International financial institutions: leading the fight against COVID-19

SEATTLE, Wash. — International financial institutions play a central but often overlooked role in managing the global economy. These institutions grant loans, finance projects and manage cross-border financial arrangements. The outbreak of the COVID-19 pandemic has fundamentally altered economic activity and threatens to overwhelm even the most developed countries. Meanwhile, shrinking growth margins and capital flight signal the collapse of developing country economies. In these unprecedented times, international financial institutions have mobilized billions in financial resources to keep the global economy strong.

International Monetary Fund (IMF)

Created after the end of World War II, the IMF is an institution designed to promote international monetary stability by providing emergency loans to disadvantaged countries. Typically, loans are granted only after a lengthy approval process and administered under strict ethical and categorical guidelines. The organization operates through a network of funding agreements with member countries, private organizations and international institutions.

COVID-19 presented a formidable challenge to the IMF, as containment policies and market closures forced many countries to seek rapid assistance loans. By May, more than 100 countries had requested IMF loans, leading the institution to announce that it would tap into its $1 trillion lending capacity to respond appropriately to the COVID-19 pandemic.

While IMF lending is usually meant to coincide with structural economic reforms or austerity measures, the situation necessitated a shift to rapid assistance lending. Other actions taken by the IMF provided debt relief to 29 countries classified as “low-income countries”, increased funding for poverty reduction and disaster relief trusts, and created a liquidity line to short term for member countries.

world Bank

Owned by its 187 member countries, the World Bank is an international development organization that provides grants, loans and financial products to its client countries. Operating primarily through subsidiary organizations or regional financing entities, the World Bank seeks to reduce poverty by financing projects and improve living standards in low- and middle-income countries.

Unlike the IMF’s focus on economic restructuring, the World Bank is more of an outlet for financing development projects. For low-income countries that are unattractive to investors, the World Bank may be the only outlet for reliable financing.

The novel coronavirus has created unprecedented demand for project funding, leading the World Bank to mobilize more than $160 billion for COVID-19 related projects in the next 15 months. While regular World Bank projects focus on infrastructure or market development, COVID-19 funding focuses on increasing hospital capacity, improving vaccine distribution networks and providing medical supplies. PPE and the training of health officials. The organization also plans to administer net transfers worth $50 billion to low-income countries, provide financial support to private interests, establish future epidemic preparedness trust funds and promote pandemic bonds to attract investors. The World Bank has responded quickly to the pandemic, funding emergency operations in more than 100 countries as of May 19.

Multilateral Development Banks (MDBs)

A diverse subset of international finance, MDBs typically operate as specialized lending entities relevant to a particular region or issue. While the World Bank remains the most influential MDB, other important players are the Asian Development Bank, the African Development Bank, the Inter-American Development Bank and the European Bank for Reconstruction and Development. Entities related to the issues include the Asian Infrastructure Investment Bank and the International Fund for Agricultural Development, among others.

Together, these institutions are committed to providing approximately $80 billion for coronavirus-related projects over the next 15 months (excluding the $160 billion pledged by the World Bank) and plan to tap into lending capacity at all levels. Despite the lack of World Bank and IMF funding, MDBs are unique in their ability to provide more specialized services in line with the cultural and societal norms of their region. Moreover, they are better equipped to work in tandem with existing regional or political associations like ASEAN and the EU.

Trends and Findings

A report from Congressional Research Service (CRS) concluded that international financial institutions “are mobilizing unprecedented levels of financial resources to help countries address the health and economic consequences of the COVID-19 pandemic”. That statement seems to ring true so far, as funding commitments and project approvals have skyrocketed.

However, it is clear that more action is needed. The World Food Program warns that the number of people suffering from acute hunger could double by the end of 2020 unless an appropriate international response is coordinated. Meanwhile, jobs, capital and investment continue their downward trend in the developing world. Recognizing the threat, international financial institutions are considering measures that provide funds to increase the reserves of developing countries, as well as expanding debt relief and transparency efforts.

These proposals have broad implications for the future of international trade. Instead of economic aid led by foreign superpowers or regional blocs with political agendas, international financial institutions are implementing a response guided by utilitarianism and the betterment of the whole. While the COVID-19 pandemic has demonstrated the potential consequences for an increasingly globalized world, a unifying global response through international financial institutions could provide a counter argument to its benefits.

Look forward

With an ever-evolving global crisis like the novel coronavirus, it is impossible to determine whether the response of international financial institutions will be sufficient to save the global economy. Despite this uncertainty, it is clear that these organizations have provided a lifeline to developing countries struggling to contain the disease.

—Matthieu Compan
Photo: Flickr

Aurora J. William