovery” (Georgieva, 2020b). Over ten times between April and July of 2020, Georgieva and senior staff articulated that it is essential that ‘for our world is to become more resilient—we must do everything in our power to promote a ‘green recovery’ (Georgieva, 2020c). Expanding on this notion, IMF Deputy Managing Director Tao Zhang emphasized that a green recovery should promote a just transition. That means assisting vulnerable households, workers, regions, and trade-exposed or fuel producing firms. And using carbon pricing revenues in broad tax reductions or public investments that boost growth and benefit all households. (Zhang, 2020).
To back up these statements, the IMF’s Fiscal Affairs Department developed and published a set of guidances, called Special Series on COVID-19, oriented to assist countries in their responses to the pandemic. Among these, we highlight the following three given their parallels with the top-level guidance in Managing Director speeches and remarks:
- Health expenditure (IMF, 2020a). Outlining principles and considerations that countries should take into account in the design of actions oriented to support the monitoring, containment, and mitigation of the pandemic.
- Support for the vulnerable (IMF, 2020b). Highlights different sets of fiscal measures and considerations that countries should take into consideration in the design of programs oriented to support the most vulnerable (firms and households) to address the consequences of the shock.
- Greening the recovery (IMF, 2020c). This document highlight different measures oriented to support a ‘green’ recovery. Among the possible measures, the IMF considers that the governments could finance ‘green’ activities, rather than “brown” ones; like climate-smart infrastructure and technologies, support adaptation, or avoid carbon-intensive investments. In addition, governments could raise carbon taxes and eliminate fossil fuel subsidies, in the context of low oil prices and fiscal reallocation needs.
In historical perspective, this is a very different set of directives than the IMF has given in the past. In response to past crises, the IMF has long prescribed fiscal consolidation that explicitly or implicitly directed countries to engage in contractionary policies that reduced spending on health and social expenditure (Kentikelenis et al, 2016). Indeed, in a study of 16 Western African countries from 1995 to 2014, Stubbs et al (2017) found that IMF programs curtailed the fiscal space for health spending in those per capital by 0.24 percent. In a broader study of IMF programs in 137 developing countries between 1980 and 2014, Forster et al (2019a) found that IMF programs lowered health system access and increased neonatal mortality. In another paper by Forster (2019b) and others, using the same sample, they found that IMF programs during that period also accentuated inequality. Other papers however, have argued IMF conditionality can potentially increase social spending through higher growth during the program period (Gupta et al, 2000, Gupta 2010). In response to these findings, the IMF had begun to add a number of social safeguards to its programs before COVID-19, such as social spending floors, social benefits and transfers, and expanding unemployment assistance. While the literature on the impact of these programs on outcomes is in its infancy, there is evidence that they have been ineffective in the medium term (Gupta et al, 2018).