Aiding fragile countries in making necessary adjustments will promote economic stability and prosperity, as well as unleash extra funding from other sources.
With high debt levels, fragmented trade, and the potential of higher-for-longer interest rates, the world faces its lowest medium-term economic prognosis in three decades. In this climate, the IMF is stepping up its efforts to foster stability and growth.
All countries are dealing with uncertainty as a result of pandemic-related shocks, the war in Ukraine, and transformative problems such as climate change and digitization. Several rising market and developing countries have demonstrated extraordinary fortitude. However, many countries, particularly low-income ones, are becoming increasingly susceptible as a result of tighter financial circumstances, limited policy options, and decreasing buffers.
These countries are likewise dealing with a funding crunch, increased food insecurity, and a slower convergence toward greater living standards. High debt burdens and steep increases in debt payment costs—which now approach 40% of revenues in certain heavily indebted countries—leave little room for social spending and growth-enhancing investment. This has a negative influence on debt sustainability and societal stability.
The IMF is responding to calls to play a larger role in assisting our member nations during these difficult times, particularly through the provision of balance-of-payments funding and policy guidance.
Channeling and crises
To be sure, the Fund intervened to assist members in meeting their balance-of-payments demands as a result of recent shocks. This involves giving emergency funding and temporarily increasing Fund access limits. We approved precautionary financing and established a Short-term Liquidity Line as a backstop for members with very good fundamentals. We responded to the global food crisis caused by Russia’s war in Ukraine by establishing a Food Shock Window in September 2022 to assist nations facing urgent balance-of-payments difficulties due to food shortages.
Since the epidemic, we have deployed $1 trillion in global liquidity and reserves through lending, as well as a $650 billion allocation of special drawing rights, or SDRs, for 2021. We have loaned over $320 billion to 96 countries. Through our Poverty Reduction and Growth Trust, we have grown our interest-free assistance to 56 low-income countries by fivefold. And, in collaboration with economically stronger members, we have channeled a considerable portion of their SDRs to more vulnerable countries, creating approximately $100 billion in fresh finance through IMF trusts such as the PRGT and the Resilience and Sustainability Trust, which were created last year.
As a result, the IMF has made unprecedented financial commitments to its members. The IMF had credit agreements with 94 countries totaling around $287 billion, or SDR 218 billion, as of September. This includes the following:
Precautionary facilities worth $93 billion for seven emerging market economies
$134 billion in lending commitments for 35 emerging market economies
$23.5 billion in interest-free loans for 45 low-income nations
$30.5 billion in outstanding emergency credit for 77 nations
Under the RST’s Resilience and Sustainability Facility, 11 emerging market economies will receive long-term loans totaling $6 billion. An additional 40 countries have requested or showed interest in an RSF agreement.
We are always assessing and improving our lending toolbox to guarantee that we can meet today’s and tomorrow’s challenges:
We recently evaluated our precautionary instruments—the Flexible Credit Line, the Short-Term Liquidity Line, and the Precautionary and Liquidity Line—because preventing crises is significantly less expensive than resolving them. Reforms aim to increase their agility and capacity while maintaining their significant signaling power. Some instrument access levels have been raised. Concurrent use enables consumers to address various balance-of-payments requirements. For the first time, users will not be required to define an exit strategy from the Flexible Credit Line’s comparatively lower levels of access.
We also reformed the Instrument for Non-Financial Policy Coordination. This device allows governments to communicate the quality of their policies, which aids in the mobilization of external financial support from both public and private sources. Reforms increase the instrument’s flexibility and signaling capability.
Work to assist countries in or near debt difficulty is ongoing, and more debt policy reforms are being considered. This includes creditor cooperation and financing assurances, enhanced involvement with members and creditors, and assistance to members undertaking debt restructuring when faced with extreme circumstances. The IMF also co-chairs the Global Sovereign Debt Roundtable, which brings together borrowing countries and official and non-official creditors.
Our next conditionality reviews and recommendations from our Independent Evaluation Office on extraordinary access will assist us in strengthening our assistance for members. They will also guarantee that Fund financing continues to assist in unlocking additional financial sources.
The IMF intends to continue assisting member nations by providing policy advice, capacity building, and funding. The problem is to assist weak countries with little fiscal space in implementing politically expensive reforms. However, credibility is more difficult to generate when money is front-loaded but adjustment and reforms are backloaded. It becomes more difficult to obtain further external money. All of this jeopardizes the completion of program evaluations and the attainment of macroeconomic stability.
Reforms and finance that pay off sooner in terms of growth are required to assist countries in undertaking and maintaining adjustment. Where debt problems are severe, debt restructuring and additional grant funding may be required. The Fund is expanding its partnership with the World Bank and other multilateral organizations with structural reform expertise in order to better calibrate and sequence reforms within their main areas of work.
We must ensure that the IMF has the resources it needs to carry out its lending mission successfully. The successful completion of the Fund’s ongoing 16th General Review of Quotas, as well as addressing lingering fundraising gaps for the PRGT and RST, will be critical to securing the Fund’s general resources. These will ensure that credit to vulnerable nations continues in sufficient quantities and on acceptable conditions.