No One Left Behind? COVID-19 and the Shortcomings of the Global Financial Safety Net for Low- and Middle-Income Countries

The Global Financial Safety Net (GFSN) refers to the set of institutions on the global, regional and bilateral level that provide balance of payments finance to countries in temporary financial distress. The GFSN has expanded tremendously in recent years, yet, this increase in resources has been accompanied by deepening structural and geographical inequalities in the provision of crisis finance. The COVID-19 pandemic has brought to light not only the possibility of surprisingly voluminous resources of crisis finance being raised by some, but also the inequities that exist when countries attempt to borrow temporary liquidity to prevent or backstop a sudden balance of payments problem.

A new policy brief from the Boston University Global Development Policy Center, Freie Universität Berlin and the United Nations Conference on Trade and Development summarizes the updated findings of the Global Financial Safety Net Tracker, a data interactive jointly compiled by the three institutions that quantifies the availability of crisis finance since the onset of the COVID-19 pandemic. For their analysis, the authors collected data for conditional and unconditional emergency lending by the International Monetary Fund (IMF), regional financial arrangements (RFAs) and bilateral currency swap arrangements between central banks during the pandemic.

The authors show that provision of liquidity is highly unequal, where high-income countries are more insured by the GFSN than low-income countries. They also find the dynamics of liquidity and solvency risk similarly differ between income levels. Low- and middle-income countries are also exposed to the risks of rising debt service payments that are likely to grow further over the course of the COVID-19 pandemic and recovery.

The analysis of the GFSN response during the COVID-19 pandemic highlights three main aspects of the GFSN: the GFSN is far from “global,” regional reserve funds play a marginal role in the pandemic and the IMF is no longer the single most important crisis prevention source for all income groups.