Safety First: Expanding the Global Financial Safety Net in Response to COVID-19 [GEGI Working Paper 37]

We call for strengthening the Global Financial Safety Net (GFSN) to manage the economic effects of the outbreak of COVID-19, in particular the massive capital outflows from emerging market and developing economies and the global shortage of dollar liquidity. Both the United Nations (UN) and the International Monetary Fund (IMF) estimate that emerging market and developing countries (EMDEs) need an immediate $2.5 trillion, yet the financing available to them is just $700 to $971 billion. To meet these immediate needs we pro- pose to: (i) broaden the coverage of the Federal Reserve currency swaps; (ii) issue at least $500 billion of Special Drawing Rights through the IMF; (iii) improve the IMF’s precautionary and emergency facilities; (iv) establish a multilateral swap facility at the IMF; (v) increase the resources and geographic coverage of Regional Financial Arrangements; (vi) coordinate capital flow management measures; (vii) initiate debt restructuring and relief initiatives; and (viii) request that credit-rating agencies stop making downgrades during the emergency. It argues that beyond these immediate measures, leaders should swiftly move to address the following structural gaps in the GFSN: (i) agree on a quota reform at the IMF; (ii) create an appropriate Sovereign Debt Restructuring Regime; (iii) expand surveillance activity; and (iv) adopt IMF governance reform and strengthen its relations with all agents of the GFSN. All of these immediate and intermediate reforms must be calibrated toward a just transition to a more stable, inclusive, and sustainable global economy