Page 33 - BNE_magazine_05_2020

bne May 2020 Cover Story I 33
The stop-shock caused by the called the expanded rapid reaction
coronavirus (COVID-19) pandemic
has brought economies around the world to a screeching halt. China’s PMI manufacturing index collapsed
to an all-time low of 35 in February during the peak of its outbreak, a deep contraction from the 50 no-change mark, and Russia’s services PMI did the same thing in March, falling to an all- time low of 37. Governments around the world have suddenly found themselves short of cash to pay salaries, meet their debt obligations and support collapsing currencies.
Which countries have turned to the IMF?
The International Monetary Fund (IMF) says 85 countries have already applied for help from the newly established Rapid Financing Instrument (RFI) for low-income countries to get through the
“Given the unprecedented demand for its services, there is a high chance the IMF will actually run out of money”
facilities, “a game-changer for some African countries.”
Most of these countries are hoping to tap the new RFI and RCF, where money is paid out immediately straight into the budget. The instrument is a fire bucket, designed to put out the conflagrations that have been caused by the pandemic’s stop-shock.
However, as the planet is very likely to slip into a global recession as a result of this shock, many of these countries will then have to start or enlarge the classic bailout facilities of the SBAs and EFFs – and here too there is talk of increasing their quotas and relaxing the rules a bit.
Given the unprecedented demand for its services, there is a high chance the
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next few months, nine of which are from eastern Europe. Indeed, the demand has been so great the size of that fund has been doubled to $100bn and a second facility introduced called the Rapid Credit Facility (RCF), also of $100bn.
At the same time the IMF has streamlined the application process and increased the access quota for countries to these funds from 100% to 150% as the fund brings out some bigger bazookas. Moreover, unlike the IMF’s standard Standby Agreement (SBA) and more extensive Extended Fund Facility (EFF), the new funds come with no strings attached.
“RFI and RCF provide rapid and low level of access to countries with [an] urgent balance of payments need.
It is designed for situations where
a full-fledged lending programme is not possible or/and not necessary,” Elina Ribakova, deputy chief economist for the Institute of International Finance (IIF), said in a tweet. Economist Sergi Lanau
IMF will actually run out of money, as it cannot bail everyone out. The IMF has already rolled out new funds and beefed up the existing ones, but even more money may be needed.
“While the pace of outflows from EM has greatly reduced in past few days, the extent and scale of the #COVID19 shock is unprecedented. The level and speed of outflows in around 90 days of 2020
is equivalent to the worst yearly figures on record,” says Jonathon Fortun, who tracks capital flows at IIF.
Does the IMF have enough money?
With so many countries asking for tens and even hundreds of billions of dollars, the question arises as to whether the IMF has enough money to go round?
Like central banks, the IMF can create money by allocations of Special Drawing Rights (SDRs) – what the IMF uses in place of foreign exchange reserves. During the 2008 Global Financial Crisis,