IMF Lending During the Pandemic and Beyond

IMF Blog, September 17, 2020

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Robert Gregory, Huidan Lin, Martin Mühleisen
September 17, 2020
In the face of unprecedented uncertainty and the severe economic impact triggered by COVID-19, the Fund continues to adapt its lending while aiming to ensure realistic targets, uphold the credibility of programs, and foster national ownership.
To date, the Fund has provided financial assistance, mainly through emergency lending and precautionary lending tools, to about 80 countries.
In addition, more than 30 countries have expressed an interest in Fund-supported programs to rebuild financial safety nets, and deal with the immediate aftermath of the pandemic.
IMF lending programs are adapting—through innovation and increased flexibility—as countries move from the initial containment phase, to stabilization, and eventually to recovery.

Primary near-term objective: stabilizing the economy.
Key policy priorities:
- Establish spending priorities (for example on health and other social spending, as well as liquidity and income support to the most affected firms and households).
- Monetary policy: be as accommodative as possible while being mindful of inflation risks.
- Financial sector policy: seek to avoid a credit crunch while maintaining sound balance sheets.
Additional measures and caveats:
- Flexibility built into the existing regulatory framework could be used to the fullest.
- There may be further room for using unconventional monetary policies.
- Monetary budget financing may risk undermining hard-won gains in policy making and institution building, set damaging precedents, and would be hard to unwind.
Program monitoring adjustments:
- Greater focus on the quality and governance of spending measures—rather than specific and measurable conditions, for example, on central government borrowing, that are traditionally attached to IMF lending.
- This reflects unprecedented uncertainty that makes planning economic policies difficult and targets prone to becoming obsolete.
- This trend is likely to continue for the duration of the pandemic until a firmer view on the economic outlook and financing conditions can be established.
- Countries will need to demonstrate that Fund resources are being used properly.

Need for agility:
- Country authorities must remain agile in reacting to economic shocks and addressing future risks.
- Regular discussions between country authorities and Fund staff about adverse scenarios and adequate policy responses are emphasized in both program and surveillance cases.
Debt vulnerabilities:
- With rising debt levels, more countries are likely to be vulnerable to debt distress.
- When a country’s debt sustainability is unclear, extending the maturity of government liabilities can be helpful in determining the future course of action until there is further clarity about the need and scope for a possible debt treatment later on.
- Costs of maturity extensions include rating downgrades, and possibly the declaration of a credit event, but can help resolve underlying problems that led to loss of market access.
- Maturity extensions can free up critical resources and reduce pressure on foreign reserves, helping reduce the need for austerity and monetary tightening that can deepen economic pain.
Precautionary lending as insurance:
- Many countries may manage the pandemic without Fund financing but may want insurance against unforeseen shocks.
- The Fund’s precautionary lending tools are an attractive option that can ease market access at lower costs.
- These can be unwound gradually as conditions improve; for example, countries with Flexible Credit Lines could transition to Short-term Liquidity Lines.

As uncertainty abates, Fund lending will progressively shift to:
- Support countries restoring policy space and reducing debt vulnerabilities.
- Emphasize growth-enhancing reforms to help members achieve strong and sustainable recoveries from the crisis.
Structural change considerations:
- The post-pandemic economy will be different from the pre-pandemic economy for most countries.
- Reforms less critical to immediate containment (for example, making it easier for employees to move in and out of jobs) may become important in adjusting to a new normal as economies undergo structural change, cope with digital technologies, and address the effects of climate change.
Collaboration and policy areas:
- The IMF will continue collaboration with other international financial institutions to implement structural policies, including health, debt management, and social protection, improved governance in lending, as well as steps to improve resilience to future health and climate risks.
Institutional commitment:
- The crisis has tested the resilience and agility of governments and central banks to the extreme.
- The IMF is committed, together with its partner organizations, to matching these efforts on the international level.
- Efficient deployment of the Fund’s lending tools will continue to play an integral part in this regard.

Robert Gregory, Huidan Lin, Martin Mühleisen; September 17, 2020.