Financial stability, the key to a solid recovery – Opinion
In the recently released World Economic Outlook, the International Monetary Fund warned that uneven deployment of the COVID-19 vaccine could divide the global economy, with high-income countries continuing recovery momentum and low-income countries. risking a further slowdown.
In addition, with supply shocks resulting from the breakdown of global value chains still weighing heavily on the real economy, the fragility of an uneven recovery will be a major challenge for the global economy in the final months of 2021 and next year.
Many countries face the challenge of financial vulnerability, and emerging and developing economies are particularly vulnerable to the risks that the upcoming political tightening in advanced economies could create. Their financial stability is subject to the spillover effects of policy changes, leading to volatile capital flows and disruptive exchange rate fluctuations. Thus, many indebted economies with limited policy tools and fiscal space could suffer prolonged economic damage.
In addition to short-term shocks, cutting-edge challenges, such as digital transformation and climate change, are both opportunities and risks for sustainable growth. They need to be dealt with now and properly.
In this time of transition, maintaining global financial stability is the key to a strong economic recovery. While global efforts are paramount in these critical times, we must not forget that the G20 has played an important role in prioritizing tasks on the basis of consensus. For example, the G20 Debt Service Suspension Initiative (DSSI) has helped countries, by temporarily suspending their debt repayments, to focus their resources on fighting the pandemic and saving lives and livelihoods of millions of the most vulnerable people. Since its entry into force. on May 1 of last year, DSSI helped 46 countries defer payment of their $ 10.3 billion debt.
The global financial safety net also helps countries tackle debt and liquidity issues, with the IMF playing the central role in this process. As of March 2020, the IMF has provided $ 117.6 billion in financial assistance to 87 countries under its various lending facilities, and $ 850.7 million in debt relief to 29 countries through of the Catastrophe Containment and Relief Trust.
The IMF’s allocation of $ 650 billion in special drawing rights went into effect on August 28 this year, serving as a source of additional funding for countries to deal with liquidity problems and boost their vaccination campaign.
The IMF also created the Resilience and Sustainability Trust with the aim of providing low-cost loans with a relatively long maturity period to low-income countries and small states. More importantly, to tackle and adapt to climate change, the IMF is committed to including a climate component in its lending policy.
But the IMF should do more to meet the growing demand for financing. The IMF Governing Council completed the 15th quota review in February 2020, providing guidance for the 16th review which is expected to be completed by December 15, 2023.
Currently, contributions from IMF member countries represent less than half of the IMF’s overall financing capacity. The remainder of the funding comes from two major temporary agreements: the new borrowing agreement and the bilateral borrowing agreements.
No wonder many fear that the lack of permanent sources of finance will limit the capacity of the IMF and undermine its legitimacy.
In addition, in times of liquidity crisis, central bank currency swap lines are essential to mitigate financial risks. For example, in March 2020, the US Federal Reserve provided dollar swap lines to prevent a liquidity crisis in major markets. In principle, swap lines are considered foreign quasi-reserves for countries in need.
For its part, the People’s Bank of China has signed bilateral swap line agreements worth 3.99 trillion yuan ($ 624 billion) with 40 central banks and monetary authorities around the world since 2008, contributing to the global financial stability.
At the regional level, regional financial arrangements help countries by providing financial support. In the past, they have played a positive role in managing financial crises by partnering with the IMF and other international and / or regional financial institutions. But as very few of them were activated during the pandemic, it has become increasingly important to mobilize these regional arrangements, especially in situations where funding gaps cannot be covered.
From a long-term perspective, a strengthened international financial system is needed to deliver more public goods to the world, and international cooperation is needed to address the common risks that threaten the global economy. Therefore, the creation of international financial institutions with a wider sharing of risks among several actors is the way to better preserve global financial stability and promote economic prosperity.
The author is a senior researcher at the Institute for World Economics and Politics, Chinese Academy of Social Sciences.
Opinions do not necessarily reflect those of China Daily.