Closing the Global Crisis Finance Gap: Why and How the IMF Should Address Weaknesses in the Global Financial Safety Net

Many low- and middle-income countries are struggling with deteriorating debt sustainability and external shocks, including the economic repercussions of the COVID-19 pandemic, Russia’s war in Ukraine and the tightening of monetary policy in advanced economies. Amid these developments, it is crucial to explore whether the world – and its most vulnerable countries – is well prepared to buffer balance of payments difficulties caused by systemic shocks.

In a new policy brief, Laurissa Mühlich and Marina Zucker-Marques explore the status of Global Financial Safety Net (GFSN) and demonstrate how structural inequalities in the GFSN could be reduced by reforming facilities and funding of the International Monetary Fund.

2023 presents a unique opportunity for the IMF to expand its funding resources and increase its lending capacity to LICs and MICs. The IMF is undergoing its 16th General Review of Quotas, a process undertaken every five years where the IMF assesses whether member quotas are adequate to cover their balance of payments financing needs and the sufficiency of IMF funding. Subsequently, the IMF Board of Governors may decide to increase quotas, which are the primary and predictable source of funding to the IMF. 

The authors provide two possible estimations to assess how much additional funding the IMF would need to address the inequalities of the GFSN. First, they calculate the necessary amount to equalize access to crisis finance in the GFSN so that LICs and MICs have the same relative crisis finance volume as HICs compared to their GDP. Second, they calculate low- and middle-income countries’ short-term gross external financing needs (GEFN) and the required crisis finance volume that would cover their GEFN.

Main findings:

The authors find that IMF quotas of LICs and MICs would need to, at the very least, double to address the current structural gaps in the GFSN and at least triple to meet their GEFN in case of a systemic shock.

• IMF lending capacity should increase by $550 billion (or 127 percent of quotas) if it aims to lift access to external crisis finance for LICs and MICs in the GFSN to the same relative volume that is accessible for HICs.
  • $8 billion is needed to equalize relative GFSN access for LICs, $297 billion for lower middle-income countries (LMICs) and $244 billion for upper middle-income countries (UMICs), excluding China.
• IMF lending capacity should increase by $1.16 trillion (or 267 percent of quotas) if it aims to cover the short-term GEFN of LICs and MICs.
  • $25 billion is needed for LICs, $433 billion for LMICs and $697 billion for UMICs, excluding China.

Policy recommendations:

A fit for purpose GFSN not only requires a higher lending capacity for low- and lower middle-income countries and a larger size in general, but also a fundamental change in IMF policies. To that end, Mühlich and Zucker-Marques recommend that the IMF:

1. Increase the access limit of unconditional facilities for LICs and MICs, which are key to creating a level playing field in the GFSN across different country income groups and making the GFSN better prepared to deal with future systemic crises
2. Consider the short-term GEFN of its member countries and the structural inequalities of the GFSN as a relevant baseline for the required lending capacity.
3. Improve its funding resources to better support its operation.

As the odds of facing another systemic crisis like COVID-19 are not unlikely, the GFSN must be made fit for purpose. The 16th General Review of Quotas, currently underway and slated to conclude in December 2023, is an opportunity to strengthen the IMF’s funding to a scale sufficient to cover the needs of countries that are underserved by the GFSN.