The stop-shock caused by the coronavirus (COVID-19) pandemic has brought economies around the world to a screeching halt. China’s PMI manufacturing index collapsed to an all-time low of 35 in February during the peak of its outbreak, a deep contraction from the 50 no-change mark, and Russia’s services PMI did the same thing in March, falling to an all-time low of 37. Governments around the world have suddenly found themselves short of cash to pay salaries, meet their debt obligations and support collapsing currencies.
Which countries have turned to the IMF? Managing director Kristalina Georgieva says 85 countries have already requested help from the Fund as the coronavirus crisis has intensified, including nine from Emerging Europe.
The International Monetary Fund (IMF) says 85 countries have already applied for help from the newly established Rapid Financing Instrument (RFI) for low-income countries to get through the next few months, nine of which are from eastern Europe. Indeed, the demand has been so great in the last few days the size of that fund has been doubled to $100bn and a second facility introduced called the Rapid Credit Facility (RCF), also of $100bn. At the same time the IMF has streamlined the application process and increased the access quota for countries to these funds from 100% to 150% as the fund brings out some bigger bazookas. Moreover, unlike the IMF’s standard Standby Agreement (SBA) and more extensive Extended Fund Facility (EFF), the new funds come with no strings attached.
“RFI and RCF provide rapid and low level of access to countries with [an] urgent balance of payments need. It is designed for situations where a full-fledged lending programme is not possible or/and not necessary,” Elina Ribakova, deputy chief economist for the Institute of International Finance (IIF), said in a tweet. Economist Sergi Lanau called the expanded rapid reaction facilities, “a game-changer for some African countries.”
Most of these countries are hoping to tap the new RFI and RCF, where money is paid out immediately straight into the budget. The instrument is a fire bucket, designed to put out the conflagrations that have been caused by the pandemic’s stop-shock.
However, as the planet is very likely to slip into a global recession as a result of this shock, many of these countries will then have to start or enlarge the classic bailout facilities of the SBAs and EFFs – and here too there is talk of increasing their quotas and relaxing the rules a bit.
Given the unprecedented demand for its services, there is a high chance the IMF will actually run out of money, as it cannot bail everyone out. The IMF has already rolled out new funds and beefed up the existing ones, but even more money may be needed.
“While the pace of outflows from EM has greatly reduced in past few days, the extent and scale of the #COVID19 shock is unprecedented. The level and speed of outflows in around 90 days of 2020 is equivalent to the worst yearly figures on record,” says Jonathon Fortun, who tracks capital flows at IIF.
Does the IMF have enough money?
With so many countries asking for tens and even hundreds of billions of dollars, the question arises as to whether the IMF has enough money to go round?
Like central banks, the IMF can create money by allocations of Special Drawing Rights (SDRs) – what the IMF uses in place of foreign exchange reserves. During the 2008 Global Financial Crisis, the IMF created an additional SDR183bn ($290bn) in order to boost global liquidity and central banks’ reserves.
But this time round the amount of money that is needed is truly mindboggling, and could run into the trillions.
For example, total global debt has grown by $78 trillion since 2008 and topped $250 trillion as of the first half of 2019, according to IIF. China alone accounts for 40% of this global debt increase as the country’s non-financial corporates (notably SOEs) and households have cranked up their leverage. Turkey’s external debt alone is now around $190bn. The extra $290bn the IMF created in 2008 could be entirely swallowed by these two countries alone and even that would not be enough to help them.
On the face of it a lot of money is already being created. The IMF’s Georgieva has said the IMF can mobilise around $1 trillion. In practice, however, the amount it can actually lend out (at least immediately) is a lot smaller, according to Ribakova.
“Around a fifth of this $1 trillion figure reflects pre-existing lending commitments (credit outstanding as well as undrawn). And about half reflects “inactivated borrowed resources” from member countries, which need to be periodically renewed and are subject to more uncertainty than funding from the standard country quotas (which stand at $480bn). The IMF itself notes that its Forward Commitment Capacity (FCC), which is 'a measure of the resources available for new financial commitments', is $270bn,” says Ribakova.
The concern that the IMF does not have enough money was backed by a European Central Bank (ECB) study in 2017 that suggested in a major shock the IMF’s finances would be stretched. The problem is many emerging markets are likely to have problems rolling over their short-term external debts, which could ultimately lead to a run-down of FX reserves and so increase their need for funding.
But maybe the biggest hurdle to clear is simply the sheer size of the problem in some of the bigger countries. IIF calculates that the IMF could afford to lend five times their SDR quota to every country (the official cap on a SBA programme is a cumulative debt of 435% of the quota) with a GDP of $100bn or less – about the current size of the Ukrainian economy – before it runs out of money.
Happily in this crisis none of the five biggest emerging markets – China, Brazil, India, Russia and Korea, which account for two-thirds of emerging markets GDP – are in trouble.
All of them have large reserves and low external debt. They all also have their own domestic bonds markets, so governments can source a lot of funds domestically to finance stimulus programmes and budget deficits before they have to go cap in hand to the IMF.
But stepping down just one tier to the likes of Turkey and South Africa, which are in difficulties, and even the size of these smaller countries is still too big for the IMF to cope with on its own.
“Their gross external financing requirements (GXFRs) are large as a share of FX reserves. And both will probably struggle to roll over maturing external debts in current market conditions,” says IIF.
International Rescue F. A. B.
If the lender of last resort for countries hasn't got the money, what can be done? A lively discussion has begun over creating some sort of mega “shared Eurobond” that can be issued by a body like the EU as a whole.
As things stand, the EU charter does not allow for this sort of instrument and an entirely new mechanism would have to be created. Talks have already begun, but the idea is proving to be very controversial. At this point it seems that the crisis would have to deepen significantly, with, say, a second wave of the pandemic, to rally the EU member states to the idea of a pan-European bond.
But the appeal of such an instrument is obvious, as it would allow EU members to share the cost of the COVID-19 crisis, helping member states to borrow at very long maturities at very low interest rates, and allow countries to re-launch their economies after the crisis is over in a co-ordinated fashion. The basic argument is: pandemics are by definition borderless, so the rescue plan should be too.
Who is not asking?
Things could be worse. A lot worse. Happily there are many big countries that don't need the IMF’s help and have already braced themselves for the storm.
Russia is an outlier, as it has spent most of the last five years getting ready for the economic shock of harsh US sanctions. But a shock, is a shock, is a shock and so Russia is actually very well prepared for this one. Both the government and companies paid down most of their debts following the last oil shock in 2014 and the government has built up a massive RUB12 trillion ($157bn) reserve fund that can finance the expected budget deficits for at least three years and as long as a decade, according to Finance Minister Anton Siluanov.
Some analysts think it would be too much of a political humiliation for Turkish President Recep Tayyip Erdogan to go to the IMF. After all, he rose to power lambasting predecessors for a Turkish financial crisis 19 years ago and said that Turkey, on his watch, would not need to turn to the Fund again. The populist strongman has even described the IMF as “the world’s biggest loan shark” and on April 13 he asserted that Turkey “will not bow down to the IMF programme, or any imposition that would indebt our country.” But the country’s economy is fragile and highly vulnerable to shutdown impacts of the pandemic. The Turkish lira has already been losing its value and Turkey could be heading for its second currency crisis in two years.
“Ankara needs to figure out a way of bailing out the economy without causing a balance-of-payments crisis,” Global Source Partners economists including Murat Ucer in Istanbul said in a report. “And because this is so difficult to do on its own, the only practical solution, normatively speaking, is an IMF programme – no matter how unrealistic the politics of it may sound.”
Per Hammarlund, chief emerging markets strategist at SEB AB in Stockholm, has said that rather than asking for Fund assistance, the government is more likely to request bilateral support from the US, China or the European Union to restore confidence. Last month, Turkey officially asked the Fed to include the nation’s central bank in its dollar swap lines, people familiar with the decision were quoted as saying by Bloomberg on April 9. The very last thing Ankara will do is use its scant FX reserves to defend the currency, so the upshot is that it appears very likely that Turkey is facing yet another deep devaluation.
The cost of insuring Turkish debt against a default touched its highest level since 2008 on April 6.
As oil-producer Kazakhstan has built up significant FX reserves, has another $61bn in its national reserve fund and maintains a low level of sovereign debt. And thanks to its relatively small population of about 17mn people the social support programmes to help the jobless are made much easier than in some of its more populated peers. Currently it has no IMF borrowings and that is not expected to change.
Uzbekistan is another country that probably won’t need much help. Having only just emerged from its three decade-long purdah under former president Islam Karimov it has little external debt and around $28bn as gross international reserves (GIR), half of which is gold. Nevertheless, Uzbek President Shavkat Mirziyoyev has ordered the Ministry of Finance to raise $1bn from international borrowing to fund a stimulus programme.
Negotiating a new programme
Ukraine’s IMF programme was suspended after Kyiv dragged its heels on reforms in 2018 and if a new deal is not agreed soon then the country will default on its debt and go into meltdown, possibility as soon as this summer.
Ukraine burned through $2bn of its precious gross international reserves (GIR) in the last week of March, or 8% of the total, to deal with panic buying for the dollar after oil prices collapsed that month.
It now only has $24bn left, which is not quiet enough to cover the three months of import cover needed to keep the hryvnia stable. And it has $4.1bn of debt obligations to meet this year – mostly the repayment of loans from International Financial Institutions (IFIs) – that it cannot cover from its reserves without a new mooted $5.5bn EFF from the IMF that will open up access to a total of some $10bn of IFI money, including loans from the World Bank and EU that are tied to a new IMF deal.
The yields on Ukraine’s 2028 Eurobonds blew out by 150bp at the end of March as the prospects for a new IMF deal faded, only to be rescued at the end of the month at the last minute when the Rada passed bank and land laws the fund has been insisting on. However, oligarch Ihor Kolomoisky, who is the target of the bank law and who is trying to regain control over Privatbank, which he looted of $5.5bn in 2016, is, at the time of writing, using his proxies in the Rada and on the banking committee to try to sabotage the law. Kolomoisky has also called the IMF deal a “road to nowhere” and says Ukraine should default on its debt to the multinational lender.
Without the IMF Ukraine faces the prospect of defaulting on its debt and years of depression, according to the consensus of observers.
Belarus has already said the “default” word and threatened in March to selectively default on its obligations to the IFIs, according to First Deputy Prime Minister of Belarus Dmitry Krutoi. The Belarusian Finance Minister Maksim Yermolovich quickly walked those comments back a few days later on March 25 as the yields on Belarus’ Eurobonds soared.
But as bne IntelliNews reported, the Belarusian government and the National Bank of Belarus (NBB) are holding urgent discussions with the IMF for financial support, "in the face of economic challenges stemming from the worsening global economic situation and the coronavirus [COVID-19] pandemic", the regulator said on March 30. And the Belarusians hate doing business with the IMF, as the government of Belarus President Alexander Lukashenko resents the strings attached to the programmes.
“We are a proud people and we don't want to be told what to do,” one high official told this correspondent in confidence. Based on the RFI’s access conditions, Belarus would be eligible for up to approximately $900mn.
The IMF is unable to process Iran’s request in March for $5bn to deal with the coronavirus pandemic because of suspected opposition from the US. The situation appears to have forced the country’s supreme leader to provide €1bn from the country’s sovereign wealth fund, the National Development Fund.
The last time Iran approached the IMF for help was in the 1960s. European nations have been supportive of its bid for Fund assistance given that it has become the epicentre of the COVID-19 outbreak in the Middle East.
Fund money would be designated for buying equipment and medicine in the fight against the pandemic, while banks, which have been asked to provide a three-month payment holiday to struggling businesses, need backing.
Iran had officially recorded 4,585 COVID-19 deaths and 73,303 infections as of April 13. Following the long Persian New Year holidays, officials have started phasing in the reopening of “low-risk” businesses.
Mongolia’s rate of infection has remained low compared with other regional countries —including China where the disease originated. Despite this relative closeness, Mongolia has so far reported only a limited number of cases of infection in the country.
On March 27, the government announced a MNT5.1tn (13% of GDP) stimulus package: to ramp up health spending, to protect vulnerable households and businesses, and to support the economy.
Meanwhile, the Ulaanbaatar government has not yet requested special funds from the IMF as part of its raft of packages prepared in response to the outbreak funded by the Government Reserve Fund. The World Bank's International Development Association, however, did announce a fund of $26.9mn for the country in two parts.
These measures include tax exemptions, loan extensions and special grants for businesses, rate relief and credit guarantees to SMEs.
• Kyrgyzstan and Tajikistan
Kyrgyzstan and Tajikistan are the only countries among Central Asian nations receiving support from the IMF as part of efforts to combat the spread of COVID-19. The IMF on March 26 approved a $120.9mn disbursement to Kyrgyzstan to help meet urgent balance of payment needs resulting from the COVID-19 pandemic.
The move marked the first IMF emergency loan worldwide to have been sent through since the pandemic began, the Fund said. The outbreak of the pandemic weakened the macroeconomic outlook for Kyrgyzstan and opened up a $400mn balance of payments gap.
The IMF support will help provide a backstop, increase buffers and shore up confidence in the Kyrgyz economy. It will also help catalyse donor support and preserve fiscal space for much needed COVID-19-related health expenditure. Kyrgyzstan has reported 430 confirmed cases of the disease so far.
Neighbouring Tajikistan has been mentioned among 25 nations set to receive immediate debt relief by the IMF under the fund’s Catastrophe Containment and Relief Trust (CCRT), to allow the countries to focus more financial resources on fighting the pandemic. The total amount allocated for debt relief in the form of grants for these nations will stand at $215mn.
The World Bank has also previously approved $11.3mn in grant financing from the International Development Association for Tajikistan.
Several countries in Southeast Europe have said they are in talks with the IMF as they seek to ensure they have the funds to cover the damage to their economies from the coronavirus pandemic and extend stimulus during and after the lockdowns.
The IMF said on April 10 it had approved $190.5mn financial assistance to Albania to respond effectively to the coronavirus epidemic in the country by strengthening healthcare. The new funds are provided under the Rapid Financing Instrument (RFI), which distributes funds to countries facing an urgent balance of payments need, without the need for a full-fledged economic programme or reviews.
Albania was hit by a double whammy of the deadly earthquake last November followed by the ongoing global coronavirus outbreak that together have caused significant losses and disruptions to the economy.
“The earthquake on November 26, 2019 and the ongoing global COVID-19 pandemic have caused significant hardship and disruption to economic activity in Albania,” Tao Zhang, deputy managing director and acting chair, said in an IMF statement. According to Zhang, the two consecutive shocks are expected to create large fiscal pressures and an urgent balance of payments need amid a tightening of global financial conditions.
Bosnia & Herzegovina
The leaders of Bosnia & Herzegovina’s three main ethnic parties and the state authorities have reached an agreement on the spending of a much-needed €330mn loan from the IMF, clearing the last condition imposed by the international institution in order to approve the sum.
The aid is part of the IMF's programme to help governments worldwide to tackle the coronavirus (COVID-19) outbreak and its economic consequences. Bosnia has been in a state of emergancy since March 17, and the number of reported cases of coronavirus reached 984 on April 12.
Although the aid was proposed by the IMF, it has warned that it will halt this assistance if the authorities undermine the country’s currency arrangement.
Earlier in April, Prime Minister Zoran Tegeltija asked IFIs for at least €600mn in joint aid to support the country's economy and healthcare system as the coronavirus crisis unfolds.
The IMF approved €51.6mn on April 10, or 50% of its quota, in emergency support for Kosovo to meet urgent balance of payment needs stemming from the coronavirus (COVID-19) pandemic.
The funds, provided under the Rapid Financing Instrument (RFI), are aimed at responding effectively to the coronavirus by strengthening healthcare and mitigating the effects on the sectors and households most affected by the crisis.
The IMF is projecting that the coronavirus pandemic will hit Kosovo’s economy hard. GDP is projected to contract by 5% in 2020 as tourism receipts, remittances, exports of goods, and FDI will decrease due to travel restrictions and the effect of COVID-19 on its trading partners and remittance-originating countries.
The deteriorated economic outlook is expected to result in external and fiscal financing gaps, the IMF noted.
The Moldovan authorities have asked for emergency financial assistance to mitigate the economic impact of the coronavirus pandemic. An IMF mission held discussions from the fund’s headquarters in Washington on March 30-April 1 on economic policies appropriate for addressing the impact of the pandemic under the combined Rapid Credit Facility and Rapid Financing Instrument.
The financing might reach $117mn (1% of the country's GDP), the fund said — which is important but far from sufficient to finance the country's public deficit, which is likely to surpass 5% of GDP in 2020. The unexpected financing needs as estimated by President Igor Dodon would be around €300mn. Separately, €200mn of financing promised by Russia, although confirmed recently by Dodon, is uncertain and might create additional pressures, since the money has already been included in the budget.
The IMF has approved a disbursement of SDR140.3mn (about €176.53mn), which is 100% of the quota for North Macedonia to support financing health and macroeconomic stabilisation measures.
Skopje expects budget revenues to drop by 20% to 40% in 2020 compared to last year, according to its three scenarios drawn up in light of the coronavirus crisis. On the expenditure side, the government is redistributing funds to cover the increased needs of the health sector, as well as the measures to be taken to cushion the impact on the economy.
Tao Zhang, IMF deputy managing director and acting chair, said that North Macedonia’s economic outlook has deteriorated substantially as a result of the epidemic and that real GDP is seen falling by 4% in 2020 due to a drop in both domestic and external demand.
"This, together with negative shocks to confidence and spillovers from global financial channels, has created an urgent balance of payments need,” Zhang said in the statement.
Seeking a new IMF agreement has been discussed in Bucharest, but this is off the table for now, Finance Minister Florin Citu said on April 1. The government is wary about seeking IMF support after its previous experience of austerity following the economic crisis of 2009. According to Citu, the government will first tap the local market to finance the budget deficit, which is expected to widen this year, and only afterwards rely on the IMF and the European Bank for Reconstruction and Development (EBRD) under arrangements that would not include conditions such as structural reforms or performance targets.
• South Caucasus
Looking at the South Caucasus, the IMF has reached an agreement with the Armenian government under an existing programme for a funding hike of around $175mn, subject to approval by its executive board. Also, on April 14, Georgian PM Giorgi Gakharia said Tbilisi had completed negotiations with the IMF for assistance of $447mn. According to local reports, $200mn of the IMF loan will go to the government, while the rest will flow to the National Bank of Georgia to help the central bank support its foreign exchange reserves. The central bank previously said there was no doubt the country was set to raise “a significant amount of money” from the Fund. Georgia asked the IMF to increase its funding in the framework of the EFF programme, which last December was extended by one year until April 2021.