Event of the Finance Ministers on Financing for Development in the Era of COVID-19 and Beyond

IMF News, September 8, 2020

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Authors: Kristalina Georgieva
Published: September 8, 2020

Outlook for the world economy

Incoming data since end of May paints a picture that is less bleak; signs of recovery in the world economy.
Advanced economies: outlook somewhat less bad than anticipated.
China: "has turned the corner and is recovering a little faster than anticipated."
Drivers of the relatively improved outlook:
- A very strong and synchronized policy response by finance ministries and by central banks.
- "A massive policy response put a floor under the world economy." This included $11 trillion of fiscal measures.
- Central banks injected large amounts of liquidity and supported national economies and, through spillovers, the economies of other countries.
- It has become easier for emerging market countries with good fundamentals to raise money.
- Behavioral adaptation to the pandemic: mask wearing, social distancing, protocols enabling some rebounds.
- Non-contact-dependent activities like manufacturing are doing somewhat better than expected.
- Improved results in testing and treatment and hope for a vaccine (described as "on the more optimistic side").
Divergences and vulnerabilities:
- Majority of emerging markets and developing countries—excluding China—are not seeing a reversal of fortunes; some may face downgrades in projections.
- Small tourism-dependent countries described as "on their knees."
- Countries with high debt levels are "in terrible trouble."
- The virus is spreading to places with weaker health systems.
Aggregate loss estimate:
- "We are at a point when we can say that the world economy will lose $12 trillion this year and next year."

IMF response and financing

IMF actions:
- Supported over 80 countries through emergency financing and through regular lending programs.
- "We have now extended support of $270 billion – out of the Fund’s $1 trillion capacity – and more than a third of this support has been provided in recent months."
- Never in IMF history has it "done so much so quickly."
Policy implication for supporting economies:
- Continued support is required until the economy turns around; the projected recovery is "only partial and uneven."
- Advanced economies can continue support more easily due to low interest rates making it more affordable.
- For developing economies and emerging markets with weaker fundamentals, there is a need to boost available financing collectively.
- IMF emphasis on expanding the use of existing SDRs, encouraging a shift from advanced economies towards developing economies to allow reliance on IMF financing on concessional terms.

Debt, debt relief, and transparency

Debt concerns:
- Debt levels are high in many emerging and developing economies—"high to a point of suffocating capacity to act."
Debt Service Suspension Initiative (DSSI):
- Described as "a great achievement."
- IMF and World Bank "are calling for a one-year extension."
- Call for greater private sector participation in the Initiative.
Restructuring and transparency:
- Recognition that for some countries the DSSI will not be enough and "some countries will need a restructuring to bring debt down to a sustainable level."
- Strong call for debt transparency: "If we know debt levels, then this issue is much easier to handle."

Building resilience for the future — policy priorities

Three main priorities summarized:

1. Maintain support until recovery is secured (see financing measures above). 2. Address unsustainable debt and ensure debt transparency, extend DSSI, and increase private creditor participation; provide restructurings where necessary. 3. Build resilience through investment and reforms.

Areas for resilience-building investment:
- Education
- Digital capacity and human capital
- Health systems
- Social protection systems
- Integrate and address the climate crisis
- Prevent rising inequality and poverty, including gender inequality
Fiscal policy and taxation:
- "We have to take care of taxation in a way that transforms and builds resilience for the future."
Political and reform context:
- Acknowledgement that reforms will be hard politically.
- Historical analogy: after the global financial crisis, resilience was built in the banking sector through reform; now similar holistic resilience-building is required for economies as a whole.

By Kristalina Georgieva, IMF Managing Director; Washington, DC; September 8, 2020.