October 18, 2024
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The rising influence of geopolitics in economic crisis support
The International Monetary Fund (IMF)-World Bank Annual Meetings provide an opportunity for policymakers and civil society members from around the world to take stock of the institutions which make up the backbone of the international financial system. Historically, the Bretton Woods institutions were the primary insurance providers for countries facing economic and financial crises. Their roles have shifted markedly following the 2008 global financial crisis (GFC) and the rise of bilateral and regional lines of support.
This emergence of bilateral swap lines and regional financing arrangements to supplement IMF lending was a crisis response, not a political one. However, in the emerging era of global fragmentation, the world can expect these newer insurance mechanisms to increasingly be used as political footballs. To be clear, a broader set of insurance providers could support a more robust system if they are underpinned by greater international cooperation. Yet this year’s Annual Meetings, held October 21 through October 26, will likely highlight just how difficult the current political constraints to such international coordination are.
Not your mother’s safety net
Collectively, these insurance mechanisms for countries facing crises are referred to as the global financial safety net (GFSN). The GFSN—which comprises international reserves, bilateral swap lines, regional financing arrangements, and IMF resources—provides liquidity to countries who struggle to meet their balance of payments needs and supports a robust global economy. In the years leading up to the GFC, the IMF was the largest component of the safety net. It made up anywhere between 76 to 95 percent of the GFSN’s total resources, excluding reserves. Following the crisis, the IMF’s share of resources has waned to 28 percent. Bilateral swap lines and regional financing arrangements have become the largest elements, collectively making up between 72 to 74 percent of total resources.
Unlike IMF programs, bilateral and regional arrangements are often extended with domestic political motivations in mind. For example, the People’s Bank of China swap lines are extended with the intent to support the internationalization of the renminbi and to strengthen Chinese diplomatic ties. Federal Reserve swap lines are extended to countries that pose spillover risks to US financial stability. India’s $760 million of support to the Maldives is the latest example of such politically motivated lending.
Rising geopolitical tensions threaten to expose vulnerabilities in this evolved, and increasingly complex, safety net. The IMF’s diminished role as lender of last resort could result in a less equitable system where geopolitically relevant countries receive outsized bilateral support—as was the case when Egypt narrowly avoided a crisis situation earlier this year. Developing countries who do not fit this description may be required to default on their obligations and rely on the IMF’s less timely support, which would have real developmental impacts. All in all, the shifting composition of the safety net could lead lending arrangements astray from their core purpose, which is to support global financial stability, and place domestic politics in the driver’s seat.
Ensuring robust support in an era of fragmentation
Expanding the safety net to include diverse financial insurance mechanisms is not, in its own right, a bad outcome. Introducing new support lines can provide more effective and tailored funding for countries facing different types of crises. Federal Reserve swap lines, for example, are effective insurance for countries who face acute dollar shortages but don’t exhibit structural imbalances that would be better addressed through an IMF program. A diversified GFSN can also provide support when IMF resources are constrained—as is currently the case with the Poverty Reduction and Growth Trust, the IMF’s main vehicle for providing concessional lending to low-income countries.
Yet international cooperation is essential to ensure that all components of the GFSN are working towards the same goal. The proliferation of bilateral and regional arrangements introduces differing incentives which reflect local, rather than global interests. Consensus is needed at the global level to align incentives across GFSN components. Agreement could, and should, be achieved through an explicit discussion of the costs and benefits of different relief measures.
Conclusions
The IMF/World Bank Annual Meetings present an opportunity for finance ministers and central bank governors to engage with one another and assess whether the Bretton Woods institutions are adequately performing their core duties. Geopolitical dynamics will inevitably influence many of these discussions, whether over the merits or flaws of industrial policy or in relation to IMF policies such as the quota formula. The IMF has a role to play in breaking through this impasse. A first step toward facilitating more productive debate would be for the IMF to acknowledge that it is too polite, as recently emphasized by US Treasury Assistant Secretary for International Finance Brent Nieman. While Assistant Secretary Nieman’s remarks were made in the context of the IMF choosing not to recognize political dynamics in country lending and surveillance operations, the IMF would also do well to acknowledge rising geopolitical influences and how they could impact the GFSN.
Revisiting the effectiveness of the GFSN is needed now more than ever, as ballooning external debt stocks in low- and middle-income countries inhibit their ability to achieve climate and development goals. A frank discussion about political influences in crisis support would mark a meaningful step towards greater cooperation and begin a process of reimagining the role of the IMF in the evolved GFSN.
Patrick Ryan is a Bretton Woods 2.0 Fellow at the Atlantic Council GeoEconomics Center.
Amulya Natchukuri is a Next Gen Fellow at the Atlantic Council GeoEconomics Center and an undergraduate student at Rutgers University studying math and economics.
The views expressed in this article are the authors’ and do not reflect that of any employer.
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