Finance ministers and officials from around the world will gather soon for a virtual annual meeting of the International Monetary Fund and World Bank. Sometimes these gatherings lead to major international announcements. This time, two weeks before the highly consequential elections in the U.S., it would be naive to expect any new initiatives, which would be a regrettable outcome given the Covid-19 pandemic’s toll on the global economy. Even so, the assembled officials should advance consensus on areas where, regardless of the political outcome in the U.S., collective action will be needed to address the worst development and humanitarian crisis in modern history. Here are four specific propositions on which greater consensus is essential.
Move beyond debt standstills and tackle insolvency. Despite all the fanfare, the current G20-sponsored debt-service suspension initiative, even if it is extended through the middle of 2021, is pushing some repayments down the road and only for a limited set of countries. This is helpful, but it doesn’t solve the fundamental solvency problem facing at least a dozen poor countries, which will need some external debt written off. Delaying action on the inevitable is only making the problem worse. Countries like Angola and Zambia, which entered the crisis with significant debt vulnerabilities, are now visibly scrambling to restructure their loans with major creditors, suggesting that a short-term payments standstill won’t be enough.
Restoring solvency for countries with unsustainable debt will require the participation of all creditors—official and private, bilateral and multilateral—and an agreed set of rules. The absence of an agreed and enforceable framework has made the implementation of the initiative contentious among official creditors and nonexistent for private creditors. Six months after its start, the amount of relief expected this year has been reduced to about $5 billion. Moreover, uncertainty about which countries will need debt relief is acting as an impediment for new private lending to all low-income countries.
The forthcoming meetings are the moment to instruct the IMF and World Bank, working with creditors and debtors alike, to come forward by year end with a proposal for restoring solvency for this group of low-income countries. This should include estimates of the financing that will be required from creditors and international financial institution shareholders under different scenarios for moving forward. And they should consider additional measures, such as statutory approaches, like new domestic or international law options that limit creditor recovery, immunize assets in judicial proceedings, or limit the timing of lawsuits—or new instruments, like IFI-financed credit or cash enhancements, that these institutions could deploy in helping to resolve this issue.
Dramatically scale up official financing for low-income countries over the next five years. The recovery from Covid-19 will be a multiyear task, and it comes when these countries were already falling behind on development goals. Most of the financial scaling-up will need to come from the multilateral development banks and the IMF since there is little scope for either bilateral aid or private finance to grow dramatically. These institutions have responded quickly, but the scale of their support remains limited and, in some cases, lacks transparency.
They can do much more, but only by changing their operations and financial models. The IMF could triple its concessional financing capacity to $100 billion using Special Drawing Rights or borrowing from rich countries and selling a part of its gold reserves to soften the terms of lending to poor countries at this scale. The International Development Association, the World Bank’s concessional arm, could double its commitments to $50 billion for each of the next five years, financing this with a $50 billion-$75 billion call on market borrowing and an acceleration of its next replenishment by donors.
Complementing these resources should be a $1 trillion issuance of Special Drawing Rights that would provide at least $14 billion in reserves in additional liquidity to countries in need, and possibly more if some rich countries that don’t need their allocation can be persuaded to lend them to the poor countries that do. Rich countries can also do much better at focusing their bilateral aid on poor countries who need it rather than allocating half of it to richer countries who could be helped with less concessional resources. Shareholders should ask these institutions to come up with an operational strategy for dramatically scaling up their concessional financing over the next five years.
Help emerging market countries access private capital on better terms. Emerging market countries will continue to rely primarily on international financial markets for supplementing their own savings. International financial institutions play a small quantitative role in these countries, but they can be a catalyst for promoting better policies and investments. They can also help to reduce the cost of private market access for these countries through their programs of risk mitigation and credit enhancement.
When risk-free assets trade at zero interest rates while emerging market premiums are historically high, there is scope for the multilateral development banks to play this constructive intermediary role at a far larger scale. There are legitimate concerns the about inappropriate use of official guarantees or other enhancements to attract private funding to poor countries, but they need to be addressed through better program design rather than becoming a barrier for innovation and creativity. Properly designed, these instruments could also accelerate the adoption of policies, investments, and financial instruments aligned with a “green recovery” in the emerging market countries.
Make fighting climate change a central focus of the international financial institution business model. Engagement and financing by development banks will be essential to fighting climate change in emerging markets. Already, World Bank analysis shows natural disasters cost middle- and low-income countries about $18 billion a year alone through energy and infrastructure damage, and additional costs of $390 billion a year in wider household and firm disruptions. However, the potential for climate investment is great: IFC analysis shows an emerging market investment opportunity of $29.4 trillion by 2030. For some of the larger developing countries, this will mean supporting policies and investment choices that will make a tangible impact on global emissions; for many others, it will raise the priority of programs that will help them prepare for and adapt to the consequences of climate change on their societies.
European development banks have already come to recognize this reality, both in setting ambitious targets for climate-related operations and in aligning their overall strategies with the Paris Agreement, but that message needs to reach Washington. Both the IMF and World Bank can do more as part of the global machinery to fight climate change, but they are held back by divisions among their shareholders. The importance of fighting climate change should be a priority for officials representing committed shareholders.
In a world beset by crisis, uncertainty, and disappointment, one should not look to the forthcoming Washington meetings of the IMF and World Bank for comfort or certainty. World leaders can, and should, however, use the proceedings to build consensus for the long haul in helping poor countries get through this crisis.
Masood Ahmed is president of the Center for Global Development and a former International Monetary Fund and World Bank senior official.