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The International Monetary Fund (IMF) has approved USD102.3
billion in emergency coronavirus disease 2019 (COVID-19)-related
assistance to 83 countries in 2020, of which 62.3% (USD63.8
billion) was granted to 21 Latin American and Caribbean countries,
and 16.4% (USD16.8 billion) was granted to 34 countries in sub-Saharan Africa. The funds
have been key in creating the fiscal space for governments to deal
with the negative economic effects of COVID-19 and were disbursed
with very little of the IMF's traditional conditionality. In the
wake of COVID-19, the conditionalities underpinning IMF lending are
set to evolve as countries in Latin America and sub-Saharan Africa
transition to official programs.
Transitioning from emergency support
Funding disbursed through the International Monetary Fund's
(IMF) emergency Rapid Funding Instrument (RFI) and Rapid Credit
Facility (RCF) has involved virtually no conditionality. It was
granted without specifying fiscal deficit targets, with its one
main requirement being to demonstrate that proceeds would be spent
on pre-determined coronavirus disease 2019 (COVID-19) virus
pandemic-related response efforts. By allowing beneficiaries to "do
whatever it takes but keep the receipts", public spending to
sustain social programs and provide financial aid to those affected
by the pandemic has been maintained. Furthermore, the IMF in
October 2020 extended by six months the annual quota available for
eligible countries to access financing under the RFI and the RCF,
whereby 100% of a country's annual IMF quota can be used to access
funding until 6 April 2021. As this emergency support ends,
countries in Latin America and sub-Saharan Africa will transition
to more traditional IMF lending programs, involving more stringent
demands for reform and economic adjustment.
Returning to fiscal consolidation
A common factor in the latest IMF programs is the need for
continued fiscal consolidation, with this policy advice also being
cited in several large RFI and RCF programs. Where IMF programs
were agreed prior to the pandemic, a return to fiscal consolidation
is expected after the impact of the COVID-19 shock has abated. The
characteristics of post-pandemic conditionality vary depending on
the circumstances of each country, but common characteristics
include:
An expectation that fiscal consolidation will resume from late
2021, or once the COVID-19 virus pandemic has abated
Reducing wage bills and/or implementing civil service hiring
freezes
Freezing spending to specified levels on goods and
services
Suspending specific capital expenditure outlays
Broad increases in tax revenue, particularly where tax-to-GDP
ratios are low
Implementing or expanding VAT regimes
Reversing pandemic-related expenditures, such as fiscal outlays
for healthcare and social protections.
There are also signs of continued flexibility with respect to
the type of conditionality and how conditions are expected to be
met - namely by permitting the immediate disbursement of funds with
reviews being deferred by 12 months, or otherwise re-phasing the
disbursement of funds under existing programs. In any case, the
return to fiscal consolidation in 2021-2022 to assist countries in
restoring their debt sustainability will signal renewed efforts to
impose spending cuts, threatening an increased risk of political
opposition and protests within Latin America and sub-Saharan
Africa.
Facilitating coordinated debt restructuring
Traditional IMF programs and monitoring will also be reasserted
through the facilitation of coordinated debt treatments, in
principle involving official bilateral and private creditors. The
Group of 20 Nations' (G20) Common Framework for Debt Treatments
launched in November 2020 specifies that participants are expected
to undertake an IMF Debt Sustainability Assessment (DSA) and commit
to an IMF program, including policy reforms sought by the IMF in
return for additional financing. At present, the scheme is only
accessible to the 72 International Development Association (IDA)
borrowing countries, in addition to Angola, but the IMF and the
World Bank have advocated for expansion of the Common Framework
ahead of the next G20 finance ministers' meeting that is scheduled
to be held on 26 February. The Fund's DSA examines the
sustainability of a country's debt profile and provides an
assessment of the sovereign's ability to pay: lower confidence
implies stricter program conditionality to restore debt
sustainability and access debt treatment provided under the Common
Framework.
Posted 22 March 2021 by Ailsa Rosales, Country Risk Analyst, Latin America and Caribbean, S&P Global Market Intelligence and
Carla Selman, Principal Research Analyst, Country Risk, S&P Global Market Intelligence and
Chris Suckling, Associate Director, Risk Quantification, S&P Global Market Intelligence and
Rafael Amiel, Director, Latin America & Caribbean Economics, S&P Global Market Intelligence and
Theo Acheampong, Senior Analyst Country Risk – Sub-Saharan Africa, S&P Global Market Intelligence and
William Farmer, Analyst, Sub-Saharan Africa, Country Risk, IHS Markit
