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Financial stability key to a solid recovery

By Gao Haihong | China Daily | Updated: 2021-10-26 07:07
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In the recently released World Economic Outlook, the International Monetary Fund has warned that uneven COVID-19 vaccine rollout could divide the global economy with high-income countries continuing the recovery momentum, and low-income countries risking further downturn.

In addition, with the supply shocks resulting from the broken global value chains still weighing heavily on the real economy, the fragility of uneven recovery will be a major challenge to the global economy in the remaining months of 2021, and next year.

Many countries face the challenge of financial vulnerability, and emerging and developing economies are especially vulnerable to the risks the upcoming policy tightening in the advanced economies could create. Their financial stability is subject to the spill-over effects from the policy shifts, resulting in volatile capital flows and disturbing exchange rate fluctuations. As such, many debt-laden economies with limited policy tools and fiscal space could suffer prolonged economic damage.

Apart from the short-term shocks, cutting-edge challenges, such as digital transformation and climate change, are both opportunities and risks for sustainable growth. They need to be addressed now and properly.

In this transitional period, maintaining global financial stability is key to a solid economic recovery. True, global efforts are paramount in these critical times, but we should not forget that the G20 has been playing an important role in prioritizing the tasks based on consensuses. For example, the G20's Debt Service Suspension Initiative (DSSI) has helped countries, by temporarily suspending their debt repayments, to concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people. Since taking effect on May 1 last year, the DSSI has helped 46 countries defer $10.3 billion debt payments.

The global financial safety net also helps countries tackle debt and liquidity problem, with the IMF playing the central role in this process. Since March 2020, the IMF has provided $117.6 billion as financial assistance for 87 countries under its various lending facilities, and $850.7 million in debt relief for 29 countries through the Catastrophe Containment and Relief Trust.

The IMF's $650 billion Special Drawing Rights allocation came into effect on Aug 28 this year, serving as an additional funding source for countries to deal with liquidity problems, and boosting their vaccination drive.

The IMF has also created the Resilience and Sustainability Trust with the aim of providing lower-cost lending and a relatively long maturity period for low-income countries and smaller states. More importantly, to combat and adapt to climate change, the IMF has pledged to include a climate element into its lending policy.

But the IMF should do more to meet the increasing demand for funding. The IMF's board of governors completed the 15th quota review in February 2020, providing the guidance for the 16th review that is expected to be completed by Dec 15, 2023.

Currently, the IMF member countries' quota contributions account for less than half of the IMF's overall funding capacity. The rest of the funding comes from two major temporary arrangements-the New Arrangement to Borrow and bilateral borrowing arrangements.

No wonder many fear that the lack of permanent funding sources could limit the IMF's capacity and undermine its legitimacy.

Moreover, in times of liquidity crunch, central banks' currency swap lines are critical to mitigate financial risks. For instance, in March 2020, the US Federal Reserve provided dollar swap lines to pre-empt a liquidity crisis in the major markets. In principle, the swap lines are regarded as quasi-foreign reserves for countries in need.

On its part, the People's Bank of China has signed bilateral swap line agreements worth 3.99 trillion yuan ($624 billion) with 40 central banks and monetary authorities worldwide since 2008, contributing to global financial stability.

At the regional level, regional financial arrangements help countries by extending them financial support. In the past, they have played a positive role in dealing with financial crises by joining hands with the IMF and other international and/or regional financial institutions. But since very few of them were activated during the pandemic, it has become increasingly important to mobilize those regional arrangements, especially in situations where funding gaps cannot be covered.

From a long-term perspective, a strengthened international financial system is needed for providing more public goods for the world, and international cooperation is required to deal with the common risks that threaten the global economy. Therefore, establishing international financial institutions with broader risk sharing among multiple actors is the way to better safeguard global financial stability and promote economic prosperity.

The author is a senior fellow at the Institute for World Economics and Politics, Chinese Academy of Social Sciences.

The views don't necessarily reflect those of China Daily.

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