Is the global liquidity crisis coming to an end with IMF support?

Author: Luiza Buserska, Corporate Communications Executive at CODIX

The International Monetary Fund (IMF) has taken a decision to allocate Special Drawing Rights (SDRs) for the amount of USD 650 billion, which comes into force on 23 August 2021. The monetary injection aims to stimulate the world’s economy in a time of unprecedented crisis caused by the pandemic, the consequences of which remain and which end is not foreseeable as yet. It is hoped that the allocation of SDRs will benefit all IMF members and meet the long-term global need for reserves. This historic decision of the fund will, of course, create a sense of stability and enhance the resilience and firmness of the world’s economy. The financial support is particularly important for the most vulnerable countries, which are still struggling to cope with the severe effects of the crisis. And in recent years, it is the developing and emerging markets that have been the driving forces of global growth, along with China. Therefore, a rapid economic recovery of the so-called emerging markets would also benefit Western economies.

The question is how this will affect the factoring and supply chain industry, which are significantly influenced by the state of the economies themselves. Globally, the supply chain finance’s role has become increasingly important among financial institutions and market regulators. The unique risk characteristics of the product along with its multiple benefits for SMEs & Large Corporates, have positioned it as the fastest growing form of finance in many regions, especially in the emerging ones. In the current situation, however, SMEs are highly vulnerable. In general, for most of them is a challenge to find finance, and in the current dynamic environment – even more so. At the same time, the SMEs are the main driving forces of trade and economic development. And now is the right time for development finance institutions to play an active role through various incentive initiatives, such as factoring and supply chain models, which will stimulate local economic growth, reduce financial divisions and help close the market gaps.

It remains to be seen whether the flow of fresh money provided by the IMF will unblock the processes of international exchange and thus, will have a beneficial effect on the entire business climate, or conversely, will increase the risk of division in the development of economies. The latter may occur, on the one hand, due to the emergence of new strains of the virus and the extremely low level of immunization in some countries, e.g. the region of Southeast Asia, and on the other hand, due to the fact that the funds allocated by the IMF will be distributed in proportion to the quotas that individual Member States have in the fund. Will the rich get richer and the poor get poorer? We are yet to find out.

In any case, approximately $ 275 billion of the new funds will be allocated to emerging markets and developing countries, including those with the lowest income. And this is not to be neglected. In addition, the IMF is already looking for options to redirect funds from richer to developing countries to support their recovery and achieve sustainable growth, including through low-interest or interest-free loans.

The SDR was established in the 1960s as a multi-currency reserve asset and funds have been allocated four times so far; the largest in response to the financial crisis in 2008-2009. The latter SDR was proposed in response to the pandemic and will come into effect on 23 August 2021. It is still relevant not only because the state of emergency is not over yet, but also because the recovery is chaotic and the less fortunate members continue to lag behind.

It would be interesting to see what the final effect of the IMF's financial support on the world’s economy will be. Will the current division become wider, or will rich and developed economies show solidarity with those who are most vulnerable, for instance by lending to them on favourable terms? The wise and far-sighted among them should realise that they are interested in emerging markets’ recovery, as soon as possible, and in overcoming the crisis and the massive supply and demand shock by joint efforts. It is clear that the global trade exchanges and equilibrium will be modified without a doubt as a result of the pandemic, but it is equally clear that international and global trade will keep growing in volume and value, because all stakeholders need both – trade growth and trade in a good shape.

This article was published by BCR, the leading provider of news, market intelligence and training for the global receivables finance industry: TRF News, August 10, 2021