Central bank governors are calling for more support from the International Monetary Fund for many frontier market countries that are hanging by a thread as they find ways not just to handle the pandemic but also to recover from the health crisis and grow their economies.
After the Covid-19 shock hit concerns around debt sustainability and management have risen. In response, the G20 countries launched the Debt Service Suspension Initiative in April to help poor countries defer payments.
The group also offered quick balance of payments assistance to member countries through its Rapid Financing Instrument (RFI) scheme.
Both these measures were extremely helpful as the first response to the pandemic, but Rodrigo Cubero, president of Banco Central de Costa Rica, said it was now time to focus on the recovery process.
“Many countries have to navigate difficult waters, so flexible credit lines may be useful for countries that have strong liquidity positions,” he said at a panel organised by the Institute of International Finance.
“For most others, outright lending rather than precautionary lines of credit may be necessary. Recognition that in most cases, what is needed is direct lending support as opposed to balance of payments support is critical, and is where the IMF has to help.”
Expanding Paris Club
Cubero added that debt restructuring mechanisms needed to be “rethought and refreshed”, including by revisiting the structure of the Paris Club, a group of major countries that offer financial support to poor nations.
“China and Russia are big bilateral lenders to many emerging markets and low income countries,” he said. “It’s critical to bring these non-Paris Club lenders to the fold and agree on ways of doing that restructuring.”
For some frontier market economies, however, multilateral support may not offer a way out anytime soon, said senior experts.
Sri Lanka has sought bailouts from the IMF 16 times in the past 55 years, but a change in administration in 2016 strained its relationship.
“Countries that were in good standing with the international financial institutions before Covid have generally fared better, like Pakistan and Mongolia that have been able to access IMF Covid financing and have market access,” Stephen Schwartz, head of Asia Pacific sovereign ratings at Fitch Ratings, told GlobalMarkets.
“While Sri Lanka, which fell out with the IMF last year, has not tapped the RFI and is less likely to return soon to the IMF for financial support. In many cases, bilateral financing is the most viable alternative to MDB financing.”