The International Monetary Fund (IMF) is often regarded, at least in developing economies, as hard stoned, handing out prescriptions that hurt more than the ailment itself. However, last week, it showed a rare soft heart that feels the pains of its patients. In an effort to build resilience to balance of payments shocks, the Fund proposed a $50bn trust fund for Nigeria and other low-income and vulnerable middle-income countries. It was disclosed in a blog post “A New Trust to Help Countries Build Resilience and Sustainability*.
The IMF stated that amid the Covid-19 pandemic “it is crucial not to overlook the long-term challenge of transforming economies to become more resilient to shocks and achieve sustainable and inclusive growth. A proposed $50bn trust fund could help (them) build resilience to balance of payments shocks and ensure a sustainable recovery.” It explained that the shock of the pandemic showed the importance of rectifying long term challenges. “The pandemic has taught us that not addressing these long-term challenges in a timely manner can have significant economic consequences, with the potential for future balance of payments problems.”
The IMF identified climate change as another long-term challenge that threatened macro-economic stability and growth in many countries through natural disasters and disruptions to industries, job markets, and trade flows, among others. Those challenges were not peculiar to low-income countries alone, classifying them as global public policy challenges. “These are global public policy challenges, and it is the shared responsibility of individual countries and the international community to take timely actions,” the Fund said.
The IMF would need the support of its member states and approval by the IMF Executive Board for the proposed Fund, according to the statement. It said, “With broad support from the membership and international partners, we hope that the Trust can be approved by the IMF Executive Board before the upcoming Spring Meetings and for it to become fully operational before the year’s end.” RST finance could be available to almost three-quarters of the IMF’s membership. This would encompass all low-income nations, developing and vulnerable small states, and middle-income countries with per capita GNPs less than ten times the 2020 IDA operating cutoff, or around $12,000.
Staff from the IMF and the World Bank collaborated closely to create a coordination framework for Resilience and Sustainability Trust (RST) activities on climate risks, relying on previous expertise in assisting countries with structural reforms.
RST funding would be part of a broader financing strategy pursued by members to address the longer-term balance of payments vulnerabilities, which would include a mix of multilateral, bilateral official, and private finance. An eligible member must have a package of high-quality policy measures consistent with the RST’s purpose; a concurrent financing or non-financing IMF-supported program with appropriate macroeconomic policies to mitigate risks for borrowers and creditors, and sustainable debt and adequate capacity to repay the Fund.
For Nigeria, in particular, this facility has come at the right time.
The government has an annual budget deficit financing challenge that forces it to go aborrowing, both externally and domestically. The trust fund facility will help a lot in this regard and slow down a spiraling debt profile.
