IMF Lending During the Pandemic and Beyond – IMF Blog
Faced with unprecedented uncertainty and the severe economic impact caused by COVID-19, the Fund continues to adjust its loans. At the same time, it aims to ensure realistic targets, maintain the credibility of programs and foster national ownership.
To date, the Fund has provided financial assistance, mainly in the form of emergency loans and precautionary lending tools, to around 80 countries.
In addition, more than 30 countries have expressed interest in IMF-supported programs to rebuild financial safety nets and address the immediate consequences of the pandemic.
To help members cope with this pandemic that has never happened in a century, IMF lending programs are adapting – through innovation and increased flexibility – as countries move from initial containment phase to stabilization and eventually recovery.
Short-term focus: macroeconomic stabilization
Short-term IMF-supported programs are primarily aimed at stabilizing the economy. This includes setting spending priorities (e.g. health and other social spending, as well as cash and income support for the businesses and households most affected). Monetary policy should be as accommodating as possible while taking inflation risks into account, and financial sector policy should seek to avoid a credit crunch while maintaining healthy balance sheets.
However, conventional policies alone may not be enough. In certain circumstances, additional measures may be considered. For example, the flexibility built into the existing regulatory framework could be used to the maximum, and there could be more room for the use of unconventional monetary policies. However, some other measures, such as monetary budget financing, risk undermining hard-won policy-making and institution-building gains, setting damaging precedents, and would be difficult to unwind.
This crisis has tested the resilience and agility of governments and central banks.
During the current crisis, monitoring of IMF programs (including emergency financing) has placed greater emphasis on the quality and governance of spending measures–rather than specific and measurable conditions, for example on central government borrowing, which are traditionally linked to IMF lending.
The reason is simple. The unprecedented uncertainty caused by the pandemic means that it has become more difficult to plan economic policies and the goals risk quickly becoming obsolete.
This trend is expected to continue throughout the duration of the pandemic until a firmer view of the economic outlook and financing conditions can be established. Notwithstanding a more comprehensive assessment of policies in the interim, countries will need to demonstrate that IMF resources are adequate. used correctly.
At the same time, national authorities will need to remain nimble in responding to economic shocks and dealing with future risks. This emphasizes regular discussions between national authorities and IMF staff on adverse scenarios and adequate policy responses in program and surveillance cases.
As debt levels increase, more countries are at risk of being vulnerable to debt distress. When a country’s debt sustainability is unclear, extending the maturity of public liabilities can be useful in determining future course of action until further clarification of the need and scope of any subsequent debt treatment.
This involves costs – such as downgrades and possibly the declaration of a credit event – but, ultimately, investors can benefit by addressing the underlying issues that led to the loss of access. at the market.
By freeing up critical resources and reducing pressure on foreign exchange reserves, maturity extensions can also help reduce the need for austerity and monetary tightening that can exacerbate economic suffering.
Finally, many countries may be able to manage the pandemic and its economic fallout without IMF funding, but may wish to seek insurance against unforeseen shocks. For them, the Fund’s precautionary lending tools are an attractive option that can facilitate market access at a lower cost. These can be unwound gradually as conditions improve, for example, countries Flexible lines of credit could go to Short-term liquidity lines.
Support structural adjustment towards a “new normal”
As uncertainty abates, IMF lending will gradually evolve, reflecting the need to help countries restore policy space and reduce debt vulnerabilities.
For most countries, the post-pandemic economy will be different from what existed before. As the recovery takes hold and the effects of the crisis become clearer, IMF programs will need to focus on growth-friendly reforms, in order to help members recover from the crisis in a strong and robust manner. sustainable.
For example, reforms to make it easy for employees to get in and out of their jobs are less essential to containing the virus and stabilizing the economy, but may be important in adjusting to a new normal, as economies could undergo significant structural changes, cope with digital technologies and the effects of climate change.
Accordingly, the IMF will continue to work with other international financial institutions to implement structural policies. These include health, debt management and social protection, improving loan governance, as well as measures to improve resilience to future health and climate risks.
This crisis has tested the resilience and agility of governments and central banks to the extreme. The IMF is committed, along with its partner organizations, to matching these efforts internationally. The effective deployment of the Fund’s lending tools will continue to play a critical role in this regard.