Whatever It Takes? The Global Financial Safety Net, COVID-19 and Developing Countries

Multilateral financial institutions have pledged to do whatever it takes to enable emerging market and developing countries to fill a $2.5 trillion financing gap to combat COVID-19 and subsequent economic crises.

In a new journal article published in World Development, Kevin P. Gallagher, William N. Kring, Thomas Stubbs, Christina Laskaridis and Alexander Kentikelenis compile datasets to assess how well the International Monetary Fund (IMF) and other regional financial arrangement activities are meeting the needs of developing countries in response to the COVID-19 pandemic.

First, the authors examine recent policy promises on expanding the global financial safety net, a web of ‘financial resources and institutional arrangements that provide a backstop during a financial or economic crisis,’ and compare these to pre-pandemic available resources. Second, they present an initial assessment of what the IMF and regional financial arrangements (RFA) response to date, including which countries have benefited, what level of financing has been approved and under what terms. The study relies on official pronouncements of these institutions and on newly-developed datasets of lending activities. It only covers multilateral liquidity finance and not longer-term development financing, such as that provided by the World Bank and regional development banks.

The authors found that the IMF and other regional arrangements have made relatively trivial amounts of new financing available and have been slow to disburse the financing at their disposal. As of July 31, 2020, these institutions had committed $89.56 billion in loans and $550 million in currency swaps, totaling $90.11 billion—just 12.6 percent of their current capacity. 

Where can countries turn to receive such support? Countries increasingly have no choice but to seek financial support from the third global financial safety net pillar: multilateral financial institutions. These encompass the IMF and RFAs, like the Chiang Mai Initiative Multilateralization or the Latin American Reserve Fund.

The study also includes datasets for scholars and analysts to track trends and evaluate the impact of the global financial safety net on development outcomes over time.