IMF Sounds the Alarm

By Dylan Howse

Just as Argentina, Lebanon, and Ecuador thought nothing could get worse, the IMF is now warning of a debt crisis for emerging and developing economies. A harsh reality that’s facing many of the world’s pandemic-hit nations.  

From the start of COVID-19 back in March, to date, the IMF has provided emergency loans and financial lending tools to about 80 countries. Stating back then that the crisis has tested the agility and resilience of our governments and banks, but with their policies and programs, they can help reduce the need for austerity or monetary tightening that could deepen the debt distress.

However, even the IMF may have underestimated how financially taxing this pandemic would be for these vulnerable economies. This Tuesday the U.N General Assembly met virtually and discussed the growing concerns of the debt and distress in middle and low-income nations.

“We will not see a global recovery until we have stopped the virus in its tracks,” said Secretary-General Antonio Guterres as he called for an increase in funding for the International Monetary Fund and expanded debt relief.

He went on to tell IMF member countries that they should agree to a new allocation of IMF Special Drawing Rights. Meaning that there should be a new allocation of funds in which struggling nations may take out money quickly without hefty waiting times or withdrawal penalties. Moreover, he went on to state that there should be a debt moratorium (i.e. a delay in payments) on all official debt payments by the poorest countries beyond the end of 2020, including “all developing countries and emerging markets in need.”

Yet these idea’s may be too little too late as the IMF is now calling for urgent actions and reforms to prevent an unprecedented debt crisis from happening. IMF managing director Kristalina Georgieva is sounding the alarm as the risk of sovereign bankruptcies increases daily unless debt relief measures are enabled and contracts are restructured.

“Many of these countries could suffer a second wave of economic distress, triggered by defaults, capital flight, and fiscal austerity […]. Preventing such a crisis can make the difference between a lost decade and a rapid recovery that puts countries on a sustainable growth trajectory,” said Georgieva.

The worst part is that many countries have already felt the wrath of the pandemic economically. Zambia requested more time to pay its debts last week, Rwanda has warned it might default, Lebanon is refinancing, and Argentina has struck a deal with bondholders just earlier this year. The IMF is projecting those debt ratios for emerging economies will rise even further by an average of 10 percent of GDP this year compared to pre-pandemic levels.

“The world is at a critical juncture and should not sit idle waiting for a crisis,” said Georgieva . “It needs to review its arsenal of weapons, [and] do the utmost to prevent, and if necessary, pre-empt another sovereign debt quagmire.”

For the correct adjustments to be made as soon as possible to the IMF that Antonio Guterres and Kristalina Georgieva are suggesting, they will need the permission of the United States, their largest contributor and shareholder. Earlier during the pandemic the US shot down the very same idea of special drawing rights in March. This foreshadows that the upcoming US election may not just be about American issues after all, but perhaps might mean the difference between world recovery or decade-long recessions. 

Photo by Chris Barbalis on Unsplash

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