IMF says global financial safety net to remain until pandemic ends

As world reserve holdings reaches $14trn Layers of safety net rose tenfold to $4trn

THE INTERNA TIONAL MON ETARY FUND (IMF) has said the continued use of the global financial safety net will need to be kept in place until the global pandemic crisis comes to an end as the total stock of international reserve holdings has more than doubled to about $14 trillion at the end of 2020 since the global financial crisis, while other layers of the safety net rose tenfold to about $4 trillion.

The global financial safety net is a set of institutions and mechanisms that provide insurance against crises and financing to mitigate their impact and this safety net has four main layers. The layers, according to the IMF, include: countries’ own international reserves; bilateral swap arrangements whereby central banks exchange currencies to provide liquidity to financial markets; regional financial arrangements by which countries pool resources to leverage financing in a crisis; and the IMF.

The IMF, in its special series report titled: ‘Global Financial Safety Net – A lifeline for an uncertain world’, said this global financial safety net has expanded significantly in the past decade and its sources have become more diverse while financing from the regional financing arrangements remained low, as demand was contained by supportive macroeconomic policies in advanced economies, and timely financing from other global financial safety net sources.

It further noted that the increase in the total stock of reserve holding and safety nets over the years reflects the expansion of the bilateral swap arrangements during the global financial crisis and the recent pandemic, as well as the establishment of new regional financial arrangements, especially in Europe (e.g., the European Stability Mechanism) and in SouthEast Asia (the Chiang Mai Initiative Multilateralization). It said it more than doubled available resources in the aftermath of the global financial crisis.

“When economic crises hit, such as the one caused by the pandemic, countries have a number of financial resources—both internal and external—to draw on. For its part, the IMF remained the linchpin of the safety net, approving debt service relief and providing financial assistance to an unprecedented number of countries, including low-income and emerging market economies that did not benefit from bilateral or regional arrangements.

“This reinforced insurance helped effectively cushion the shock during the first year of the COVID-19 crisis. The increased bilateral swap arrangements, primarily the US Federal Reserve swaps, provided prompt liquidity support, helping to stabilize the global financial markets and capital flows to emerging market economies.

“As countries continue to grapple with the fallout from the pandemic and face increased risks of tighter financial conditions, the continued use of the global financial safety net will likely be needed until the crisis is over,” it said.