Since the outbreak of the Coronavirus, developing countries have been exposed to massive withdrawals of capital flows. In this post, I unpack the financial challenges these countries are facing and consider what role the Special Drawing Rights (SDRs) of the IMF can play in easing the burden.
According to the calculations by the Institute for International Finance (IIF), investors withdrew almost $80 billion over recent weeks from emerging markets (Wheatley 2020). During periods of crisis, investors ‘fly to safety’ by selling risky assets and purchasing safe assets such as US Dollars and the US Treasury Securities. As international investors flee to dollars amidst the financial turmoil caused by the Coronavirus, there is an acute concern that low and middle-income countries will be short of dollars. Furthermore, the scale of the withdrawal suggests that these countries will face great difficulty in raising funds for their sovereign debt payments. Besides governments, firms based in developing countries are also expected to face difficulties in raising foreign currency-denominated debt in international capital markets. Meeting this growing demand requires a global lender of last resort that can provide dollars on request. Within the existing global financial order, the Fed and the IMF are two major organizations that are capable of meeting this demand.
The Fed can provide dollar liquidity through swap lines, which allows global central banks access to dollars in exchange for their own currency with the promise that the principal, as well as the interest, will be paid later. When engaging in a swap operation, the Fed provides dollars to the recipient central bank for an equivalent amount of their currency at a given market exchange rate. After a certain period, the two central banks resell to each other their respective currencies at the initial exchange rate. The recipient central bank provides the dollars to financial institutions in its jurisdictions at the same maturity and rate. This way, swap lines provide dollar liquidity to recipient countries’ central bank and financial institutions (Bahaj and Reis 2018).Read More »
This piece was written before the Coronavirus outbreak. It is a timely proposal of action. Given the high exposure of the developing world to the virus in contexts of medical and other logistical shortcomings, the damage to their productive capacity is likely to be much more severe than for the advanced world. This fact is already reflected in particularly sharp virus-stirred capital outflows from these countries. All this greatly increases their exposure to the present global structures for sovereign insolvency, and the urgent need for those structures to be radically reformed—as the authors propose with the Pre-Emptive Sovereign Insolvency Regime (PSIR).
In a radical call for reform of the IMF’s pro-creditor and anti-growth approach to indebted countries in Africa, Ndongo Sylla and Peter Doyle argue that the continent has a choice to make. Creditors, using the IMF, must be stopped from forcing devastating output losses by imposing high primary surpluses.
Within a decade, just to keep up with the flow of new entrants into its labour markets, sub-Saharan Africa needs to create 20 million new jobs every year. This is a huge challenge. But it is also a thrilling opportunity—to harness the energy and creativity of all of Africa’s young.
However, after it reviews these issues in Africa, the IMF’s immediate message—literally in the same sentence—is to pivot to ‘budget cuts to secure debt sustainability!’
That is plain wrong. For Africa to meet its development objectives, the IMF must radically change its pro-creditor anti-growth approach to highly indebted/insolvent countries.Read More »
A new report published by the Washington DC office of the Heinrich Böll Foundation reviews the recent initiative being led by the G20countries and their respectivedevelopment finance institutions, including the major multilateral development banks, for the financialization of development lending that is based on the stepped-up use of securitization markets.
The report details how the initiative goes beyond the Washington Consensus reforms of the last few decades by calling on developing countries to adopt even farther-reaching degrees of financial liberalization on a new order of magnitude. In what Prof. Daniela Gabor of the University of West England, Bristol, calls“the Wall Street Consensus,” such reforms would involve a wholesale reorganizationof the financial sectors and the creation of new financial markets in developing countries in order to accommodate the investment practices of global institutional investors.
The new report, “From the Washington Consensus to the Wall Street Consensus” describes the key elements of the new initiative – specifically how securitization markets work and how the effort is designed to greatly increase the amount financing available for projects in developing countries by attracting new streams of private investment from private capital markets. The paper introduces the basic logic underpinning the initiative: to leverage the MDBs’ current USD 150 billion in annual public development lending into literally USD trillions for new development finance. In fact, the World Bank had initially called the initiative “From Billions to Trillions,” before finally calling it, “Maximizing Finance for Development.”
While securitization can be useful for individual investors and borrowers under certain circumstances, the proposal to use securitization markets to finance international development projects in developing countries raises a set of major concerns. The report lists 7 important ways in which the G20-DFI initiative introduces a wide range of new risks to the financial systems in developing countries while undermining autonomous efforts at national economic development.
The key risks of securitization are:
The inherent risk because securitization relies on the use of the “shadow banking” system that is based on over-leveraged, high-risk investments that are largely unregulated and not backed by governments during financial crises;
The extensive use of public-private partnerships, despite the poor track record ofPPPs, many of which have ended up costing taxpayers as much if not more than if theinvestments had been undertaken with traditional public financing;
The degree of proposed deregulation reforms in the domestic financial sector required of developing countries would undermine the ability of “developmental states” to regulatefinance in favor of national economic development;
The degree of financial deregulation required would also undermine sovereignty by makingthe national economy increasingly dependent on short–term flows from global private capitalmarkets and thereby undermine the sovereign power of governments and their autonomouscontrol of the domestic economy;
The uncertainty relating to governance and accountability for the environmental, social andgovernance standards associated with development projects. Such accountabilityhas been fixed to traditional forms of public MDB financing for development project loans,but as future ownership of assets is commercialized and financialized, fiduciary obligationsto investors may override obligations to enforce ESG implementation;
The deepening of the domestic financial sectors in developing countries, as required by theinitiative, can create vulnerability as the size of the financial sector grows relative to that ofthe real sector within economies; and
The privatization and commercialization of public services, including infrastructure services,as called for by the initiative, has faced a growing backlash as reflected by the global trendof remunicipalizations. The fact that the securitization initiative is being promoted in such ahigh profile way by the G20 and leading DFIs despite all of these risks reflects an intensifiedcontest between those supporting the public interest and those supporting the private interest.
The report also documents the relatively minor degree of interest expressed so far by global financial markets in the initiative, suggesting it is not likely to galvanize the trillions of dollars claimed by its proponents.
It concludes by reviewing the arguments for the scaled up use of traditional public financing mechanisms and several of the important ways in which this can be done, including steps that could be taken by G20 countries, DFIs and governments.
Rick Rowden recently completed his PhD in Economic Studies and Planning from Jawaharlal Nehru University (JNU) in New Delhi.
More expansionary fiscal and monetary policies are needed to meet the Sustainable Development Goals
This month, the international community will gather at the United Nations in New York to review progress on the implementation of the 17 Sustainable Development Goals (SDGs) that are intended to reduce poverty, hunger and economic inequality and promote development, particularly in developing countries. But only one of the SDGs, #17, says anything about how to finance all the efforts. While SDG 17 calls for more international cooperation and foreign aid, it only suggests that developing countries strengthen domestic resource mobilization (DRM) by improving their tax collection and curtailing illicit financial flows, etc.
While important, this approach neglects much bigger problems with the prevailing set of macroeconomic policies that hamper the ability of developing countries to increase public investment, employment and scale-up the long-term investments in the underlying health and education infrastructure needed to achieve the SDGs. The policy framework used in many developing countries is characterized by an overly restrictive low-inflation target achieved by using high interest rates and backed up by strict inflation targeting regimes at independent central banks.Read More »
The World Bank interpreted the failure of mineral extraction to drive structural transformation in the early decades of African Independence as due to badly managed state-owned enterprises (SOEs), excessive state intervention in the economy, and government corruption. To right these wrongs, since the 1980s, the Bank has loaned hundreds of millions of dollars to the governments of mineral-rich (and mostly low-income) African countries to privatise and liberalise their mining sectors. Spurred on by the most recent commodity super-cycle beginning in the late 1990s, foreign direct investment poured in, and for many low-income African countries today, “the mining sector represents one of the most crucial sources of investment and income in their economies” (Farole and Winkler 2014: 177). A major theoretical assumption underpinning this process has been a belief in the superior expertise and efficiency of experienced transnational corporations (TNCs) compared to corrupt and mismanaged SOEs. In this post, I unpack and question the validity of this assumption, by drawing on some of the findings from my doctoral thesis on mining reindustrialisation in South Kivu Province of the Democratic Republic of the Congo (DRC). Read More »
Last month, central bankers and politicians around the world remembered the global financial crisis and the lessons learnt in its wake. The consensus goes at follows: we have done a great deal to reform banks and protect tax payers from their aggressive risk taking but we haven’t done enough on shadow banking. At this point, the consensus fragments. Central banks claim that they need more power to deal with systemic risks stemming from the shadows, whereas politicians worry about the moral hazards involved in future rescues of shadow banks like Lehman.
We are all the more concerned that the same authorities have been actively promoting shadow banking in the Global South. Under headings such as Billions to Trillions and the World Bank’s new Maximizing Finance for Development (MFD) agenda, the new strategy for achieving the Sustainable Development Goals is to use shadow banking to create ‘investable’ opportunities in infrastructure, water, health or education and thus attract the trillions in global institutional investment.Read More »
The Argentinian government has requested financial assistance from the IMF to tackle the consequences of a serious currency crisis. Last Wednesday, the government emphatically announced the new terms of such an agreement. However, unpacking the terms of those agreements and the current situation reveals serious concerns about the country’s future .
A few months back (see here), we provided an analysis of the current Argentinian crisis, highlighting the excessive vulnerability of the economy produced by the abrupt financial deregulation carried out by Macri’s administration. Three aspects in particular threatened the country’s future prospects: the deregulation of foreign exchange that failed to stop capital flight, a boom in foreign debt (at a record level among emerging market economies) and the promotion of speculative capital inflows to carry trade (buying financial instruments issued by the Central Bank called LEBAC in order to pursue carry trade operations).
When international conditions worsened and the carry trade circuit came to an end, the “LEBAC bubble” exploded and produced a tremendous foreign exchange crisis that shook the Argentine economy, causing a sharp rise in inflation and a severe recession from which the country has not yet managed to escape. Read More »
The theme of the 2018 World Economic Forum was, “Creating a Shared Future in a Fractured World.” Its six richest attendees each boasted an estimated net worth of $5.2 billion or more, or the same amount as the total burden of Somalia’s outstanding debt, which, amid the splendor of the event, Somali Prime Minister Hassan Ali Khayre met with IMF Managing Director Christine Lagarde to discuss clearing. In this era of extreme global inequality, it is estimated that the United Nations agenda of seventeen sustainable development goals (SDGs) known as Agenda 2030, will require 4.5 trillion dollars of investment per year to be realized, or more than twice the amount expected to be available from traditional official development assistance (ODA) alone. Due to the increasing concentration of private wealth in the global economy, discussions around development finance have focused on private sector engagement, rather than more traditional, ODA from predominantly Western donor governments and multilateral institutions.Read More »