Hold Tight: Strengthening the Global Financial Safety Net amid a Pandemic and Economic Crisis

By Xinyue Ma

As countries strive to recover from the COVID-19 pandemic, the world is in urgent need of liquidity to fill the investment gap in development areas such as public health, climate change, and inequality.

In the midst of this, economic risks around the world are straining the so-called Global Financial Safety Net (GFSN), which is comprised of central bank swap lines from key currency issuing nations, the International Monetary Fund (IMF), regional financing arrangements (RFAs), along with other central bank bilateral swap lines, individual countries’ foreign reserve holdings and capital flow management measures, and a loose ad-hoc system for sovereign debt restructuring. Many emerging market and developing countries are also increasingly faced with debt problems, capital flight, exchange rate depreciation, volatile commodity prices, and ensuing recessions.

Following a number of formal and informal workshops on this topic throughout 2020 and 2021, the Global Development Policy Center (GDP Center) has published a new report “Building Back a Better Global Financial Safety Net”, edited by Kevin P. Gallagher, professor of global development policy and director of the Global Development Policy Center, Boston University, and Haihong Gao, Professor and Director of Research Center for International Finance, Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS). The report includes ten articles written by a group of international experts on global economic governance. Based on empirical analyses of the evolution and current status of different policy instruments within the GFSN, the report analyzes the challenges of each GFSN component, discusses proposals to address problems exposed by the global pandemic, and identifies  necessary structural reforms to the international monetary system.

Liqing Zhang and Wen Qi from Center for International Finance Studies at Central University of Finance and Economics in China combed through some of the channels through which financial instability went global under the COVID-19 crisis, and outlined a broad set of avenues for mitigation on the global, regional, bilateral, and national level. Other experts provided in-depth articulations of these proposals from different angles.

On the global level, authors discussed different reform and policy options for the IMF. José Antonio Ocampo, a professor at the School for International and Public Affairs at Columbia University, and former finance minister and co-chair of the central bank in his native Colombia, outlined the need for a new allocation of IMF Special Drawing Rights (SDRs) and how the use of SDRs could be expanded throughout the world economy.

Edwin Truman, senior fellow at the Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School and former senior official in the United States Department of the Treasury, discussed the need and design options for a multi-lateral currency swap facility through the IMF.

Rakesh Mohan, Director of the Center for Social and Economic Progress in India specified the need and implications of increasing quota-based resources at the IMF with associated governance reforms.

Isabel Ortiz, also from the Initiative for Policy Dialogue at Columbia University and former Director of the Social Protection Department at the United Nations’ International Labor Organization (ILO), and colleague Matthew Cummins noted the record of past IMF emergency financing and showed why the Fund should abandon socially harmful procyclical programs in favor of counter-cyclical recovery programs that protect the poor.

As countries face mounting insolvency and debt distress, Ulrich Volz, Director of the Centre for Sustainable Finance at SOAS, University of London, summarized a proposal for a global debt relief facility that links debt relief to a green and inclusive recovery. Separately, he also made the case that climate change poses a macro-critical risk to economic stability and should be integrated into the IMF’s operational work, including its surveillance, technical assistance and training, and emergency lending and crisis support.

On the regional and national level, Aizong Xiong and Haihong Gao, both from the Institute for World Economics and Politics at the Chinese Academy of Social Sciences, analyzed the extent to which RFAs have played a role in the COVID-19 crisis and identified ways that RFAs could be expanded and better coordinated.

Xiaofen Tan and Mengwei Yu from Central University of Finance and Economics in China, studied the mechanisms of the global financial cycle, the fluctuation of which the world is witnessing during the COVID-19 crisis, and provided policy responses and suggestions for the emerging market and developing countries, particularly from the perspective of China.

Finally, Edwin Truman concluded the report by sharing lessons learned from the restructurings of the late 20^th century and how they might be relevant for current restructuring efforts.

Significant progress is being made on different fronts of the policy proposals discussed in the report. On April 7, 2021, the G20 decided to extend its Debt Service Suspension Initiative (DSSI) to the end of the year. Beyond the DSSI, the G20 extended its debt relief coordination efforts by endorsing “Common Framework for DSSI” in November 2020, which provides more inclusiveness and case-by-case treatment than the DSSI. A new SDR allocation of US$650 billion is currently under discussion at the IMF. The amended Chiang Mai Initiative Multilateralization (CMIM) Agreement came into effect on March 31, 2021 and expanded potential channels of liquidity support. The IMF also approved a new framework of debt sustainability analysis for market access countries, which includes climate risk assessments, as suggested in the report.

However, full implementation of many of these initiatives has a long way to go, and a truly sustainable international monetary system requires deeper structural reforms, as discussed in the report.

As Edwin Truman pointed out in the final chapter, the debt restructuring of the 1980s shows that debt relief will require a broad consensus among borrowing countries, their foreign creditors, creditors’ country authorities, and international institutions, and the process is going to take time. Further reforms of the GFSN also requires more critical discussion, as well as greater multilateralism.