Part One In Focus

International Monetary Fund. Secretary's Department

Part One In Focus

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International Monetary Fund. Secretary's Department

International Monetary Fund. Secretary's Department
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Language:: English

Keywords:: IMF quota share; IMF field presence; debt limits policy; low-income country; IMF's surveillance; Emerging and frontier financial markets; IMF history

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Abstract

The Annual Report of the Executive Board 2022

Covid-19 and the War in Ukraine

The war in Ukraine has dealt a major blow to the global economy.

The economic fallout from Russia’s invasion of Ukraine is another massive setback to the global economy. The toll on Ukraine is immense, but the impact stretches far beyond Ukraine’s borders. The severity of disruptions in commodity markets and to supply chains will weigh heavily on macro-financial stability and growth, adding to an already-complicated policy environment for countries still recovering from the COVID-19 pandemic.

Inflation, which had already been rising in many countries as a result of supply-demand imbalances and policy support during the pandemic, is likely to remain higher for longer. Financial conditions have also tightened significantly, putting pressure on a wide range of emerging market and developing economies-through higher borrowing costs and the risk of capital outflows.

The war in Ukraine may contribute to the dangerous divergence between advanced and emerging market and developing economies. More broadly, it risks fragmenting the global economy into geopolitical blocs with distinct technology standards, cross-border payment systems, and reserve currencies. Such a tectonic shift represents the most serious challenge to the rules-based system that has governed international and economic relations for the last 75 years, jeopardizing the gains made over the past several decades.

Stepping Up

In response, the IMF has provided vital financing, real-time advice, capacity development, and support to its members.

$1.4 billion in emergency financing to Ukraine was approved in FY 2022, and-at the request of several IMF member countries-a special account was established that will provide donors with a secure vehicle for directing further financial assistance to Ukraine. Support for Ukraine’s heavily affected neighbors and member countries experiencing fragility or conflict is also underway.

IMF lending and a historic $650 billion allocation of SDRs helped provide much-needed liquidity to countries worldwide, many of which have limited fiscal space after the pandemic. More than $219 billion in loans to 92 countries has been approved since the onset of the pandemic. To facilitate access to emergency financing, increases to the cumulative access limits for the IMF’s emergency financing instruments were extended through the end of June 2023 (for details see Table 2.2).

One hundred twenty-six Article IV consultations, six Financial System Stability Assessments, and nearly 2,900 virtual technical visits were conducted during FY 2022. About 60 percent of the IMF’s technical assistance during the financial year was provided to fragile and conflict-affected states, low-income countries, and small states.

As of April 2022, only 7% of people in low-income developing countries had been fully vaccinated, 73% compared with in advanced economies.

Global Partnerships

In June 2021, the IMF joined forces with the World Bank, World Health Organization, and World Trade Organization to accelerate access to COVID-19 vaccines, therapeutics, and diagnostics. Led by the heads of the institutions, a task force was created to mobilize support and funding for a $50 billion proposal by the IMF staff to end the COVID pandemic. A global target was set to vaccinate at least 40 percent of the population in all countries by the end of 2021 and 70 percent by mid-2022.

To meet the target, the task force called on Group of Twenty (G20) countries to share more vaccine doses with low- and middle-income countries; provide financing, including grants and concessiona financing; and remove all barriers to exports of inputs for finished vaccines, diagnostics, and therapeutics.

A global database (www.Covid19GlobalTracker.org) and country-by-country data dashboards were set up to track and monitor progress toward targets and improve transparency. Access to essential tools for fighting COVID-19, nevertheless, remains very uneven. As of April 2022, only 7 percent of people in low-income developing countries had been fully vaccinated, compared with 73 percent in advanced economies. There are similar gaps in access to oxygen, treatments, and personal protective equipment.

Equipping developing economies to fight the pandemic and prepare for future health care needs is in everyone’s interest: no one is safe until everyone is safe. An updated plan shows that a modest $15 billion in grants in 2022 and $10 billion annually thereafter could greatly strengthen global health systems. More recently, the IMF, World Bank, UN World Food Program, and World Trade Organization have called for urgent, coordinated action on food security and have appealed to countries to avoid restricting food or fertilizer exports. In collaboration with partners, the IMF continues to champion global cooperation and multilateralism.

Governance Reform

Progress toward governance reform and a timely and successful conclusion of the 16th General Review of Quotas are crucial for ensuring a strong, quota-based, and adequately resourced IMF. The review is expected to build on the 2010 agreement, including efforts to protect quotas and voting shares of the IMF’s poorest members. The current formula for determining quotas, which was approved in 2008 and has been used as a guide, will also be reviewed.

A More Equitable Recovery

Low-income countries have less scope to respond. The IMF is stepping up to help countries most in need.

On August 2, 2021, the IMF’s Board of Governors approved a general allocation of SDRs equivalent to $650 billion—the largest in IMF history. The newly created SDRs were distributed to all 190 members in proportion to their IMF quota shares, providing a substantial liquidity boost to countries. About $275 billion went to emerging market and developing economies, and low-income countries received about $21 billion.

This allocation helped boost reserves and improve global market confidence, supported market access for emerging market and developing economies, and freed up resources for much-needed health and recovery efforts. Low-income countries are using up to 40 percent of their SDRs on essential spending.

Between when the SDR allocation was made effective and the end of April 2022, members converted about SDR 14.1 billion (equivalent to $19 billion) into freely usable currency through voluntary trading arrangements. Of this figure, SDR sales by low-income countries accounted for about $4.5 billion.

Members have converted SDR 14.1 billion (around $19 billion) into freely usable currency through voluntary trading arrangements.

Options are also available for countries with strong external positions to voluntarily channel their SDR allocation to poorer and more vulnerable countries, through either the IMF’s trust for concessional lending to low-income countries, the Poverty Reduction and Growth Trust (PRGT), or the newly established Resilience and Sustainability Trust (RST; see Table 2.4).

The RST will complement the IMF’s existing lending toolkit by providing affordable longer-term financing under a Resilience and Sustainability Facility (RSF) arrangement to support countries as they tackle structural challenges that pose significant macroeconomic risks. These will initially include climate change and pandemic preparedness.

Compared with the General Resources Account (GRA) and the PRGT, the RST will provide significantly longer financing terms-with a 10½-year grace period and 20-year maturity-and a tiered interest rate structure providing the most concessionality to the poorest countries. About three-quarters of the IMF’s membership (143 countries) are eligible for RST financing. This includes all low-income countries eligible to receive PRGT financing, vulnerable small states, and lower-middle-income countries.

Support for Vulnerable Countries

The overlapping global crises of war, pandemic, and inflation are hitting the poorest countries hardest. Low-income developing countries experienced significant declines in per capita income during the pandemic. Now they are facing a sudden surge in energy, fertilizer, and food prices exacerbated by the war in Ukraine. This is contributing to an increase in poverty and inequality, widening the divergence between advanced and emerging market and developing economies. While aggregate output for advanced economies is expected to return to its pre-pandemic trend by 2025, employment and economic activity in emerging markets and low-income developing countries are unlikely to recover in the medium term. This suggests some permanent scarring.

To better support low-income countries, reforms to the IMF’s concessional lending facilities were introduced in July 2021. Limits on annual access to concessional financing increased by 45 percent, fully aligning them with those in the GRA, and hard caps on cumulative limits were eliminated altogether for the poorest countries, provided they meet the requirements for obtaining above-normal access. Cumulative limits for emergency financing instruments were also raised in December 2021. These reforms will make more concessional financing available to countries with strong policies and large balance of payments needs.

The IMF’s Executive Board also approved an associated two-stage fundraising strategy to support the PRGT’s long-term sustainability, involving new contributions for subsidy and loan resources, facilitated by the channeling of SDRs. These reforms to the PRGT will ensure that the IMF has the capacity to respond flexibly to low-income countries’ needs over the medium term while continuing to provide concessional loans at zero interest rates.

Lending is expected to be provided through multiyear lending arrangements-a shift from 2020, when countries largely tapped the IMF’s emergency financing facilities.

A new framework to support fragile and conflict-affected states has been put in place, following approval in March 2022. The impact of the COVID-19 crisis and of the spillovers from the war in Ukraine have put these countries at significant risk of falling even further behind the rest of the world, given their long-term structural challenges, such as weak institutional capacity, governance challenges, limited resources, and struggles with environmental degradation or active conflict. About one-fifth of IMF members are classified as fragile and conflict-affected states.

The new framework includes rolling out country engagement strategies across fragile and conflict-affected states to better tailor IMF engagement, inform program design and conditionality, and support a stronger dialogue with country authorities and partners; an expanded IMF field presence to further support capacity development; and enhanced partnerships with other international financial institutions and donors, including the World Bank.

How the SDR Allocation Has Helped Member Countries

The IMF has published a tracker on member countries’ use of special drawing right (SDR) allocations, drawing from staff reports published after the implementation of the general allocation. The tracker’s goal is to promote transparency and accountability about how countries are putting these resources to use.

Some countries have used or plan to use their allocations to support health and vaccine-related spending, to finance their overall budget deficits, or to retire expensive debt.

Here are some examples of how countries are putting their allocations to use:

Ecuador: The allocation went directly to the 2021 government budget and was used to cover financing shortfalls. A new budget code is being used to monitor how the SDR proceeds are spent.

Guinea-Bissau: The allocation helped close the country’s external financing gap and was used to service external non-concessional debt.

Moldova: Given the country’s large financing needs, the authorities used the allocation for budgetary financing. Special legislation was drafted and approved by Parliament to ensure consistency with the government’s legal framework.

Senegal: The authorities spent about half of the SDR allocation on the health sector, domestic vaccine production, and cash transfers and to pay down unmet debt obligations. The other half is expected to be used to cover financing needs and financial transactions.

Debt Dynamics

Debt vulnerabilities are rising, with potential costs and risks to debtors, creditors, and, more broadly, global stability and prosperity.

The war in Ukraine is adding to the strain on public finances even as countries are still reeling from the pandemic. Extraordinary policy support during the pandemic stabilized financial markets and gradually eased liquidity and credit conditions around the world, contributing to the recovery. But deficits increased and debt accumulated much faster than during previous recessions, including the global financial crisis. According to the IMF’s Global Debt Database (Figure 1.4), overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020. Government borrowing accounted for about half of this increase, with the remainder from nonfinancial corporations and households. Public debt now represents close to 40 percent of the global total-the most in almost six decades.

Governments are now struggling with rising import prices and debt bills in a highly uncertain environment of elevated inflation and a slowdown in growth. As monetary policy tightens to curb inflation, sovereign borrowing costs will rise, narrowing the scope for government spending and increasing debt vulnerabilities, especially in emerging market and developing economies. To complicate matters, the extent of liabilities and their terms are not fully known in many cases.

The IMF provided debt relief totaling SDR 690 million (around $927 million) to its poorest members.

To address the problem of unsustainable debt, the G20 and the Paris Club reached an agreement in November 2020 on a Common Framework for Debt Treatments beyond the earlier Debt Service Suspension Initiative (DSSI), which aims to deal with insolvency and protracted liquidity problems in eligible countries by providing debt relief consistent with the debtor’s spending needs and capacity to pay.

The Common Framework is off to a slow start: not a single country has achieved restructuring to date. The nature of the delays is varied and traces both to creditors and debtors, but urgent action is needed by all relevant stakeholders to ensure that the framework delivers. This includes clarifying steps and timelines on the framework process, early engagement with all stakeholders, more clarity on how comparability of treatment of private sector creditors will be implemented, and expansion of the framework to other non-DSSI-eligible heavily indebted countries. A standstill on debt service payments during negotiation under the framework would provide relief to debtors under stress and provide incentives for faster agreement. Jointly with the World Bank, the IMF will continue to support implementation of the framework.

More broadly, governments must adopt medium-term policy frameworks that balance short-term needs and investments with medium-term fisca sustainability. Reforms to improve debt transparency and strengthen debt management policies and frameworks are essential to reduce risks. To support low-income countries and emerging market and developing economies in this effort, the IMF and World Bank have, since 2018, been addressing rising debt vulnerabilities through a multipronged approach. Work launched under the multipronged umbrella to enhance debt transparency continues, including by strengthening debt management capacity, applying accurate debt analysis tools, and improving policies. The IMF continues to work with partners to strengthen the debt resolution architecture.

For low-income countries, reforms to the IMF’s debt limits policy, which went into effect in June 2021, give those countries more flexibility to manage their debt while incorporating safeguards to preserve or restore debt sustainability. The debt limits policy is an important tool for addressing debt vulnerabilities and a useful reference framework for lending decisions by other creditors.

Debt Relief

Debt relief by official creditors was made available through the G20 DSSI, which the IMF, together with the World Bank, helped support. The initiative took effect in May 2020 and delivered $12.9 billion in debt relief to 48 countries before it expired in December 2021.

In parallel, the IMF provided debt service relief on its own lending under its Catastrophe Containment and Relief Trust (CCRT) to its poorest members. The IMF Executive Board approved the fifth and final tranche of this relief in December 2021, and the relief effort expired in April 2022, bringing total debt relief close to SDR 690 million (about $927 million; see Table 2.3). Eighteen IMF members and the European Union helped finance this support, with grant pledges of about SDR 609 million ($819 million).

With the end of debt relief, and interest rates set to increase, borrowing costs could rise significantly, placing pressure on national budgets and making it increasingly difficult for low-income countries to service their debt. About 60 percent of low-income developing countries are already at high risk of or in debt distress. The economic shocks from the war in Ukraine only add to their challenges. Continued support from the international community will be critical for these countries.

Sudan, meanwhile, has taken the necessary steps to begin receiving debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. It is the 38th country to reach this milestone, known as the HIPC decision point. Once it reaches the HIPC completion point, Sudan’s external public debt will be reduced by more than $50 billion in net present value terms, representing more than 90 percent of its total external debt. The normalization of Sudan’s relations with the international community has enabled it to obtain access to additional financial resources, setting the country on a path to achieve more inclusive growth.

Climate Change, Digitalization, and Inclusion

Major structural transformations are underway. Policymakers should seize the opportunities.

Even as countries battle crises on multiple fronts, it is crucial not to overlook the longer-term challenge of improving their resilience to shocks and achieving sustainable and inclusive growth. If these long-term challenges are not addressed in a timely manner, there can be significant economic consequences, with the potential for future balance of payments problems.

Tackling Climate Change

Climate change imposes large economic and social costs, in part by contributing to a higher frequency and intensity of natural disasters, affecting macroeconomic and financial stability. For the IMF to live up to its mandate, it needs to assist its members in managing these challenges by rapidly scaling up and more systematically covering climate-related issues through its lending as well as its analytical, surveillance, and capacity development work.

The Executive Board approved a strategy to help members address climate-change-related policy challenges in July 2021. As part of the IMF’s surveillance, mitigation and adaptation policies and strategies for managing the transition to a low-carbon economy-especially for countries heavily dependent on fossil fuel production-are now regularly covered during Article IV consultations. In the past year, climate issues featured in about 30 country assessments, including those for Barbados, Canada, China, Fiji, Germany, Malawi, Mexico, the United Kingdom, and the United States.

In FY 2022, climate featured in assessments of about 30 countries, including Barbados, Canada, China, Fiji, Germany, Malawi, Mexico, the United Kingdom, and the United States.

In an effort to integrate in-depth climate-related risk assessments into the Fund’s work, the IMF’s Financial Sector Assessment Program (FSAP) now incorporates climate risk analysis, including stress testing where relevant. Climate risk analysis has been completed in regard to Colombia, Norway, the Philippines, South Africa, and the United Kingdom. Assessment of supervisory frameworks will also start evaluating climate risks.

Work is also underway to scale up climate-related capacity development. For example, to help governments improve the effectiveness of public investment in low-carbon and climate-resilient infrastructure, a new climate module has been added to the current Public Investment Management Assessment (PIMA) framework. The “Climate-PIMA” has been tested in more than 15 countries. A new IMF climate diagnostic tool, the Climate Macroeconomic Assessment Program, has been developed and piloted in two countries. The tool is intended to assess the macro-fiscal risks of climate shocks and stresses, the preparedness of climate-vulnerable countries, and the implications of mitigation and adaptation policies. A “green public financial management” framework was released in August 2021 and showcased in several regional trainings, helping governments integrate climate into public financial management practices. To improve data and disclosure to more effectively price and manage climate risks, in 2021 the IMF launched the Climate Change Indicators Dashboard, which has since been further updated. The dashboard builds on collaboration with other international organizations and includes a range of distinctive indicators that demonstrate the impact of economic activity on climate change, making it a one-stop shop for relevant climate-change-related macroeconomic data. These indicators have been grouped into five categories: Economic Activity, Cross-Border, Financial and Risk, Government Policy, and Climate Change Data.

IMF staff members also cohost the Secretariat of the Coalition of Finance Ministers for Climate Action, as well as the Financial Stability Board’s working group on climate risks, data, and vulnerabilities. The institution collaborates with international organizations such as the Bank for International Settlements; Network for Greening the Financial System, where IMF staff members cochair the “bridging the data gaps” workstream; Organisation for Economic Co-operation and Development; United Nations; and World Bank.

Digitalization

Digital forms of money are diverse and evolving rapidly. The opportunities are immense, but the challenges to policymakers are also stark, complex, and widespread. The most far-reaching implications are to the stability of the international monetary system. Digital money must be designed and regulated so that member countries reap the potential benefits, including greaterfinancial inclusion and more efficient payments across borders. Achieving these goals requires managing risks related to capital flow volatility and loss of control over monetary policy. International cooperation will be key to mitigating cross-border spillovers.

The IMF has a mandate to help ensure that widespread adoption of new forms of digital money fosters domestic economic and financial stability, as well as the stability of the international monetary system, and is engaging regularly with authorities to evaluate country-specific policies, identify policy options and trade-offs, and provide capacity development.

To do so, the IMF is deepening its expertise and collaborating closely with the Bank for International Settlements, Financial Stability Board, World Bank, and other international working groups and standard-setting bodies.

The Fund continues to deliver hands-on capacity development, particularly on gender budgeting, and has started a new collaboration with the Gates Foundation to strengthen analysis and advice on gender policies and institutions.

As part of the IMF’s surveillance, the broad domestic effects of digital money adoption are also being covered in an increasing number of countries. For example, the recent Article IV consultation on The Bahamas included an analysis of the introduction of the “Sand Dollar” (the digital version of the Bahamian dollar). Analysis of risks related to digital financial services will also be included in FSAP reports, as was done recently for Korea, Singapore, and Switzerland. Assessment tools are being upgraded to incorporate new sources of risks, as well as guidance and recommendations issued by international standard-setting bodies.

Digitalization and mobile money are also rapidly transforming fiscal operations and policies through GovTech, an area of increasing IMF support to members. During the pandemic, governments accelerated digital delivery of key government services. Revenue administrations are increasingly using e-tax filing and e-payment systems and digital technologies to improve compliance management, helping to reduce tax evasion and boost revenue mobilization. Digital technologies are also improving the efficiency and effectiveness of public financial management systems and processes, including budget preparation and execution, cash and debt management, e-procurement, financial reporting and audits, and administration of social programs. In many countries, digitalization is also enabling improvements in governance and fiscal transparency, allowing citizens and other stakeholders to have easy access to information on government revenues and spending and reducing opportunities for corruption.

Inclusive Growth and Gender

Inequalities within and across countries widened during the pandemic. Spillovers from the war in Ukraine, including the threat of fragmentation, are likely to amplify these inequalities, potentially rolling back years of progress.

The pandemic has also deepened long-standing gender gaps, which has macro-critical implications. IMF research has consistently underscored the benefits of addressing extreme inequality, including greater productivity and financial stability.

The IMF finalized a strategy in July 2022 to better integrate work on gender in its analysis and advice. The Fund continues to deliver hands-on capacity development, particularly on gender budgeting, and has started a new collaboration with the Gates Foundation to strengthen analysis and advice on gender policies and institutions. As part of the Platform for Collaboration on Tax—a joint initiative with the Organisation for Economic Co-operation and Development, United Nations, and World Bank— the IMF is also considering the role of taxation in achieving gender equality.

In addition to the analytical work underway on income and wealth inequality, the IMF continues to implement its strategy for engagement on social spending. The IMF’s COVID-19 Crisis Capacity Development Initiative is helping low-income countries and emerging market and developing economies address inequalities, including by improving tax policies and leveraging digitalization to create safety nets and accelerate cash transfers.

A study is also underway on epidemics, gender, and human capital, drawing lessons from previous health crises. The analysis will quantify the impact of health crises on school completion rates in low-income countries, particularly for girls.

Abstract

Covid-19 and the War in Ukraine