IMF, World Bank Must Support Developing Countries’ Recovery

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Inter Press Service

The COVID-19 pandemic continues to take an unprecedented human and economic toll, wiping away years of modest and uneven progress towards the Sustainable Development Goals (SDGs). Developing countries now need much more support as progress towards the SDGs was ‘not on track’ even before the pandemic.

By end-2022, average incomes are expected to be 18% below pre-crisis levels in low-income countries (LICs) and 22% less in emerging and developing countries excluding China – compared to 13% lower for developed economies.
These lower incomes will push hundreds of millions into extreme poverty and hunger, surviving on incomes under US$1.90/day. The World Bank estimates the poor increased by 119–124 million in 2020, and by 143–163 million more this year.

Fiscal Gap Growing Fast
As the UN Secretary-General has noted, “richer countries have benefited from an unprecedented $16 trillion of emergency support measures,… the least developed countries have spent 580 times less in per capita terms on their COVID-19 response”!

Last year, the International Monetary Fund (IMF) and UNCTAD estimated that developing countries need about US$2.5 trillion for relief to affected families and businesses, and to expedite economic recovery.

IMF Managing Director Kristalina Georgieva later acknowledged that developing countries need much more. The IMF’s April 2021 Fiscal Monitor estimates that only achieving access to basic services by 2030 in 121 developing countries would require US$3tn, up to half in LICs.

Most developing countries cannot do more due to financing constraints. As public spending needs shoot up, the pandemic has significantly cut their revenue. Recent IMF research found “larger output losses are experienced by countries with lower GDP per capita”, partly due to “lower fiscal stimulus”.

With limited tax and other revenue, developing countries will need to borrow more, increasing their already high public debt. As the IMF notes, “the international community [needs] to provide additional support through grants, concessional financing, and, in some cases, debt relief”.

Too Little, Too Late?
The Bretton Woods institutions (BWIs) – the IMF and the World Bank – must mitigate the new setbacks, by enabling relief, recovery and reform. The Fund and also the Bank have responded, sometimes innovatively, but far too slowly. Most importantly, actual support from both BWIs so far is far short of needs.

The Fund used its Catastrophe Containment and Relief Trust fund to provide relief for six months of IMF debt payments owed by 29 LICs. But last October, the IMF board rejected a new Pandemic Support Facility with easier conditions than usual.

Although the Fund has committed about US$250 billion, a quarter of its US$1 trillion lending capacity, it has only deployed a tenth of its capacity so far, according to former senior official, Ousmène Mandeng. He argues the Fund should instead offer much more support that countries need and want.

According to The Economist, since March 2020, the IMF has only disbursed US$32bn in emergency financing while offering US$74bn via other facilities, both “with more strings attached”.

The 85 countries now receiving funds from the IMF account for only around 5% of global GDP. None of them could access the Fund’s new “short-term liquidity line” due to its stringent conditions.

BWIs Must Rise to the Challenge
In April 2020, the Bank announced a new multi-donor trust fund, the Health Emergency Preparedness and Response Multi-Donor Fund. This is supposed to complement the US$160bn the World Bank Group had pledged to deploy by mid-2021.

Bank disbursements have been slow despite the urgency, with actual disbursements to needy countries totalling only US$79bn by June 2021, under half what was pledged. The Bank also dropped its Pandemic Emergency Financing Facility, criticised for being too small and too slow.

However, fast-disbursing budget support during the much deeper and more extensive pandemic crisis is actually less than during the GFC. The Bank is no longer offering more emergency budget support.

Just as the Fund lent more in 2009 during the global financial crisis (GFC) than since the pandemic began, new Bank loan disbursements rose less in the first half-year of the pandemic than during the GFC.

The Bank committed US$19.5bn to finance the G-20’s grossly inadequate April-December 2020 Debt Service Suspension Initiative (DSSI). Meanwhile, it has refused any debt standstill for loans owed to it, arguing this would jeopardise its credit rating and consequent ability to borrow cheap.

BWIs Must Become Part of Solution
Blocked by the Trump administration, the likely issue of US$650bn IMF special drawing rights (SDRs) is still only half the SDR1tn (US$1.37tn) The Financial Times deemed necessary.

SDRs do not need to be repaid, and incur a very low interest rate (currently 0.05%), costing less than loans. They are often more attractive than grants, typically tied to conditions.

While the 75 LICs should get about US$62bn in SDRs, poor countries could benefit much more if rich countries transferred their unused SDRs to the BWIs. Besides providing debt relief, the Bank could then intermediate more long-term development finance at the lowest possible cost to borrowing countries.

As UNCTAD has also argued, the multilateral system needs to lend much more to developing countries at lower cost. In 2019, the average interest rate on multilateral debt to LICs was 1.7%, compared to 2.5% for bilateral loans.

Private creditor rates are much higher. With ‘preferred creditor’ status (i.e., getting repaid before others), the Bank can borrow – and lend – at the lowest rates. This is most easily done by expanding Bank lending and guarantees.

Bank for Recovery and Development?
Loans worth US$500bn, mostly for poorer countries, are likely to be announced this week at the IMF and World Bank Spring meetings. As the BWIs can offer much better terms, this will certainly help, but much more is urgently needed.

Borrowing at the International Bank for Reconstruction and Development’s current 1.75% rate on a 20-year loan, total debt service in 2021 and 2022 would fall from US$90bn to US$65bn, e.g., saving US$25bn for the G20-DSSI eligible LICs.

If all developing countries benefit, savings would be much higher, around US$285bn. But to do so, both the Fund and the Bank would need to expand their lending capacities with additional resources.

Currently, all too many developing countries are being forced to adjust by cutting social and environmental programmes. By lowering lending costs and other demands, the BWIs can become part of the solution, rather than the problem.

 

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8 comments

  1. chuck roast

    A simple casual observer here, observing that both the IMF and the World Bank were formed in 1944. I’m wondering; in these 76 years is there a success story here? South America? Latin America? Africa? The Asian Rim? Uh…no. Seventy six years of unremitting failure. Or is it failure? What if they had had even two success stories? You know…one each. Is that too much to ask? Say Argentina or Algeria. No and no. All we get is an endless stream of begging laments from staff (IMF staff are particularly good at this) fellow travelers and fat and happy administrators endlessly buzzing around the metropole. What rubbish!

    Was it so long ago that the Argentines were reduced to barter because the IMF refused to give their elites yet another loan to top off their dwindling Miami bank accounts. Couldn’t help the Greeks. Sorry, but they are a ‘developed’ country and more importantly the Germans and French are the designated vampires in this neighborhood. And just who exactly are the Columbians to resist ‘development loans’ from such generous and benign institutions. The Bank and the Fund are happy to design ‘loans’ to meet the specific needs of local 1%ers.

    In my lifetime South Korea is the only ‘developing’ country that escaped the neo-colonial debt slavery trap set by these international scammers. That only because they practiced the well troddened mercantilist policy path to economic development. They may have only been allowed to do this because they were a great-game buffer state and a linchpin of American nuclear policy.

    Anyway, the sun is out; the apogee is getting good; the cats are looking for a place to nod-out, and my rave has come to an end. Please, no more of this kind of annoying nonsense.

    Reply
  2. tegnost

    Who else notices that when the rich suffer, it’s instant bailouts, and when the poor suffer it’s “moral hazard” and “inflation! Ack!” The US loans it’s corps money to buy back stocks and drive up their (nominal) value for free (free market?) zero. nada. nothing. Poor countries and people get student loans, foreclosures, evictions, debt conditions and most importantly “skin in the game” Don’t see much bezos skin in the game. We’re talking 18% less in wealth for the poors, and 100% more wealth for the globalist glitterati! The weak are swiven, and the deplorables als, as it were…

    Reply
  3. doug

    ‘BWIs Must Rise to the Challenge’

    Good grief. As Chuck points out they been ‘helping’ for 75 years now.
    Like some other 75 year old’s, time to retire?

    Reply
  4. aleric

    In addition, to help fight global warning, all serial killers should commit to planting a tree for each victim.

    Reply
  5. Tom Collins' Moscow Mule

    “Loans worth US$500bn, mostly for poorer countries, are likely to be announced this week at the IMF and World Bank Spring meetings.”

    Like the old song and its endless refrain,

    “How long has this been going on?
    Well, if friends with their fancy persuasion
    Don’t admit that it’s part of a scheme
    But I can’t help but have my suspicions
    ‘Cause I ain’t quite as dumb as I seem”

    It is the economic version of the eternal recurrence set to music, because everyone must dance to the music provided by those who call the tunes that define the repetitive playlist. That is, for example,

    “We got into the mess in the first place because money was very easy. Interest rates were low to negative, . . . . So the borrowers borrowed, and they borrowed heartily. They borrowed for mega projects, some of them vastly detrimental to the environment. They borrowed to finance current consumption, which simply means living beyond your means. They borrowed to finance capital flight—in other words, the money didn’t even stay in the country; it went straight back to banks in the North.” The devil, of course, being in the economic details:

    http://aurora.icaap.org/index.php/aurora/article/view/49/62

    Or, refer to and actually read carefully, “The Grip of Death” by Michael Rowbotham, instead of merely reading the review. I provide a link to the review, because it is convenient, as I continue to habitually rummage through mostly forgotten past readings.

    “The full horror and iniquity of Third World debt is that the under-developed and indebted countries of the world are acting as part of the money supply to developed nations’. He shows how this money is created as debt registered to impoverished nations but bound up in the economies of the wealthy nations.”

    https://www.feasta.org/documents/feastareview/glynn.pdf

    All is for the best, in the best of all possible worlds, it appears, because the privileged wealthy class continues to amass even greater fortunes during a global pandemic, even as the economically and politically powerless are ground down the debt spiral even further. This current cycle and its feedback loop has yet to fully unfold, along with its intended and unintended spillovers, that is the negative consequences. Unlike Trix, Minsky Moments and Crack Up Booms are not just for kids, because even central bankers make mistakes, that is,

    “Mr. Greenspan accepted that the crisis had “found a flaw” in his thinking but said that the kind of heavy regulation that could have prevented the crisis would have damaged US economic growth. He described the past two decades as a “period of euphoria” that encouraged participants in the financial markets to misprice securities.”

    Silly rabbits [central bankers] never learn. Apparently.

    Reply
  6. Matthew G. Saroff

    I think that the author is too sanguine about the purpose of the IMF and other BWIs.

    I believe that their purpose is to replace de jure governmental colonization with de facto financial colonization.

    Reply
  7. Synoia

    IMF, World Bank Must Support Developing Countries’ Recovery

    Really? From where do they get their $? Who is their paymaster, and exerts control?

    Reply
  8. NARmageddon

    I’ll add to the chorus of IMF/WB skeptics above, and point out that the REAL purpose of IMF/WB is to bail out, using taxpayer money, (mostly) US banks that lend money that mostly goes to line the pocket of the corrupt elite of 3d world countries while saddling the 2d world taxpayers with unpayable debt.

    Reply

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