Rewriting the Global Financial Rulebook: Background Paper (November 2020)

The coronavirus pandemic continues to unfold as an unprecedented global crisis. The pandemic has created devastating rates of infection, mortality and lasting health impacts, exacerbated the fragility in health systems, and disrupted the provision of primary healthcare. Beyond these health impacts, the global pandemic has severe socio-economic consequences, including the broadest collapse in per capita incomes since 1870, the loss of 495 million jobs in Q2 2020, protracted school shutdowns, and now the risk of famine and violent conflict. The direct and secondary effects of the pandemic are disproportionately affecting the poorest and most vulnerable populations, with the level and depth of poverty rising for the first time in three decades. It is likely that the worst effects of the pandemic are yet to be seen.

The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) estimates the need for an additional $90 billion in financing for low-income countries – less than 1 per cent of the stimulus packages currently being implemented in OECD countries. It is cheaper, more effective and more dignified for people in crisis to act now. Further delays in the global response will increase the cost of the crisis. In an interconnected and globalized world economy, the effects of the crisis, if left unaddressed, are likely to cascade and reverberate for years to come.

The current existing funds and commitments from International Financial Institutions (IFIs) fall short of what is needed to overcome this crisis. While OECD countries are rewriting the rulebooks when it comes to their own public finances, the financial instruments available to the most vulnerable countries are more limited. Based on publicly available information compiled by the Centre for Disaster Protection and OCHA , IFIs have committed $87 billion in COVID-19 response financing worldwide, as of 8 October. This still falls short of the needs of the pandemic response, with the financing also not well targeted at those countries that need it most. Approximately 12 per cent ($10.6 billion) of all COVID-19 financing has been committed to low-income countries. Nearly all financing has taken the form of loans rather than grants (95 per cent). After peaking in June, new monthly financial commitments for COVID-19 have fallen, with a total of $1.87 billion committed in September – only 6.6 per cent of that in June ($28 billion).

IFIs need to act ambitiously and act now – and to boldly use creative solutions to expand the use and capability of existing resources. There is a strong moral and economic case for the international community to coordinate an immediate scale-up of financial resources to respond to the COVID-19 crisis. Against this backdrop, this report calls for shareholder support for four policy options that IFIs and multilateral development banks (MDBs) can use to meet the financing needs of the COVID-19 response:

• Use existing commitments and limits fully.
• Expand Special Drawing Rights.
• Rethink outstanding debt and new debt relief packages.
• Leverage differential pricing to improve the terms of lending.