Multilateral Financial Institutions

10th April – Multilateral Financial Institutions

Focusing multilateral money

The World Bank group, which includes the bank, the private sector-focused International Finance Corporation (IFC), and the loan guarantee-focused Multilateral Investment Guarantee Agency (MIGA), has now moved to address the fast-spreading public health and economic crisis caused by the novel coronavirus.

What is being done?

  • The initial spending approved was worth $1.9 billion, and is due to be spent in 25 countries. However, more than 50 per cent of that money will be spent in India, which is to get $1 billion of it.
  • This infusion of money is welcome, and is an indication that the bank is cognisant of its primary purpose.
  • The group has already indicated that its final lending to deal with the crisis might approach $160 billion.
  • The IFC is reportedly setting aside $8 billion for supporting the private sector and keeping open global supply chains, and the MIGA will have to work to ensure that governments across the developing world have access to capital markets if they need to fund the purchase of lifesaving equipment and medicines.

What should be done?

  • It is important that the World Bank group’s lending be targeted specifically at those pressure points where it can make a specific difference, rather than merely be used to supplement state resources in countries like India.
  • For example, the World Bank must lead efforts to ensure that the private sector across the world feels secure in re-focusing its efforts on producing essentials like ventilators and personal protective equipment.
  • The bank should thus focus particularly on ensuring that its spending provides some security against risk to producers who wish to shift their production lines in this manner. This could be done, for example, through procurement guarantees or open procurement offers.
  • The World Bank, after all, was set up after the Second World War to reconstruct the market economies of Europe. It should be seen as the one that supports and broaden the market institutions that can ramp up productive capacity and, eventually, restore economies to health.

Way forward –

  • It is not just the World Bank that must step up. It is International Monetary Fund’s (IMF’s) duty to protect the international financial system and to ensure that countries remain solvent through crises. It will be sorely tested at a time when $90 billion has been sucked out of the developing world — a situation far worse than the financial crisis of 2008.
  • The IMF has said that about 90 countries have already approached it for assistance. It must be given whatever resources necessary to augment its emergency financial capacity to meet this crisis.

Conclusion –

It is important to note that the financial crisis must not lead to an insolvency crisis for governments as much as for companies. The world must keep in mind that heavily indebted poor countries will be forced to deploy state resources towards augmenting their health sectors. They will not be able to keep to repayment schedule — so mass debt forgiveness must also be discussed.

SourceBusiness Standard

QUESTIONDiscuss the role of multilateral financial institutions in rebuilding world economy post-COVID19 pandemic situation.

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