In the News

U.S. Coronavirus Rescue Boosts Capital for Global Recovery

The Wall Street Journal
3/28/2020

The economic aid legislation signed by President Trump on Friday bolsters the international lending institutions that are gearing up for an unprecedented bailout of the global economy.

The legislation boosts capital at the International Monetary Fund, the World Bank and the African Development Bank—institutions that are laying plans for about $1.2 trillion in lending programs to countries grappling with the coronavirus pandemic.

The institutions themselves accelerated work on their policy response. The IMF has already fielded requests or inquiries for aid from 80 countries and has said it is prepared to use its full lending capacity of around $1 trillion to support the global economy. The first IMF disbursement, $120.9 million to Kyrgyzstan, was announced Thursday. The World Bank has said it is developing a $160 billion coronavirus relief package to be distributed over the next 15 months.

Meanwhile, the Federal Reserve has unveiled more partnerships with international central banks to allow them to ensure the flow of dollars continues in their economies.

The biggest surprise may be the steps from Congress that fully met all U.S. commitments to the institutions. Members have occasionally been skeptical of the need to support the IMF and the World Bank.

The institutions aren’t funded through direct appropriations or earmarks but rather through countries that create borrowing arrangements and subscribe to capital in the international institutions.

In the U.S., this requires the congressional authorization that was included in the rescue bill approved by the Senate on Wednesday and the House on Friday and then signed by Mr. Trump. The U.S. owns about one-sixth of the IMF and World Bank.

When countries boost their capital and grant borrowing capacity, the IMF and the World Bank can make the loans that, in the case of the coronavirus programs, could total about $1.2 trillion. Because the funds must ultimately be paid back by borrowing countries, there isn’t a large direct fiscal cost associated with the programs.

Often, even after the U.S. Treasury makes such commitments, Congress waits years to fulfill them, which can hamper the ability of the IMF and the World Bank to operate at their full capacities.

The legislation “will provide capital to the world’s poorest countries and will reduce reliance on bilateral loans from countries like China,” said Rep. French Hill, an Arkansas Republican who proposed the measure providing for the international lending institutions.

“By pushing for new authorizations now, Congress can mitigate Covid-19’s effects abroad before they find their way back to the American people and our economy,” Mr. Hill said.

The IMF, World Bank and African Development Bank are international development and finance institutions funded by member countries. Collectively they have massive lending resources that they are preparing to make available to countries responding to the pandemic.

The World Bank and IMF each have 189 members, of which the U.S. is the largest. The African Development Bank has 80 members, and the U.S. is a major contributor to that bank’s capital.

When the institutions are fully capitalized, they have enormous resources. At times, however, the institutions have had challenges having their funding approved by Congress, with many lawmakers questioning whether the institutions need the funds. But the current crisis has caused many skeptical lawmakers to recognize the urgency of bolstering the entire global economy.

“This is extremely helpful, not only for the United States itself, but for other countries in critical need of international support,” said Meg Lundsager, a public-policy fellow at the Wilson Center and a former executive director at the IMF who represented the U.S.

“First and foremost, it will demonstrate U.S. global leadership and commitment to collective action to help crisis-hit countries,” she said. “This step will be widely welcomed. Many countries will be relieved that the U.S. is stepping up to lead the global effort to slow further economic damage.”

The IMF is by far the largest of the international institutions. Kristalina Georgieva, its managing director, said Friday in a briefing that “it is clear that we have entered a recession as bad or worse than in 2009.”

Ms. Georgieva said that emerging markets are likely to need at least $2.5 trillion to stabilize their economies and possibly more. “We do know that their own reserves and domestic resources will not be sufficient,” she said.

The coronavirus pandemic has rapidly transformed into a global economic crisis. Money has flooded out of emerging markets with unprecedented velocity. The IMF estimates over $83 billion has been pulled out of emerging economies in recent week, a flow that dwarfs even what occurred during the global financial crisis. Such moves destabilize economies that abruptly lose access to dollars.

The Fed has responded by opening up so-called swap lines with other countries’ central banks. These instruments allow those countries to swap their own currencies for U.S. dollars. The program was used successfully during the financial crisis.

Standing swap lines are available between the Fed and the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank.

On March 19, the Fed opened temporary lines with the central banks of Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore, South Korea and Sweden, for at least six months.

The IMF said Monday that it is considering a proposal that would create a network of additional swap lines, possibly through an IMF facility, that would keep funds flowing.