IMF should double funds to $2T, offer debt moratorium for COVID-19 crisis response
“COVID19: Increase in IMF resources and debt moratorium urgently needed”
By Cristoph Trebesch and Rolf J. Langhammer, courtesy of IfW Kiel
Never in its 75-year history has the IMF been more important for global financial and economic stability than now in the corona pandemic. Already 90 countries have applied for credit assistance in recent weeks, a worrying record. In crises, the IMF is a lender of last resort for developing and emerging countries and thus an irreplaceable source of finance, because these countries have less strong central banks and currencies, weaker tax systems and are more dependent on fluctuating commodity revenues and foreign funding than the industrialized countries.
The current resources of the IMF amount to a maximum of USD 1 trillion, which is equivalent to about 1% of global economic output. This is far too little in view of the currently estimated global GDP collapse of about 3% this year, even if the funds were to be increased by USD 500 billion in 2021 as discussed. It is important and in their own interest that the industrialized countries have assured the IMF of their financial support. But this crisis calls for even more vigorous countermeasures to avoid a collapse of the economy and society in poorer countries.
It is to be feared that if the economic collapse hits developing and emerging economies as hard as it did the industrialized countries, it will be at least twice as severe as in 2008, partly because these countries have a much greater weight in the global economy today than they did then. Therefore, a doubling of IMF resources to more than USD 2 trillion is necessary, in particular by expanding the credit lines of the industrialized countries to the IMF. This is the only way to prevent developing and emerging countries not only from being weakened both as sourcing and sales markets but also from being destabilized socially.
Moreover, a debt moratorium would be of great importance for all developing countries now seeking assistance from the IMF. All interest and redemption payments should be suspended for up to 2 years, i.e. beyond the currently proposed 6 months. Private investors and state creditors such as China must also be involved in a concerted action. Otherwise, the moratorium would remain ineffective, as any money released would flow into the coffers of these creditors instead of being available to the state and the domestic economy.
The IMF’s USD 500 million in grants to facilitate debt servicing only reach the IMF’s 25 poorest debtors, but not the more advanced developing countries. A UN resolution could legally secure the moratorium and prevent claims for repayment. As a model, a resolution for Iraq in 2003 could serve as a model, which provided for debt relief and effectively protected the country from legal action by private creditors at the time.
Prof. Dr. Cristoph Trebesch is Head of International Finance, Fiscal Policy & National Budgets, Economic & Financial Crises at IfW Kiel. Prof. Dr. Rolf J. Langhammer was Vice-President of the Kiel Institute for the World Economy from October 1997 until August 2012 and Professor at the Kiel Institute. He retired from the Vice-Presidency on August 31, 2012 but continues to work at the Institute.