Mobilizing to meet the recovery needs of low-income countries in the event of a pandemic – IMF blog
By Christian Mumssen and Seán Nolan
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Low-income countries have been hit hard by the pandemic. Their significant financing needs can only increase as they face the crisis and its economic consequences. The IMF has approved a sweeping support package that would expand their access to zero-interest financial assistance, while providing stronger guarantees against indebtedness they cannot handle. For these efforts to be successful, economically stronger member countries will need to play their part.
A rapid and unprecedented response
The pandemic has dealt a severe blow to the economies of many low-income countries: production growth has stopped or reversed, living standards have fallen, poverty has risen, and a decade of solid progress is now in jeopardy.
The IMF responded with unprecedented speed and scale. Financial assistance to 50 low-income countries reached $ 13 billion in 2020, compared to an average of $ 2 billion per year before the pandemic: a more than six-fold increase. It also provided $ 739 million in debt service relief in the form of grants to 29 of its poorest and most vulnerable members.
Three-quarters of new loans came from the Poverty Reduction and Growth Trust (PRGT) – the IMF’s vehicle for zero-interest loans to low-income countries. The lion’s share was in the form of emergency disbursements with limited conditionality aimed at ensuring transparent use of resources to meet pandemic-related needs.
As they entered the pandemic with limited financial means, IMF assistance was crucial for many low-income countries to support lives and livelihoods.
Going forward, low-income countries will continue to need exceptional levels of external financial support as they recover from the pandemic, and will stimulate investment to build more resilient and inclusive economies.
In this context, the IMF has approved a package of far-reaching reforms to the PRGT to enable it to better meet the financing needs of low-income countries over the coming years. These include:
- Increased access to concessional finance for all low-income countries. The limits for normal access to PRGT resources have been raised by 45%.
- Unlimited access to concessional finance for the poorest countries. Access to concessional finance will no longer be subject to maximum levels for the poorest countries with strong economic programs that meet the criteria for higher than normal access levels.
- Maintain zero interest rates for all PRGT facilities. The interest rates on all PRGT loans, reviewed every two years, will be kept at zero until July 2023.
- Strengthened safeguards to protect low-income countries from debt distress. High borrowing levels, even on concessional terms, can push countries into unsustainable debt positions; The IMF’s program design will pay increased attention to the debt levels of countries at risk.
With a difficult path to recovery ahead, we expect demand for IMF support to remain high. Total IMF loans to low-income countries are expected to reach around $ 48 billion during the pandemic and its immediate aftermath. Outstanding PRGT loans could peak at $ 32 billion in 2025-2026 (graph, black line). However, there are significant uncertainties regarding the timing and strength of the economic recovery, and the possible demand for concessional support from the IMF (area shaded in blue).
But IMF loans will meet only a fraction of the external financing needs of low-income countries. Bilateral donors and multilateral development agencies must also step up their contribution, both through bilateral aid and support to IMF fundraising efforts.
Moreover, if low-income countries are to maintain sustainable debt levels, much of this financing will need to come from grants and highly concessional loans.
A two-step financing strategy
Along with improved access to finance, the IMF also approved a two-stage financing strategy to cover the cost of pandemic-related loans and ensure the financial sustainability of its concessional support.
In the first step, the Fund aims to mobilize an additional $ 18 billion in PRGT lending resources and $ 3.3 billion in new bilateral contributions for grant resources to enable continued lending through the PRGT to zero interest rates. Donors will be offered various flexible mechanisms for providing grant resources. This will be complemented by the use of internal IMF resources of approximately $ 0.7 billion.
In the second stage of the strategy, in 2024/2025 – by which time current economic uncertainties should have subsided – the IMF will decide on the size of the PRGT and the associated long-term financing mechanisms. The use of existing and new SDRs should facilitate the financing effort.
The IMF continues to scale up its response to the unprecedented and persistent needs of low-income countries. The result is better access to finance and a long-term vision for its concessional loans. It also allowed donors to play their role. The sums required may seem large, but the cost of doing nothing – paid for in human lives and livelihoods – will be much higher.