No One Left Behind? Assessing the Global Financial Safety Net Performance During COVID-19

Since the global financial crisis of 2008, the Global Financial Safety Net (GFSN) has changed dramatically to become increasingly voluminous and complex. Today, the GFSN is comprised of the International Monetary Fund (IMF), regional financial arrangements (RFAs) and bilateral currency swaps between central banks. The GFSN now has an unprecedented capacity for crisis prevention and liquidity support via emergency financing institutions and arrangements at the bilateral, regional and global level. 

The COVID-19 pandemic presented an opportunity for the expanded and more robust GFSN to be put to the test during a truly global crisis. However, the significantly expanded crisis finance capacity of regional and global elements in the GFSN remains largely untapped.

A new journal article in the Journal of Globalization and Development by William N. Kring, Laurissa Mülich and Barbara Fritz develops a framework, building upon concepts in economics and international political economy, to analyze GFSN inefficiencies and evaluate the utilization of the GFSN. Combining balance of payments models with the concept of regime complexity, the authors analyze and compare patterns of GFSN utilization in response to COVID-19 with past usage. 

The authors find that even in reaction to a system shock like the COVID-19 pandemic, there has been surprisingly little use of the IMF and RFAs compared to their respective lending capacity. Much in contrast to the IMF and the RFAs, bilateral central bank currency swaps are in ever rising use and provide enormous advantages to swap partners: high liquidity volumes, immediate availability and absence of any conditions. However, currency swaps are available only to a selected group of countries based on the willingness of the offering country to provide liquidity to another country’s central bank.

The authors draw three main conclusions for what they consider urgent needs for reform to make the GFSN fit for purpose:

• The strong performance of newly reformed non-conditional, easy to access crisis response facilities calls for a widening of this kind of credit facility to address external shocks, and for more substantial overhauling of standard IMF conditionality. 
• The observed borrowing patterns suggest that RFAs need not just increased funds, but differentiated reforms. The small and first-generation RFAs would profit from enlarging their capital and membership, the middle-sized regional funds would require more balanced governance mechanisms and the voluminous non-autonomous RFAs with strong ties to IMF programs would require increasing autonomy as well as more balanced decision making and governance structures.
• The authors’ analysis reinforces that swaps have become an integral part of GFSN crisis response. Bilateral swaps give room to domestic financial and trade-related interests of the offering countries, and reinforce individual geo-strategic interests and aspirations that further fuel the fragmentation of the global financial order.

In all, coordination of different GFSN elements could reduce the transaction costs both for borrowing countries and lending institutions. The preference for IMF non-conditional facilities over standard conditional credit lines, together with the expansion of bilateral currency swaps, seems to be a strong signal that borrowers prefer less intervention in economic policy. The authors argue that reform of policy conditionality in IMF facilities is urgent and fundamental if the IMF intends to regain its central coordinating role as global firefighter.