On March 26, 2020, an extraordinary virtual G20 Leaders’ Summit will take place to discuss global plans to tackle the public health and economic challenges posed by the coronavirus pandemic (COVID-19). The Leaders’ Summit will follow a virtual meeting of G20 Finance Ministers and Central Bank Governors that was held on March 23 and a virtual G20 Sherpa meeting to be held on March 25.
As anticipated, the G20 finance ministers did not issue a joint declaration after the call. Media reports suggest that no consensus was reached on releasing a joint declaration due to recent tensions between the US and China over trade issues and the origin of the coronavirus.[1]
The G20 Saudi secretariat only issued a press release stating that “G20 Finance Ministers and Central Bank Governors agreed to closely monitor the evolution of the COVID-19 pandemic, including its impact on markets and economic conditions and take further actions to support the economy during and after this phase. They also agreed to develop a joint G20 Action Plan in response to COVID-19, which will outline the individual and collective actions that G20 has taken and will be taking to respond to the COVID-19 pandemic.”[2]
The press statement provides no further information about what specific individual and collective policy actions would constitute the G20 Action Plan. The G20 finance ministers issued a somewhat similar joint statement (on March 6) promising “actions, including fiscal and monetary measures, as appropriate, to aid in the response to the virus, support the economy during this phase and maintain the resilience of the financial system.”[3] For more details on the G20 Action Plan, perhaps we may have to wait until the Leaders’ Summit taking place on Thursday.
More than bland statements, the world urgently needs is coordinated action plans (with concrete steps, resources required, deadlines, and accountabilities) to address the triple crisis — a health crisis, a real economy crisis, and a looming financial crisis triggered by unprecedented capital outflows and credit stress.
Apart from the immediate global health policy response to strengthen health infrastructure, well-coordinated economic policy actions are needed to restart the economy and protect the most vulnerable countries. Given the scare resources, a coordinated multilateral strategy would be mutually reinforcing and would create significant positive spillover effects for all countries. Hence, countries should initiate joint actions and seek greater international coordination in all policy areas to produce better outcomes.
The following are seven key issues for action that G20 could collectively undertake to address the public health crisis and the corresponding economic fallout of the coronavirus pandemic.
1. Enhance Medical Aid and Collaborations
First and foremost, given the transmission of coronavirus across six continents, G20 should ensure that the movement of essential medical supplies (such as masks, gloves, and other medical equipment) should not be restricted across borders and should be offered to all those countries that need them.
The export restrictions on essential medical supplies imposed by the EU and some national governments should be immediately removed as many countries lack the domestic production of medical supplies to deal with the pandemic. Such short-sighted export controls are obstructing global efforts by governments, foundations, and NGOs to send essential medical supplies to affected countries.
Further, the US, China, and Europe should jointly collaborate on many levels in developing and testing a vaccine against the coronavirus. Currently, there are no bilateral or multilateral collaborations to develop a vaccine or other treatments. Needless to add, the conduct of multiple testing programs across various jurisdictions enhances the success of vaccines.
Once a vaccine is approved and successfully launched, it should be offered to people around the world affordably, and regardless of economic or geostrategic considerations. Saving human lives is far more critical than seeking monopoly privileges or pursuing geostrategic goals.
The coronavirus pandemic has, once again, highlighted the need to provide substantial financial support to the WHO to meet the current and future health epidemics.
2. Financial Mobilization and Coordination
G20 should provide significant financial assistance through grants and concessional loans to the poor and developing countries that desperately need funds to augment their public health infrastructure and to revive the economy.
In this regard, G20 needs to adopt a multipronged approach and extend support to myriad international initiatives.
The IMF has made available $50 billion through its twin emergency financing facilities — the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI) — to the poor and developing countries affected by the coronavirus.[4] Besides, the IMF has recently expressed its willingness to mobilize an additional $1 trillion to assist its member countries.
Both these initiatives by the IMF could be effective provided loans do not prescribe fiscal tightening measures and are not denied to member-countries (for instance, Iran or Venezuela) that may have political or strategic differences with some of the biggest shareholders of the Fund.
Since mobilizing $1 trillion may take considerable time in getting approval from its largest shareholders, the IMF could devote more resources to its twin emergency financing facilities in the near terms. On March 23, Kristalina Georgieva, the managing director of the IMF, informed that as many as 80 member-countries are seeking help from the Fund.[5] Hence, $50 billion may not be adequate to meet the immediate financing needs of 80 countries.
Further, the funds under the RFI facility should be made available to countries at zero interest rates, with repayment over ten years. Some of the preconditions attached to securing financial support under the RFI should be relaxed for countries dealing with the global pandemic.
Apart from the IMF, financial support from regional and international financial institutions should be mobilized. For instance, the World Bank can play an essential role in reviving trade finance, as it did during the 2008 global financial crisis.
Norway has proposed to establish a coronavirus fund[6] at the United Nations to assist poor countries facing the virus epidemic, similar to Ebola Response Multi-Partner Trust Fund established in response to the Ebola outbreak in 2014 by the UN. Such financing initiatives need to be welcomed by the G20 and international community.
Apart from resource mobilization, international coordination of financing initiatives is equally important. Ideally, the UN is well-placed to coordinate myriad financing initiatives, given its strong commitment to the Sustainable Development Goals (SDGs) along with the active participation of poor and developing countries in the decision-making processes.
3. Extend US Dollar Swap Lines
The G20 should request the US to extend dollar swap lines to large emerging markets (such as Turkey, Argentina, and South Africa) that are facing a dollar funding squeeze. Currently, the US Federal Reserve has offered swap lines to just four EMEs: Singapore, South Korea, Mexico, and Brazil.
There are regional financing arrangements (RFAs) such as Chiang Mai Initiative, Arab Monetary Fund, BRICS Contingent Reserve Arrangement, and Latin American Reserve Fund that have been established to provide financial support to countries experiencing financial difficulties. However, since most member-countries of the RFAs are also experiencing financial problems, large financial support from such arrangements may not be available in the present circumstances.
4. Coordinate Macroeconomic Policies
The G20 should take the lead in coordinating a wide range of macroeconomic policies to avoid the beggar-thy-neighbor policies, as it did so in the wake of the 2008 crisis.
Although most fiscal stimulus measures are likely to be targeted at sub-national and national levels by governments, G20 should task the Financial Stability Board (FSB) to explore a coordinated and synchronized global fiscal response that can mitigate the economic downturn and protect the most vulnerable economies.
Unlike advanced economies, most developing and emerging economies lack social safety nets that can serve as automatic fiscal stabilizers by boosting fiscal spending during economic downturns.
Special attention needs to be given to support households and small and medium enterprises badly hit by simultaneous supply and demand shocks.
5. Regulate Volatile Capital Flows
The G20 should pledge to do “whatever it takes” to preserve macroeconomic and financial stability. In particular, G20 leaders should strongly endorse the use of capital controls to stem rapid outflows currently experienced by several EMEs as panicked investors are dumping assets in exchange for the US dollar.
Capital outflows from the EMEs have exceeded $70 bn since the beginning of the coronavirus outbreak. The Institute of International Finance has noted that fund outflows from EMEs since late January “are already twice as large as in the global financial crisis and dwarf stress events such as the China devaluation scare of 2015 and the taper tantrum in 2014.”[7]
A sudden surge in capital outflows can trigger large depreciation of EM currencies, which in turn increases the domestic value of foreign currency debts and could trigger sovereign and corporate defaults. The foreign exchange interventions and liquidity provisions have their limitations, and therefore, policy actions are needed to regulate volatile capital flows.
A strong statement by G20 leaders endorsing capital controls would immensely help in removing the deeply-rooted stigma attached to capital controls. The G20 should task the FSB or the IMF to coordinate actions on capital controls. The G20 should also direct the IMF to update its 2012 institutional view that endorses capital controls only as a last resort and imposed selectively on capital inflows.
Besides, G20 leaders’ endorsement of other regulatory measures (such as a ban on short-selling, and enhanced surveillance of high-frequency trading) would encourage national regulators to undertake all necessary preventive measures to maintain market integrity.
6. Grant Substantial Debt Relief
The sudden stop in capital flows coupled with a sharp decline in commodity prices has further complicated external financing of many developing and emerging economies. Almost half of the EMEs are commodity exporters. Some countries are finding it difficult to service their foreign currency debt as their debt levels were unsustainable well before the coronavirus outbreak. In early March, Lebanon defaulted on its foreign currency debt. Argentina desperately needs substantial debt restructuring to avoid a sovereign default.
G20 should support substantial debt relief to all those countries that are facing a full-blown debt crisis. A moratorium on debt repayments by multilateral lenders and foreign creditors would enable countries to devote more resources to fight the pandemic.
7. Resolve Bilateral Disputes
This is the time for international solidarity, not for trade wars and sanctions. The G20 countries should resolve two major ongoing bilateral disputes — a trade war between the US and China; and an oil price war between Saudi Arabia and Russia.
The trade and oil price wars weaken international cooperation at a time when it is badly needed to fight the coronavirus pandemic.
At the very least, the G20 member-countries should hit the pause button on their bilateral trade and oil price disputes until the world fully recovers from the coronavirus and its economic effects.
Endnotes
[1] Patrick Wintour, “G20 finance ministers’ talks hampered by US-China standoff,” The Guardian, Available at: https://www.theguardian.com/world/2020/mar/23/g20-finance-ministers-talk....
[2] Press Release, G20 Finance Ministers and Central Bank Governors Virtual Meeting, March 23, 2020. Available at: https://g20.org/en/media/Documents/FMCBG_Extraordinary_Press%20Release.pdf.
[3] Statement on COVID-19, G20 Finance Ministers and Central Bank Governors, March 6, 2020. Available at: https://g20.org/en/media/Documents/G20%20Statement%20on%20COVID-19%20-%2....
[4] IMF Makes Available $50 Billion to Help Address Coronavirus, Press Release, IMF, March 4, 2020. Available at: https://www.imf.org/en/News/Articles/2020/03/04/sp030420-imf-makes-avail....
[5] IMF Managing Director Kristalina Georgieva’s Statement Following a G20 Ministerial Call on the Coronavirus Emergency, IMF, March 23, 2020. Available at: https://www.imf.org/en/News/Articles/2020/03/23/pr2098-imf-managing-dire....
[6] Gwladys Fouche, “UN to create global coronavirus fund, Norway says,” Reuters, March 23, 20202. Available at: https://www.reuters.com/article/us-health-coronavirus-unitednations-norw....
[7] Sergi Lanau and Jonathan Fortun, “The Covid-19 Shock to EM Flows,” Economic Views, Institute of International Finance, March 17, 2020.
