Safety First: Expanding the Global Financial Safety Net in Response to COVID-19

The outbreak of COVID-19 is a human tragedy that is rapidly becoming an economic tragedy as well. As the world’s health systems are under strain to combat the virus, the present Global Financial Safety Net (GFSN) is similarly struggling to respond to the severe financial strain governments are facing around the world. A high degree of uncertainty and an initial lack of coordinated policy responses intensified market panic and volatility, resulting in the largest outflow of portfolio capital from emerging market and developing economies in history and a global shortage of dollar liquidity.

A working paper by Kevin P. Gallagher, Haihong Gao, William N. Kring, José Antonio Ocampo and Ulrich Volz calls for the strengthening of the GFSN to manage the economic effects of the outbreak of COVID-19, in particular the massive capital outflows from emerging market and developing economies and the global shortage of dollar liquidity. 

The authors’ short-term proposals include: broadening the coverage of the Federal Reserve currency swaps, issuing at least $500 billion of Special Drawing Rights through the International Monetary Fund (IMF), improving the IMF’s precautionary and emergency facilities, establishing a multilateral swap facility at the IMF, increasing the resources and geographic coverage of Regional Financial Arrangements, coordinating capital flow management measures, initiating debt restructuring and relief initiatives and requesting that credit-rating agencies stop making downgrades during the emergency. Their long term proposals are agreeing on quota reform at the IMF, creating an appropriate Sovereign Debt Restructuring Regime, expanding surveillance activity, adopting IMF governance reform and strengthening its relations with all agents of the GFSN.