Emerging markets and developing countries are facing dire economic situation due to the Covid-19 crisis. All eyes are on the International Monetary Fund, the world’s largest player. But the pandemic poses fundamental challenges for the IMF.

The Fund is the world’s leading balance of payments lender and macroeconomic institution. Yet he cannot lend freely; its resources are limited. In addition, its operations overlap with those of other international financial institutions, official lenders and the private sector. Governments often fail to implement the necessary reforms.

If a country is hit by temporary liquidity stress beyond its control and immediately recovers from it, the IMF’s liquidity support may be able to fill the gaps.

But the conditions are much more complex. A V-shaped recovery is unlikely. The coronavirus will lead to longer-term shocks, even if it is not the country’s fault. The prices of raw materials can remain low. Tourism receipts, remittances and other income will suffer. Weak growth and health spending will hurt fiscal positions. Unlimited cash support is unlikely.

The IMF could face three types of coronavirus country cases. First, countries with very strong fundamentals and buffers; second, those with questionable liquidity and sustainability; and third, those whose finances are unsustainable. Ex ante categorization is not easy. The distinction between illiquidity and insolvency is often blurred.

Funding gaps can be filled with adjustment, new money and debt relief.

Countries with very strong fundamentals may not need IMF support, but could benefit from additional IMF cushions. For them, the Fund focuses on “crisis prevention loans”. Chile and Peru have just subscribed to the IMF’s flexible credit line, joining Mexico and Colombia. The Fund recently created a Short Term Liquidity Line (SLL) to offer “swaps” – so far there have been no takers. The likely candidates would be the Southeast Asian countries that have long been wary of “stigma”. The IMF’s actions on FCL and SLL are commendable. But with the sudden halt in March-April, crisis prevention loans are an unlikely focal point.

Countries that are illiquid and have questionable viability receive liquidity support from the IMF through the Quick Finance Instrument or the Quick Credit Facility. But these countries may need to gravitate around IMF programs. Given the exogeneity and gravity of the crisis, the lingering uncertainty and the harm done to citizens, the Fund’s programs should reorient their traditional balance of adjustment and funding towards more generous funding and longer deadlines. long. If countries have programs, they should be increased. Annual access limits should be increased to allow RFI loans. More consideration on a case-by-case basis could be given to exceeding cumulative access limits, depending on debt and sustainability.

For non-viable countries, beyond immediate liquidity support, debt relief is essential. In the short term, given the economic uncertainties, freezing the G20 / IMF / International Bank for Reconstruction and Development debt makes sense. But it is limited to poor countries. Emerging markets could also benefit. In addition, the private sector is reluctant, as are countries that fear that a six-month moratorium will justify possible consequences on market access. China is a major bilateral lender, but its actions are mired in obscurity.

In the longer term, durability must be restored. IMF funding should not be used to drive the private sector out. Countries should not suffer from debt distress either.

These countries should restructure their debt, in parallel with IMF programs aimed at restoring viability and market access.

A wave of restructuring could be imminent. The IMF’s case-by-case approach to debt relief is not well placed to weather a wave. Tackling this conundrum must be a priority. As Sean Hagan, suggested the former IMF legal adviser and Anna Gelpern and Adnan Mazarei of the Peterson Institute for International Economics, the Fund should think creatively about supporting debt restructuring. Some ideas so far range from IMF softeners to debt operations, as was the case with the Brady plan[1], or national laws based on the United Nations charter protecting creditors’ assets as was done for Iraq in 2003.

All of these suggestions will raise complex technical issues for the design of IMF facilities and conditionality.

Finally, there are legitimate questions about the adequacy of IMF resources given the enormity of the virus.

One of the debates is about a special allocation of drawing rights, perhaps less than $ 650 billion so as not to require the approval of the United States Congress. Whether for or against, it is recognized that an allocation would provide only modest support to emerging markets to ease fiscal constraints. With a proposed new allocation failing to progress, some analysts are taking a welcome stance on redistributing existing SDRs, mostly sitting on strong balance sheets in advanced economies / emerging markets. Implementation can be difficult given national laws and increased credit risks. Surprisingly, member countries have made extremely limited use of their SDRs so far this year, around $ 3 billion net.

Another question is whether an increase in quotas is necessary. This would strengthen resources, improve their distribution among quotas, emergency and bilateral resources, and allow the necessary adjustment of certain voting actions. The IMF still has $ 220 billion in loanable quota resources and over $ 500 billion in emergency / bilateral resources. But the financing needs will increase over time. Quota negotiations are arduous and should be launched as soon as possible.

The impact of the virus on the IMF is just beginning. It will unfold over years, requiring difficult judgments, weighed against a tight budget envelope and other actors. It will be an epic challenge.

Mark Sobel is the US President of OMFIF.

[1] See here and here.