Inequities in Access to Crisis Finance for Low- and Middle-Income Countries Persist – Insights from the Updated Global Financial Safety Net Tracker

Photo by CHUTTERSNAP via Unsplash.

By Laurissa Mühlich, Barbara Fritz and William N. Kring

Reform of the international financial architecture has become a pivotal issue, particularly for emerging market and developing economies (EMDEs) facing pressures from all sides: high interest rates, an increasing cost of capital, growing sovereign debt burdens, rising geopolitical tensions and climate shocks.

The Global Financial Safety Net (GFSN) – the network of institutions including the International Monetary Fund (IMF), regional financial arrangements (RFAs) and central bank swaps – is the critical component of the global financial architecture where countries can turn for liquidity financing in times of crisis. However, analysis by the Boston University Global Development Policy Center (GDP Center) and Freie Universität Berlin has repeatedly found that the GFSN is under-resourced, and that the distribution of resources within the GFSN is uneven and unequal, with many countries only able to access a small or limited portion of the GFSN.

To better understand the state of the GFSN and the potential impacts of proposed reforms, the Global Financial Safety Net (GFSN) Tracker, co-produced by the GDP Center, Freie Universität Berlin and United Nations Conference on Trade and Development (UNCTAD), is the first interactive that allows users to explore current and historical data on global crisis finance.

Newly updated with data through July 2023, the GFSN Tracker underscores three key trends: lower- and upper middle-income countries (LMICs and UMICs, respectively) have the least access to crisis finance resources from the GFSN, access to regional funds is inequitable across income groups and geographic regions, and higher-income countries have access to a disproportionately higher amount of crisis finance in the GFSN.

These findings come at an important policy moment. EMDEs have repeatedly called for reform of crisis financing to ensure a “well-resourced, quota-based IMF at the center of the global financial safety net, capable of playing the role of international lender of last resort.”

Following the 2023 IMF/World Bank Group Annual Meetings in Marrakech, the IMF Executive Board announced a proposal to increase overall IMF quota resources by 50 percent and for those quotas to be allocated in proportion to members’ current quotas.

Yet, as research has shown, an equiproportional allocation of quota resources would only serve to perpetuate the inequitable distribution of resources across the GFSN. Furthermore, since the proposed increase in quota resources will replace Bilateral Borrowing Arrangements and New Agreements to Borrow at the IMF, there will be no net increase in IMF lending capacity and by extension, no net increase in the GFSN’s lending capacity.

Key trends

As of December 2022, we estimated that the financing available from the GFSN had increased to approximately $5.1 trillion in lending capacity (the IMF with $1 trillion, RFAs with $1.5 trillion and swaps with $2.6 trillion, not including unlimited swaps between advanced economies), or 4.41 percent of global gross domestic product (GDP). Overall, the size of the GFSN is still only about 1 percent of total global financial assets that are estimated to total $486.6 trillion in 2021. The size of the GFSN can be considered small, considering that global GDP shrank by 3.9 percent in 2021 due to the COVID-19 crisis.

The updated GFSN Tracker reveals continued inequity in coverage of liquidity resources across the world, especially across different income groups.

Lower-income countries’ (LICs) coverage from the three elements of the GFSN has increased from 3.8 to 4.1 percent of GDP between 2018-2022, mainly driven by temporarily higher access to IMF unconditional facilities that had almost doubled from 2.2 percent of GDP to 4.3 percent in response to COVID-19. At the same time, coverage of high-income countries (HICs) in the GFSN rose to 5 percent of GDP. The access to currency swaps for HICs almost doubled from 0.7 percent of GDP in 2018 to almost 1.4 percent in 2022. Middle-income countries (MICs) are the least covered income group, with a GFSN coverage of 2.6 percent of GDP in 2022. Notably, while RFAs can provide HICs with up to 11 percent of GDP in liquidity access, LICs and MICs can access less than 1 percent of GDP in total crisis finance.

When compared to the payment obligations governments must make in the short-term, notably for LICs and MICs, the amount of potential liquidity access from the GFSN is small. UNCTAD estimates that interest payments on government debt total 2 percent for developing countries and 1.5 percent for developed countries. On a comparative basis, this means that financing from GFSN resources would only cover half of a government’s debt interest payments as a share of GDP, reflecting the extent to which the GFSN is under-resourced.

Understanding crisis finance since the COVID-19 pandemic

During the COVID-19 pandemic and in its aftermath, the following patterns of GFSN usage were visible through the GFSN Tracker. The IMF reformed and opened access to unconditional lending for all IMF members to swiftly react to balance of payment financing needs. In 2019 and 2020, 96 loan agreements for reformed unconditional facilities were made, with a volume of almost $83 billion. This number decreased in the post-pandemic period. The number of IMF standard lending has also fallen considerably in the post-pandemic phase to 43 agreements compared to 76 loan agreements in 2019–2020. However, the volume of IMF lending has increased considerably, to almost $90 billion compared to a volume of $21 billion during the pandemic when the temporarily offered unconditional lending facilities were given preference by borrowers.

RFAs have become more important in the aftermath of the acute phase of COVID-19: their lending has increased from about $4 billion in 21 loan agreements to almost $30 billion in 19 loan agreements in 2022 and during the first half of 2023. Notably, almost 90 percent of this increase can be attributed to multiple lending activities to Ukraine through the EU Macro-Financial Assistance facility, initiated since the onset of Russia’s war in Ukraine in February 2022.

Bilateral swap arrangements, including Chinese swaps, have played an important role in responding to the COVID-19 pandemic. During 2020, the number of swap agreements peaked at 65, of which 18 were new agreements. Fourteen were partnered with the People’s Bank of China (PBOC), and 27 with the US Federal Reserve (Fed). As of July 2020, the volume of swaps totaled almost $1.8 trillion, or approximately half the volume of swaps as before the pandemic. From 2019 to mid-2023, 28 new swap agreements that were made, and of these, 14 were made between HICs, seven between UMICs and seven between LMICs. While the Fed offered swaps mainly to HICs and a few UMICs, the PBOC offered swaps more broadly to upper- and lower-middle-income countries. While China has helped to fill a critical crisis finance gap, more multilateral financing through a more equitable, quota-based IMF and an expansion of RFAs is crucial to ensuring a sufficiently resourced, transparent, predictable and equitable GFSN.

It is important note that central bank currency swaps, such as what the Fed, the PBOC and other central banks offer, should not be confused with other forms of finance, such as, for example, China’s overseas development finance. While various databases, including the China’s Overseas Development Finance Database, track China’s overseas development finance, the GFSN Tracker visualizes currency swap access in terms of available access to currency swap liquidity. Central bank currency swaps, as part of the GFSN, should not be confused with loans or with other financial insurance mechanisms for overseas foreign direct investment (FDI), as swaps are simply the exchange of the equivalent amount of money denominated in the respective currencies of two central banks, albeit with potential costs associated with fees, length and future reversal conditions of the swap.

The GFSN Tracker shows that in response to the COVID-19 shock, LICs used the GFSN amounting to about 0.4 percent of their GDP, whereas HICs sourced crisis finance from the GFSN equivalent to 2.4 percent of their GDP. The disparity reflects an imbalance of access to crisis finance to those who need it most. In contrast, after the pandemic, GFSN use increased considerably for LICs, up to 2 percent of their GDP, while HICs’ use amounted to only 0.8 percent of their GDP. This shows that in the post-pandemic phase, primarily poor countries who needed third-party finance had marginal access to crisis finance sources. Meanwhile, most advanced economies could weather the pandemic shock rather well, with strong support from the GFSN.

While the scale of available crisis financing from the GFSN has increased in the past decade – predominantly through an increase of number and volume of bilateral central bank currency swaps – inequitable access to short-term crisis finance persists in the aftermath of the COVID-19 pandemic. At a time of higher interest rates and global economic headwinds, it is essential that the GFSN provide more equitable access, in particular to more vulnerable low-income and middle-income countries.

Barbara Fritz is a professor at the Freie Universität Berlin, with a joint appointment at the Department of Economics and the Institute for Latin American Studies.

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