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Bretton Woods twins keep the multilateral flame alive


The devastating impact of the coronavirus pandemic on emerging and developing countries has put the International Monetary Fund and the World Bank at the centre of the fightback. This week’s annual meetings must set a course for 2021

Cometh the crisis, cometh the man. Or in this case, a man and a woman. International Monetary Fund managing director Kristalina Georgieva and her opposite number at the World Bank Group, David Malpass, have become household names over the past seven months.

This is especially so in the towns and cities of emerging markets and developing countries that have looked to the two multilateral lenders, known as the Bretton Woods Twins from their birth at the eponymous World War II conference, for help.

The economic damage caused by the outbreak of the Covid-19 pandemic, the lockdown on consumer and corporate behaviour, and the huge amount of public money needed to pay for those issues have left emerging markets reeling.

The rapid globalisation of the infection left national policymakers with little choice but to impose quarantines on their populations and shut down large sections of their economies. Given the impact on their public finances, they were going to need assistance — and fast.

The two international financial institutions reacted swiftly, as most observers agree. The World Bank, which focused on the least-developed, developing and some middle income countries, has intervened with a package of loans and grants.

Anshula Kant, the World Bank Group’s chief financial officer, says it will be providing up to $160bn in financing tailored to the health, economic and social shocks countries are facing over the 15 months to June 2021. This will include $50bn on grants and highly concessional terms to the world’s poorest 73 countries that are members of its International Development Association.

“The World Bank Group’s emergency health responses are already under implementation in more than 110 countries, which includes addressing transmission issues related to the pandemic,” Kant told an audience of capital market executives in London by Zoom on the eve of the meetings.

Meanwhile, the International Finance Corporation, the Bank’s arm that lends to emerging market companies, is deploying $8bn in fast-track financing, with almost 300 businesses requesting support.

In the IMF headquarters on the other side of 19th Street in Washington DC — although more likely from their own front rooms — Georgieva and her fellow executives have taken similarly decisive action.

The IMF says it will make $250bn, a quarter of its $1tr lending capacity, available in the form of debt relief from the Catastrophe Containment and Relief Trust. So far, it has provided $89bn of financial assistance, mainly through emergency lending and precautionary lending tools, to about 80 countries — of which $30bn has gone to the poorest countries.

For now, the jury is out, with the IFIs being praised for their initial speed but slammed for the amount of intervention.

“I don’t know whether proactive is the right word, but they were very responsive,” says Paul Cadario, a fellow at the Munk School of Global Affairs and Public Policy at the University of Toronto.

“Going back to the first week of the pandemic, the Fund really had the messaging down — that governments must devote resources to fighting the health consequences of the pandemic, to protecting family income, to protecting small businesses, and to making sure that there was not a range of bankruptcies that led to asset deflation.”

But Masood Ahmed, president of the Center for Global Development and a former IMF executive, says the fund needs to ramp up its financing, particularly for poorer countries. He says that the IMF currently has the capacity to provide $30bn of concessional finance — grants or low-rate loans — but it should be allowed to raise that to $100bn. “For the next five years, that is how these poorest countries are going to get their development finance,” he says.

“These meetings are a good opportunity to start building a consensus on what is the size of that number and how could it be financed,” Ahmed adds, raising the idea of further sales of gold reserves.

Emerging markets will also need financing over the coming years, but this will come mainly from international financial markets that are becoming increasingly risk-adverse. Ahmed says the IFIs can take a big role: “They need to think about how they can do risk mitigation, introduce a whole bunch of credit enhancement instruments and think much more creatively of ways in which they can bridge these countries back to the market.”

Seven-month stocktake

High profile bust-ups are unlikely at this week’s annual meetings, as the several hundred finance ministers and central bankers who flock to Washington along with hordes of financiers, campaigners, think-tankers and media will in reality be staying at home. Almost all meetings for both IFIs will be held by Zoom or similar platforms and the ability to cross-examine and question executives will be minimal.

But given that it is seven months since the imposition of lockdowns around the world, this week will be a good opportunity for both Bretton Woods twins to find out from members how successful their interventions have been and what steps they should take next.

Cadario, who joined the World Bank in 1975 and played a number of roles — including nearly two decades with the World Bank’s frontline development programmes in Western Africa and China — sees the meetings as an opportunity.

“One of the things that I will be looking at Mr Malpass and Axel van Trotsenburg, the managing director for operations, [to do] is a stocktaking — however preliminary — on the extraordinary effort the Bank and the IFC went to, in the spring, to put all this money at the disposal of countries to fight the pandemic,” he says.

“What we should all be looking for, when they get together virtually for the annual meetings, is ‘let’s have stocktaking about the resources that were deployed and what happened’.”

In the case of the Bank, a lot of the money went towards public sector procurement for crucial equipment — personal protective and other medical equipment such as masks, gowns, respirators, hospital beds, ventilators, oxygen cylinders, and ambulances.

For Cadario, given that some governments struggled to get hold of equipment while major economies such as the US were able to source vast quantities, the question is whether the Bank should have ensured more equitable distribution. “Is there a good story to tell there?” he asks.

While for some countries it may be clear that the Bank and national governments stepped up to the challenge, as they have done in the past when dealing with the aftermath of a tsunami or other natural disaster, others have been hit hard.

Alternatively, there may be certain places where they fell short in this area and where lessons can be learned, both for a future crisis and for any second wave of Covid-19.

“Some of it is going to be very anecdotal and very preliminary,” Cadario says. “But nonetheless, there are probably areas that got money from the Bank and the Fund where there will be stories to be told, and they will be successful. And we need to hear those stories because they reinforce the need for multilateral action and the importance of the knowledge, experience and agility of the IFIs in these situations.”

Josh Lipsky, director of and policy and programmes at the Atlantic Council’s GeoEconomics Center, which advocates a multilateral approach, says that a strong personal relationship between Georgieva and Malpass has helped the two organisations work together.

Georgieva was recruited from the Bank, where she was its first chief executive, to head up the fund. “There’s a personal connection here that works in favour of her knowing the bank well, and knowing David Malpass, and them understanding each other, and that does make it easier,” Lipsky says.

He adds that the fact that Malpass was a member of the Trump administration, which in effect appointed him and backed Georgieva’s nomination, means that the White House has not criticised his actions (or Georgieva’s). “There is not a natural distrust of these international institutions, as there is with some of the others.”

Since the election of Donald Trump almost exactly four years ago, the White House has acted to undermine many of the other institutions that are seen as part of the post-World War II compact.

The World Trade Organization lacks enough judges to hold hearings on trade because the US refuses to approve nominees to fill vacancies on a crucial appeals panel. Its director general, Roberto Azevedo, has quit a year early.

The other Geneva-based multilateral, the World Health Organization, has also been caught in the crosshairs of Trump’s Twitter account, with the president branding it a “puppet of China”.

The one time the White House locked horns with the IMF was over a proposal for the fund to issue $1tr of its own currency, the Special Drawing Rights, to boost its ability to inject money where it was needed at short notice. The Group of 20 nations, including the US under former president Barack Obama, approved a similar liquidity injection in the middle of the 2009-2010 global financial crisis.

The US objected because some new money would have been allocated to IMF members in accordance with their quota share, meaning more resources going to strategic rivals such as China, Iran and Venezuela.

Debt and taxes

Despite the multi-billion handouts by the two IFIs, the huge accumulation of debt by governments in the fight against the virus could create problems that the IMF and the World Bank have become familiar with over the past decades.

The Covid-19 pandemic has greatly extended the list of emerging economies and developing countries in debt distress. “Not only are numerous especially low income countries already having debt distress, but many more will fall into debt distress as this crisis continues,” World Bank Group chief economist Carmen Reinhart told a podcast on the eve of the meetings.

So far, however, the shock of the virus has been confined to the poorest countries and has not exploded into a full-blown middle-income emerging market debt crisis.

Emerging markets have benefited from low borrowing costs and benign liquidity conditions, thanks to interventions by central banks and continued strong demand by private investors.

According to the IMF, emerging market governments issued $124bn in hard currency debt during the first six months of 2020, with two-thirds of the borrowing coming in the second quarter.

Lipsky echoes Cadario’s praise for the IFIs’ rapid reaction, and adds that in the early stages it became more flexible in its response than it had traditionally been.

“In the first few months there were these new flexible arrangements,” says Lipsky, a former senior communications adviser at the fund. “But I think as the crisis went on, as always happens, some of the old procedures came back a bit, and some of the flexibility and creativity eased — and it needs to continue to ramp up, as opposed to scaling back. I’m confident they can do it.”

Mounting budget pressures have been accompanied by a new wave of sovereign debt credit ratings downgrades, surpassing peaks during earlier crises and raising the prospects of defaults.

Kenneth Rogoff, a professor of public policy and of economics at Harvard University, who wrote a keynote book, This Time Is Different, jointly with Reinhart a decade ago, says history has shown that it is not unusual for countries to keep borrowing even when default risk is high.

“Amid massive and synchronous financing needs across a broad swath of countries, there is brewing in the background a growing need for debt restructurings in numbers not seen since the debt crisis of the 1980s,” they wrote in an article for the IMF with two other professors. “Official creditors should be prepared to act as needed.”

The World Bank and the IMF have taken the lead on the idea of some form of debt relief. It was in response to their pressure that the finance ministers of the G20 agreed in February to suspend debt interest payments on their bilateral official loans.

However, the impact of this initiative has been underwhelming. Masood goes much further, saying the international response has been “woefully inadequate”. It had initially aimed to provide $20bn of relief, but, so far, 41 of 73 eligible countries have applied and only about $5.3bn of payments have been postponed. The private sector and countries outside the Paris Club of mainly industrialised nations had not participated as fully as expected by the G20.

Malpass and Georgieva are certain to use the annual meetings (which also include a summit of G20 finance ministers) to push for a deal to reduce the stock of debt hanging over the poorest countries. “Malpass has been turning up the temperature recently, saying there really needs to be more involvement from non-Paris Club countries, there needs to be involvement from commercial creditors; neither of these have come forward,” Cadario says.

Lipsky says he will be disappointed if a deal is not agreed to extend the reach of timeline of the debt forgiveness programme. “It certainly would be, I believe, a crushing blow to the developing world if they don’t extend some of these moratoriums at this meeting.”

He added that the US would be right to press China, which was praised at the spring meetings for its participation as a non-Paris Club member, to be more transparent about which state-owned entities were participating in bilateral debt relief.

“It turns out there were a lot of exemptions from the Chinese side,” Lipsky says. “And that has raised a lot of eyebrows about what the commitment really means. I think you will see this from the US, pushing China to live up to what they said at the last meetings.”

‘Not a typical time’

Despite the need for action, it is unlikely there will be much concrete progress at the annual meetings because of the US political timetable, Ahmed says.

“You would be naive to expect that the annual meetings of the IMF and the World Bank — two weeks before the most consequential and contested election in the largest economy that is the biggest shareholder in these institutions — are going to produce any major decisions,” he says.

“But that’s not going to stop both institutions from coming up with clear signals and there’s nothing to stop shareholders sending clear instructions to the institutions on what they want them to come up with.”

Lipsky hopes the IMF will use the meetings to start a debate over the future of capitalism, something that, he says, Georgieva is well placed to do, given her upbringing in the former Soviet Union.

“When you have two economic crises within the span of a decade, the faith, especially for younger people, is shaken to its core,” he says, adding that they must “touch into some of the roots of the Bretton Woods system” when thinking about the reforms that will be needed.

“I think that conversation would go a long way and it’s, frankly, not typical of the meeting. But this is not a typical time.”

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