The economic crisis caused by the coronavirus pandemic has compelled governments around the world to implement emergency measures – unparalleled in modern history – to calm financial markets, limit job losses, and put money in their citizens’ hands. The International Monetary Fund (IMF) works to coordinate and guide these efforts. Known as the world’s “financial crisis firefighter,” this global institution has mobilized in the last three months like never before.
The IMF was established shortly after World War II in order to to ensure the stability of the international monetary system, which enables countries to trade with and invest in each other. The organization pursues this mission by:
- Monitoring the economic and financial systems of its member countries and advising them on policy;
- Providing loans to member countries; and,
- Helping governments modernize their economies and train their people.
Current efforts to stabilize the global economy
The IMF has a dire outlook for the world economy over the short-term due to COVID-19 impacts. Whereas, at the start of 2020, it was expecting 170 national economies to expand, it now anticipates that 160 will actually contract by the end of the year. Overall the organization’s economists predict a 3 percent global contraction. The United States economy may shrink by 6 percent, the eurozone by 7.5 percent. These are significant numbers.
However, the IMF is quarterbacking an unprecedented and massive coordinated financial response by its 189 member countries. The efforts will dwarf the response to the 2007-2008 Global Financial Crisis. According to IMF Managing Director Kristalina Georgieva, “fiscal measures so far have amounted to about $8 trillion and central banks have undertaken massive (in some cases, unlimited) liquidity injections.”
Moreover, since the pandemic crisis began, the IMF has advanced several of its own critical reforms and emergency measures. This includes increasing its ability to rapidly disburse funds, increasing its debt-relief capacity for poor nations, and establishing a liquidity line for better positioned countries in need of short-term support. The IMF currently has a $1 trillion lending capacity. Director Georgieva also reported that 103 countries have already requested emergency funding during the crisis. The IMF has approved approximately $6 billion in assistance to date. On April 15, it announced six months of debt relief for 25 of the world’s poorest countries, of which 23 are in Africa. That relief may expand to additional nations and could last for as long as two years.
The 4-point plan
Earlier this month, Georgieva outlined an overarching four-point plan for addressing the global economic implications of COVID-19.
- Continue with essential containment measures and support for health systems. The IMF believes defending people’s health is necessary for economic recovery. Governments should prioritize health spending for testing and medical equipment; pay doctors and nurses; and ensure hospitals can function.
- Shield affected people and firms with fiscal and financial sector measures. This includes tax deferrals, wage subsidies and cash transfers to the most vulnerable; extending unemployment insurance and social assistance; and temporarily adjusting credit guarantees and loan terms.
- Reduce stress to the financial system and avoid contagion. Lower interest rates. Activate and create swap lines between central banks. Enhance liquidity for emerging economies.
- Plan for recovery. Governments must move swiftly to boost demand. Coordinated fiscal stimulus will be essential. Monetary policy should remain accommodative.
Relevance and criticism
Since the start of the European sovereign debt crisis in 2010, the IMF has experienced increased relevance. It intervened in significant ways when several eurozone nations – including Greece, Spain, and Ireland – were unable to finance their government debts. For Greece, in particular, it led a massive bailout program totaling $375 billion over 8 years.
The IMG and its supporters argue that these interventions were absolutely necessary to prevent a far-reaching meltdown. They point to the success of IMF efforts in such places as Ireland as evidence that the institution is a force for good. However, the IMF has drawn sharp criticism from some economists who believe that the reforms it demands of loan recipients might be counterproductive. These measures include fiscal austerity, high interest rates, and privatization of industries, among others.
Although it is hard to measure the true impact – either positive or negative – of IMF actions and policies, there appears to be a global consensus that, right now, the organization is as essential to the world’s economic prospects as it ever has been.