1

TITLE :
Navigating the Post-COVID-19 Landscape:
A Comprehensive Policy Report on the International
Monetary Fund's Role in Crisis Mitigation
CODE OF SUBJECT :
POLS5122

STUDENT :
NURFARHANAH ATHIRAH BINTI ABD AZIZ
(ID : 5521286)

DATE OF SUBMISSION :
17TH NOVEMBER 2023

INSTRUCTOR :
DR MADISON CARTWRIGHT
 2

1. INTRODUCTION:

In the aftermath of the global COVID-19 crisis, this policy report critically
examines the International Monetary Fund's (IMF) role in addressing the economic
challenges that nations face. Evaluating the effectiveness of IMF strategies, the
report aims to provide insights into enhancing international economic cooperation
and resilience in a post-pandemic world.

2. PURPOSE OF THE REPORT:

This report seeks to evaluate the International Monetary Fund's (IMF) actions
in the aftermath of the COVID-19 pandemic, examining its strategies and proposing
possible adjustments. Through an in-depth analysis of the IMF's involvement, the
report aims to provide suggestions to enhance global economic stability and promote
a fair recovery amidst enduring difficulties.

3. BACKGROUND :

Against the backdrop of the unprecedented challenges posed by the COVID-

19 pandemic, the global economy faced severe disruptions, necessitating a robust
response from international institutions. The International Monetary Fund (IMF)
assumed a pivotal role in mitigating economic fallout, providing financial assistance
and policy advice to member countries. This report examines the IMF's interventions,
challenges encountered, and the evolving economic landscape and lays the
foundation for an informed assessment of its post-COVID-19 crisis role.

4. EXISTING APPROACHES - IMPLEMENTATION OF FISCAL POLICIES &

DEPLOYMENT OF ASSISTANCE AND DEBT SERVICE RELIEF

IMF Managing Director emphasized, in her speech, that although the global
economy is recovering with vaccine distribution, economic inequality is worsening,
requiring robust policy actions for universal recovery and a better future (Georgieva,
Washington and DC, n.d.).

According to Armah et al. (2022) from March 2020 to 2022, the IMF provided
about US$ 171 billion, dropping to US$ 75.4 billion (excluding flexible credit lines).
Developing countries' estimated needs were US$ 2.5 trillion, surpassing the IMF's
conservative lending capacity of US$ 1 trillion. Factoring in various elements,
including unusable quota resources, prudential balances, and commitments, a more
accurate estimate places the IMF's lending capacity at approximately US$ 800
billion.
 3

4.1 IMPLEMENTATION OF FISCAL POLICIES :

The IMF applauds nations for swift responses to the health crisis, cushioning
economic impacts. The April 2021 Fiscal Monitor reveals global fiscal support at
nearly $16 trillion, with advanced economies implementing substantial measures
(6% of GDP, on average). Fiscal aid prevented severe contractions but raised
deficits and debts across all income groups. Central banks globally, deploying
unprecedented measures like $10 trillion balance sheet expansion, eased monetary
policy. In emerging markets, half reduced policy rates. Central banks ensured
financial stability through liquidity injections, swap line arrangements, and buying
riskier assets. (IMF, 2021).

4.1.1 Competencies And Limitations :

Public health preservation and policies successfully reduce health risks,

restore confidence, and empowering economic activity and employment while
alleviating fiscal pressures (Gaspar and Gopinath, 2020).

Additionally, ongoing support from flexible fiscal policies has secured a safe
and enduring exit from the crisis as opposed to a premature fiscal retrenchment that
foresees future fiscal risks (Gaspar and Gopinath, 2020).

Recognizing the transformative nature of the crisis, from maintaining jobs to

supporting individuals in retraining or relocating across sectors has become a reality.
Resource transfer from contracting sectors, such as air travel, to expanding ones like
digital services, has been successfully implemented. Governments have efficiently
distinguished solvent from insolvent firms, employing interventions like convertible
bonds and temporary nationalization for strategic entities. (Gaspar and Gopinath,
2020).

IMF Fiscal Affairs Department (2021) asserts that there is significant progress
post-implementation of the fiscal policies by the IMF, encompassing 2020, 2021, and
beyond, categorizing fiscal support types.
 4

Figure 1

Figure 2

Figure 3
Note : From Database Of Fiscal Policy Responses To COVID-19, October 2021
(IMF, 2021)
 5

Meanwhile, there is considerable drawbacks in debt levels and financing

capacities among countries, coupled with high uncertainty in forecasts. Rapidly
escalating borrowing costs, particularly for emerging economies and frontier
markets, pose a challenge. Achieving a return to sustainable fiscal balances is
crucial, especially for countries entering the crisis with low growth and elevated debt.

The IMF database serves a specific purpose, excluding its use for fiscal
reporting classification or cross-economy comparisons due to varied responses
shaped by country-specific factors. Its primary focus remains on government
discretionary measures that enhance existing stabilizers, with preliminary estimates
reflecting ongoing governmental actions (IMF Fiscal Affairs Department, 2021).

Compared to the January 2020 World Economic Outlook, fiscal deficits are
projected to exceed fivefold in advanced economies (AEs) and more than double in
emerging market economies (EMEs). This results in an unparalleled surge in public
debt, increasing by 26 and 7 percentage points of GDP, respectively (Gaspar and
Gopinath, 2020).

Figure 4 Figure 5

Figure 6

Note : From Fiscal Policies for a Transformed World, July 2020 (IMF Blog, 2020)
 6

4.1.2 IPE’s Analytical Lense :

Neoliberalism is often associated with economists like Friedrich Hayek and

Milton Friedman (Mudge, 2008; Boas and Gans-Morse, 2009), emphasizing market-
driven solutions and minimal state intervention, influencing the IMF's approach. The
focus on specific purposes, avoidance of cross-economy comparisons, and reliance
on government discretion align with neoliberal principles, prioritizing individual state
sovereignty. This may hinder a more coordinated and standardized global economic
response. The projected fiscal deficits and rising public debt in AEs and EMEs
underscore the challenges posed by neoliberal fiscal policies in addressing systemic
economic shocks and fostering international cooperation for comprehensive
solutions.

Institutionalism, contributed by Robert Keohane (1988) and Peter J.

Katzenstein (Gourevitch et al., 2008), aligns with addressing unprecedented fiscal
challenges, enhancing the IMF's role in global economic governance, and promoting
stability across diverse economies. Institutions, like the IMF, adapt to changing
circumstances and priorities. A reformed IMF can enhance its capacity for
comprehensive fiscal reporting and cross-economy comparisons. Improving
transparency, inclusivity, and coordination among member states can mitigate varied
responses.

4.1.3 Addressing Fiscal Policies Challenges (Recommendations) :

Governments need credible medium-term fiscal plans, emphasizing revenue

mobilization through measures like minimizing tax avoidance, enhancing tax
progressivity, carbon pricing, and improving spending efficiency. Transparent
communication is vital to mitigate potential volatility in sovereign debt markets
(Gaspar and Gopinath, 2020).

International institutions must ensure continued access to international

liquidity and concessional financing, particularly for vulnerable low-income
developing countries (LIDCs) struggling with limited resources for healthcare and
essential services. While 72 countries have received IMF emergency assistance,
additional bilateral and multilateral support is imperative. Prolonged debt relief,
including through the G20 Debt Service Suspension Initiative, may be necessary for
poorer nations. Such efforts hinge on global solidarity to ensure equitable access to
treatment and vaccines. As this is achieved, governments should redirect fiscal
policy towards resilient, sustainable, and inclusive growth (Gaspar and Gopinath,
2020).

Policymakers must address heightened poverty, inequality, and structural

vulnerabilities exposed by the crisis, investing in robust health systems, well-
resourced social safety nets, and digitalization. Active support for climate-friendly
investments, promoting greener, job-intensive, and innovation-driven growth, is
essential. Fiscal policy should further combat inequality through spending directed at
 7

universal access to health and education, coupled with progressive tax systems
(Gaspar and Gopinath, 2020).

4.2 DEPLOYMENT OF ASSISTANCE AND DEBT SERVICE RELIEF :

Amidst the COVID-19 crisis, the IMF has deployed a comprehensive strategy,
doubling access to emergency financing, grant-based debt relief, and policy advice
to member countries. The Fund swiftly doubled access to its Rapid Credit Facility
and Rapid Financing Instrument, approving emergency financing for 85 countries.
Debt service relief, extended through the Catastrophe Containment and Relief Trust,
aids 29 vulnerable nations. Calls for bilateral debt relief led to the Debt Service
Suspension Initiative, providing temporary relief for 73 countries. On 23rd August
2021, the International Monetary Fund Committee (IMFC) endorsed a $650 billion
Special Drawing Rights allocation, and the IMF established a Short-term Liquidity
Line to enhance the global financial safety net. Existing lending arrangements are
adapted to address emergent needs. The IMF offers real-time policy advice and
capacity development to over 160 countries, covering critical areas such as cash
management, financial supervision, and cybersecurity, aiming to foster economic
recovery and resilience. Online courses and a Learning Channel on YouTube
contribute to knowledge dissemination (IMF, 2021).

As of March 2022, the IMF is allocating approximately $250 billion,

constituting a quarter of its $1 trillion lending capacity, to assist member countries
(IMF, 2022)

Countries Receiving Assistance and Debt Service Relief

Figure7
Note : From Emergency Financing by Region, March 2022 (IMF, 2022)
 8

The proportion of special drawing rights (SDRs) in the reserve assets of

developing regions following a new issuance totaling US$ 650 billion.

Figure 8

Figure 9
 9

Figure 10
Note : From Report on Special Drawing Rights (SDRs) and The COVID-19 Crisis,
April 2022 (ECA-ECLAC 2022)

4.2.1 Competencies And Limitations :

Armah et al. (2022) highlight six key advantages of Special Drawing Rights
(SDRs) for IMF member nations. Firstly, SDRs provide an automatic and universally
accessible line of credit, setting them apart from other financing options. Secondly,
SDRs entail no debt, eliminating the obligation for principal repayment, unlike other
IMF facilities. Thirdly, SDRs lack associated policy conditionalities, fostering financial
inclusivity and expanding policy space in developing economies. Fourthly, using
SDRs incurs a very low, below-market interest rate (0.05%), particularly
advantageous for countries with high-risk premiums. Fifthly, SDRs enhance reserve
assets without typical costs, assisting countries grappling with pandemic-induced
external imbalances. Augmented reserves mitigate country risk, reduce domestic
borrowing costs, and improve access to private financing.

Most Developing Regions With Likelihood of Credit Risk

Figure 11
Note : From Report on Special Drawing Rights (SDRs) and The COVID-19 Crisis,
April 2022 (ECA-ECLAC 2022)
 10

Lastly, SDRs enhance financial stability and can drive economic development
by freeing resources for domestic public goods or serving as capital.

However, Armah et al. (2022) pinpointed the side effects, that are: Firstly, The
US$ 650 billion SDR allocation inadequately addresses the over US$ 2.5 trillion
financing gap in developing economies. Developed nations, with unrestricted access
to reserve currencies, spearheaded the global fiscal response surpassing US$ 11
trillion; and

Secondly, developed countries, especially in the G7 and Europe, have

considerably lower dependence on Special Drawing Rights (SDRs) compared to
developing regions like Africa, Latin America, and East Asia. Utilization rates,
ranging from 5.9% to 7.79% in developed countries, contrast significantly with
percentages ranging from 25.28% to 52.37% in developing regions, indicating
that developed nations typically act as net lenders of SDRs (Armah et al., 2022).

2021 Median utilization rates of Special Drawing Rights (SDRs).

Figure 12
Note : From Report on Special Drawing Rights (SDRs) and The COVID-19 Crisis,
April 2022 (ECA-ECLAC 2022)

Additionally, the utilization rates offer a basis for estimating the share of
the new US$ 650 billion SDR issue that could be redistributed from developed to
developing economies, potentially reaching US$ 393 billion (Armah et al., 2022).

2021 Redistribution of Special Drawing Rights (SDRs) based on utilization

rates.

Figure 13
Note : From Report on Special Drawing Rights (SDRs) and The COVID-19 Crisis,
April 2022 (ECA-ECLAC 2022)
 11

The utilization of SDRs are governed by three key considerations. Firstly,

countries are obligated to pay interest on on-lent SDRs, constituting a minor cost yet
a liability for the SDR lender. Secondly, as countries perceive SDRs as a reserve
asset, they seek assurance that on-lent SDRs can be promptly recalled. Therefore,
on-lending agreements must incorporate mechanisms ensuring SDR liquidity. Lastly,
SDRs can only be held by eligible IMF member countries and prescribed holders,
limiting their distribution (Armah et al., 2022).

4.2.2 IPE’s Analytical Lense :

Dependency Theory, associated with scholars like Prebisch (Ocampo, 2001)

and André Gunder Frank (Dietz, 1980), elucidates the unequal power relations
between developed and developing nations, evident in the inadequate SDR
allocation. The disproportionate reliance on reserve currencies by developed
countries aligns with Dependency Theory's focus on structural disparities and the
perpetuation of economic inequality in the international system.

In the contrary, Structuralism, by Raúl Prebisch, focuses on the underlying

systemic issues, emphasizing the need to restructure global economic institutions to
rectify imbalances (Ocampo, 2001). In this context, reforms in international financial
institutions, such as the IMF, could be advocated to ensure more equitable
distribution of resources and responsiveness to the financial needs of developing
economies. Structuralist approaches often call for transformative changes in the
global economic system to alleviate dependency and promote a fairer international
order.

4.2.3 Addressing Deployment Of Assistance And Debt Service Relief Challenges

(Recommendations) :

To cater to the financial needs of developing countries ineligible for support

from the Poverty Reduction and Growth Trust (PRGT), it is proposed various means
of reallocating Special Drawing Rights (SDRs) :

One approach involves strengthening PRGT, reforming its structure, and

removing policy conditionalities, extending its coverage beyond low-income to select
middle-income nations. Another proposal focuses on aiding pandemic-affected
middle-income countries by establishing a fund for concessional borrowing,
leveraging SDRs to finance Sustainable Development Goals (SDG)-related projects.
Lending SDRs to Liquidity and Sustainability Facility (LSF) and PIMCO to create a
repo market for sovereign bonds is suggested as a third reallocation method. Lastly,
using SDRs to augment the lending capacity of development banks and regional
financing institutions is advocated, allowing these entities to issue bonds to the IMF
in exchange for SDRs, which can fund long-term loans at the SDR rate (Armah et al.,
2022).
 12

5. CONCLUSIONS :

Urgent actions to enhance legal mechanisms for resolving debt overhangs

and preventing long-term economic scarring have been executed on a global scale.

(2170 words)
 13

6. REFERENCE LIST :

Armah, B., Perez-Caldentey, E., Boketsu Bofili, J.P., Olanike, B., Sheng , Z. and
Villarreal, F. (2022). Report on Special Drawing Rights (SDRs) and the COVID-19
crisis . [online] Economic Commission for Africa (ECA), e Economic Commission for
Latin America and the Caribbean (ECLAC) and the Economic Commission for Africa
(ECA), pp.1–25. Available at: https://www.uneca.org/ [Accessed 16 Nov. 2023].

Boas, T.C. and Gans-Morse, J. (2009). Neoliberalism: From New Liberal Philosophy
to Anti-Liberal Slogan. Studies in Comparative International Development, [online]
44(2), pp.137–161. doi:https://doi.org/10.1007/s12116-009-9040-5.

Dietz, J.L. (1980). Dependency Theory: A Review Article. Journal of Economic

Issues, 14(3), pp.751–758. doi:https://doi.org/10.1080/00213624.1980.11503774.

E. Clark, A., D’Ambrosio, C. and Lepinteur, A. (2020). The Fall in Income Inequality
during COVID-19 in Five European Countries. [Working Paper Series] pp.1–27.
Available at: http://www.ecineq.org/milano/WP/ECINEQ2020-565.pdf [Accessed 16
Nov. 2023].

Ferreira, F. (2021). Inequality and COVID-19 – IMF F&D. [online] www.imf.org.

Available at: https://www.imf.org/external/pubs/ft/fandd/2021/06/inequality-and-covid-
19-ferreira.htm.

Gaspar , V. and Gopinath, G. (2020). Fiscal Policies for a Transformed World. IMF
Blog. Available at: https://www.imf.org/en/Blogs/Articles/2020/07/10/blog-fiscal-
policies-for-a-transformed-world [Accessed 16 Nov. 2023].

Georgieva, K., Washington, I.M.D. and DC (n.d.). Giving People a Fair Shot—
Policies to Secure the Recovery. [online] IMF. Available at:
https://www.imf.org/en/News/Articles/2021/03/25/sp033021-SMs2021-Curtain-Raiser
[Accessed 16 Nov. 2023].

Gourevitch, P.A., Keohane, R.O., Krasner, S.D., Laitin, D., Pempel, T.J., Streeck, W.
and Tarrow, S. (2008). The Political Science of Peter J. Katzenstein. PS: Political
Science & Politics, [online] 41(04), pp.893–899.
doi:https://doi.org/10.1017/s1049096508211273.

IMF (2022). Emergency Financing by Region. [online] IMF. Available at:

https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker.

IMF Fiscal Affairs Department (2021). Fiscal Policies Database. [online] IMF.
Available at: https://www.imf.org/en/Topics/imf-and-covid19/Fiscal-Policies-
Database-in-Response-to-COVID-19.

IMF. (2021). Questions and Answers: The IMF’s response to COVID-19. [online]
Available at: https://www.imf.org/en/About/FAQ/imf-response-to-covid-19#Q1.
 14

Keohane, R.O. (1988). International Institutions: Two Approaches. International

Studies Quarterly, 32(4), pp.379–396.

Mudge, S.L. (2008). What is neo-liberalism? Socio-Economic Review, [online] 6(4),

pp.703–731. doi:https://doi.org/10.1093/ser/mwn016.

Ocampo, J.A. (2001). Raúl Prebisch and the development agenda at the dawn of the
twenty-first century. CEPAL Review, 2001(75), pp.23–37.
doi:https://doi.org/10.18356/80eee999-en.