Flash Report / Global

Ukraine seeks help from IMF's emergency financing facility

  • IMF sets aside US$50bn to help countries fight coronavirus
  • We think up to US$2.7bn could be available for Ukraine
  • Meanwhile, discussions on its new IMF EFF programme continue

Ukraine looks to have become the latest country seeking to tap funds from the IMF’s emergency financing facilities to help countries deal with the coronavirus pandemic that was announced earlier this month, according to local media yesterday citing the NBU governor. 

The Fund announced on 4 March that it had set aside US$50bn for emerging markets and developing countries through its existing rapid-disbursing emergency facilities, with US$40bn for emerging markets (such as Ukraine) available through its Rapid Financing Initiative (RFI) and US$10bn for low income countries through its Rapid Credit Facility (RCF). 

There was, however, no mention of how much Ukraine will request. If Ukraine seeks 100% of quota, the normal maximum allowable under these facilities, that would amount to US$2.7bn we think. Of course, every little helps, as market financing dries up, but – as with most countries in these uncertain times – is it enough? According to reports, the central bank has spent US$1.7bn supporting the hryvnia, which has fallen by 11.5% against the US dollar since the end of February. Reserves stood at US$27bn at end-February. 

Note, however, that this isn’t the IMF programme we’ve long been waiting for, after staff-level agreement on a new Extended Fund Facility (EFF) was announced in December. Discussions on that new programme continue, notwithstanding the interruption caused by President Zelensky's government reshuffle on 3 March and what that signalled about the reform agenda. One might imagine that Ukraine would be incentivised to try to reach agreement on the new programme sooner than later under current circumstances.

Ukraine joins Ghana, Iran and Venezuela in seeking help from the IMF's emergency financing facilities to fight coronavirus, as far as we know so far. According to reports on 17 March, Venezuela's disputed president Nicolas Maduro requested US$5bn from the IMF, although the request was rejected because there is no agreement within the IMF's membership over who it recognises as the country's legitimate president – Maduro or US-backed Juan Guaido.

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Macro Analysis / Global

Africa in the news: COVID-19, financial assistance, and political updates from Malawi, Burundi, and Rwanda

27 June 2020

Multilaterals approve financial assistance for African countries during the pandemic

Late last week, three African countries reached agreements with international financial institutions as part of efforts to boost economic recovery and their COVID-19 responses. On June 17, Ethiopia and the World Bank signed an agreement for $250 million for the Second Ethiopia Growth and Competitiveness Programmatic Development Policy Financing—$125 million will be in the form of credit, while the remaining $125 million will be a grant. The program targets private sector participation and good governance practices in the country, and the funds will allow the government to continue implementing these reforms, specifically by addressing its “unanticipated financing needs” resulting from COVID-19.

Meanwhile, on June 19, the New Development Bank approved a loan for $1 billion to South Africa as part of its emergency assistance program for the bank’s member countries: Brazil, Russia, India, China, and South Africa (BRICS). The technical details have not been finalized, but the loan is intended to support South Africa in improving its health care response and providing a social safety net to vulnerable groups.

Also on June 19, the International Monetary Fund approved $148 million for Guinea in emergency credit through its Rapid Credit Facility. The executive board of the IMF says that this funding is meant to help with balance of payments needs during the pandemic in addition to “catalyzing donors’ financial support” and “scaling up health spending.” Guinea also received debt relief in April through the Catastrophe Containment and Relief Trust.

In related lending news, on June 25, Zambian President Edgar Lungu announced that the country expects its external debt service to increase by 8.7 billion kwacha ($481 million) and its expenditure by 20 billion kwacha ($1.11 billion) due to a significant weakening of its currency. Zambia currently owes $3 billion to China, $2 billion to commercial banks, and $2 billion to the World Bank and International Monetary Fund; it also has $3 billion in outstanding eurobonds. A group of its creditors has formed a bondholder committee in order to “engage with Zambia with regard to its present situation, to facilitate communication among creditors, and to pursue any appropriate actions.”

COVID-19 updates and cascading effects in Africa

According to the Africa CDC, as of Wednesday, June 24, there were 337,315 cases and 8,863 deaths from COVID-19 in Africa. Of all the countries hit with the pandemic, South Africa, Egypt, Nigeria, Ghana, and Cameroon, respectively, have recorded the highest number of cases of the novel coronavirus on the continent. Meanwhile, countries continue to approach reopening their economies in a variety of ways, including delaying their timelines. For example, on Monday, Rwanda reported 59 new cases, the highest single-day spike since March, forcing officials to reconsider fully opening hotels, airports for tourism, and shops to boost the economy. In Senegal, President Macky Sall is going into self-isolation after being exposed to someone who tested positive for the virus.

Some countries continue to forge ahead, however: Tanzania is looking to open up the Mikumi National Park and other tourist attractions that have been closed since March, and South Africa’s Education Minister Angie Motshekga reported a 98 percent attendance rate in schools that have been open since June 8.

The virus is having effects on other parts of Africa, as tensions have risen between the northern Tigray region—specifically Tigray People’s Liberation Front (TPLF), who were in power prior to the current regime—and Prime Minister Abiy Ahmed’s central government. On Wednesday, June 24, the National Electoral Board of Ethiopia (NEBE), rejected the northern region’s proposal to hold elections despite the coronavirus. They determined that they do not have the capacity to hold elections at this time and could move the election to “nine to twelve months after the coronavirus is deemed not to be a public health concern,” according to Ethiopian lawmakers. This move would keep Prime Minister Ahmed in office past the initial end of his term, which was to be in October.

At the same time, despite the spread of COVID-19 across the continent, news of the disease has yet to reach many people, like migrants coming into Somalia—often young men from rural parts of Ethiopia who have little or no access to education or the internet. Indeed, according to information from monitors for the International Organization for Migration, the United Nations migration agency, in the week ending June 20, 51 percent of the migrants interviewed said they had never heard of COVID-19, though this percentage is down from 88 percent when they first began asking migrants about the virus. According to the Associated Press, this lack of information is not limited to migrants who are crossing the border, as some Somalis in rural areas have been either dismissive of the virus or did not know it exists.

Political updates in Malawi, Burundi, and Rwanda

On Tuesday, citizens of Malawi went to the polls once again to vote in a presidential election, after the country’s supreme court had annulled the results of the May 2019 election under reports of severe irregularities. By Thursday evening, supporters of opposition candidate Lazarus Chakwera were anticipating a victory as the state broadcaster MBC announced his early lead over incumbent President Peter Mutharika. However, as of this writing, no winner has been announced.

In the lead-up to the polls, observers, citizens, and local watchdogs have expressed their belief that the rerun will be “free, fair and credible,” especially under the reconstituted electoral commission. Voting was largely peaceful, with the exception of reports by Mutharika of violence in opposition strongholds in central Malawi. Notably, this election was the first to see a change in how the winner is decided, moving away from a first-past-the-post system to mandating that the winner receive over 50 percent of the vote or else head to a run off.

Meanwhile, on Wednesday, June 24, Burundi announced the selection of its newest prime minister and vice president after approval of the nominations by the country’s senate. The positions will be held, respectively, by Alain-Guillaume Bunyoni and Bazombanza Prosper. Technically, while the vice president assists the president in his executive duties, the prime minister is considered the head of government. The two men were nominated to the posts by newly elected President Evariste Ndayishimiye, who was notably inaugurated early due to the sudden death of outgoing President Pierre Nkurunziza earlier this month.

Also this week, in neighboring Rwanda, the country’s parliament voted to expand the powers of President Paul Kagame. On June 23, citing the desire to reduce government inefficiencies, the Rwandan parliament approved a bill by 78 to 2 empowering the president to create and disband both public institutions and state-owned companies. Previously, the power belonged to the parliament itself.

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Macro Analysis / Global

China’s debt relief for Africa: Emerging deliberations

9 June 2020

After rounds of global calls for debt relief for Africa due to the COVID-19 pandemic as well as the particularly vocal demand for China to take key steps as Africa’s largest single-state creditor, details regarding China’s debt relief plan have finally begun to emerge. While many questions on specific implementation plans remain elusive, the deliberations discussed below offer us a fairly decent overview of the Chinese plan.

China’s official frameworks for debt relief so far

To date, the Chinese government has made two specific commitments on debt relief. The first was the G-20 Debt Service Suspension Initiative for Poorest Countries reached by finance ministers and central bank governors on April 15. As part of this agreement, the Chinese Foreign Ministry officially recognized that G-20 countries, including China, would suspend both principal repayments and interest payments starting on May 1, 2020 until the end of 2020. The suspension is applicable to all IDA-eligible countries (76 countries) plus Angola, including 40 sub-Saharan African countries.

The second official pledge came one month later, from President Xi Jinping himself, at the virtual event opening the 73rd World Health Assembly on May 18. According to Xi, “China will provide $2 billion over two years to help with COVID-19 response and with the economic and social development in affected countries, especially developing countries.” Notably, the wording of the Chinese language version specifies that the donation will be made under the category of “international assistance,” presumably meaning that it will come from China’s foreign aid budget.

Thus, because Xi designated the $2 billion not only toward direct COVID-19 response, but also economic and social development in COVID-affected countries, China is leaving the door open for that allocation to be counted toward the debt relief itself or the cost China has to carry for such relief. Given China’s preferred approach toward bilateral social and economic development, many of these efforts will happen bilaterally. Indeed, when addressing the specific question on how China will help Africa counter COVID-19 at his May 24 press conference at China’s legislative session, Chinese Foreign Minister Wang Yi confirmed two channels through which China will pursue debt relief for African countries: the G-20 Debt Suspension Initiative and bilateral support.

The most recent statement from the Chinese government on June 7 reconfirms these frameworks. At the launch of the white paper “Fighting COVID-19: China’s Action,” the Chinese Foreign Ministry affirmed that China’s $2 billion donation covers both bilateral and multilateral venues and issues like public health, poverty alleviation, and economic recovery. Importantly, even the $50 million donation to the World Health Organization made earlier this year was included in the $2 billion count.

Are concessional loans included in the G-20 initiative?

When we consider China’s debt relief for Africa, the key question is still whether that relief will apply to concessional loans. Indeed, commercial loans will hardly be considered for relief due to their commercial nature and commercial lenders, At the same time, concessional loans have made up a significant portion, if not the majority of China’s lending to Africa in the past two decades.

A review of China’s Forum on China-Africa Cooperation (FOCAC) financial commitments confirms this belief: In China’s 2006 FOCAC financial pledges, 50 percent of the financing is concessional in nature: concessional loans ($3 billion) and concessional buyers’ credit ($2 billion). In the 2009 FOCAC financial pledges, China’s commitment of $10 billion was all in concessional loans and was 10 times larger than the Special Loan for the African Small- and Mid-Sized Enterprise. In the 2012 FOCAC financial pledges, concessional loans made up more than 50 percent of the total $20 billion committed. In 2015, the percentage of concessional loans and export buyers’ credit jointly ($35 billion) made up around 60 percent of the total $60 billion committed. Notably, the percentage of the concessional loans did drop in the 2018 FOCAC arrangement, where grants, zero-interest loans, and concessional loans jointly made up 25 percent of the $60 billion China committed.

The G-20 agreement on debt relief—in the form of a standstill, not cancellation—that China signed on to earlier this year includes all official lending to qualified countries. In addition, foreign and Chinese observers are in broad agreement that the standstill will apply to concessional loans. Notably, the G-20 agreement—again, to a standstill, not cancellation—as it currently stands is only applicable and effective for the eight months between May 1, 2020 and December 31, 2020.

Given the widespread and devastating health and economic impacts of the pandemic, Africa will likely need continued debt relief beyond December 31, 2020. Importantly, that situation will require a whole new negotiation that must take into account multiple factors, including the development/resumption of African economies and the continued health and economic impacts of COVID-19, as well as matching or similar relief efforts by multilateral creditors and private creditors, in order to achieve a comprehensive and holistic solution. What China has committed to under the G-20 framework so far does not go beyond the scope of the eight-month suspension of payment. In other words, bigger, broader, and longer-term debt relief is not yet on the table.

The question of counting/accounting

Thus, China’s G-20 commitment to principal repayment and interest payment suspension for the rest of 2020 evidently has some overlapping content with President Xi’s commitment of $2 billion for COVID-19 response and economic/social recovery of developing countries. Given China’s pattern of counting every penny spent in Africa toward the fulfillment of its every-three-year FOCAC commitment, it is highly likely that these two commitments (by the G-20 initiative and by President Xi) are not mutually exclusive.

For example, President Xi’s $2 billion pledge has a timeframe of two years, between May 2020 and May 2022. At the same time, China’s 2018 FOCAC commitment covers the period of 2019, 2020, and 2021. These two financial pledges overlap with each other by 19 months. Given China’s economic engagements and activities in Africa have been significantly affected by COVID-19, it is highly possible that China will count some of the same money toward both these purposes.

Thus, we must consider a perhaps more sobering possibility/reality: that the $2 billion pledge, with its two-year framework, could be the maximum amount China will contribute toward dealing with the global (not only African) economic consequences of COVID-19, including its losses from the principal and interest payment suspension, any future debt forgiveness, and multilateral donations such as the $50 million donated toward the WHO earlier this year. While it is possible that China could come up with additional funding, such generosity cannot be assumed given the domestic economic hardship China has been experiencing, which has been the key priority of China’s legislative sessions this year other than Hong Kong.

In brief, on China’s debt relief for Africa, the world is looking at a long process of bilateral renegotiations, debt restructuring, and refinancing instead of a rapid, blanket, and comprehensive solution. Notably, an equity-debt swap will not be a popular strategy due to external, and, most notably African, perceptions, which will inevitably exacerbate the already terrible image of China’s “debt trap” diplomacy. The debt relief will be a long game between China and Africa, one where neither side is likely to come out pleased.

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Macro Analysis / Global

Figures of the week: Regional integration in Africa

27 May 2020

While the recently announced postponement of trading under the African Continental Free Trade Area (AfCFTA) due to the COVID-19 pandemic will hinder the continent’s short-term progress toward regional integration, particularly trade integration, authorities look to continue the integration agenda.

Last week, the African Union Commission, the United Nations Economic Commission for Africa, and the African Development Bank released the second edition of the Africa Regional Integration Index Report. In order to assess African countries’ status and efforts toward the goal of improved regional integration, the report analyzes five dimensions of integration: the free movement of people, trade integration (including tariffs and shares of intra-regional trade), productive integration (including integration into regional value chains), macroeconomic integration (including investment treaties, currency convertibility, and regional inflation), and infrastructural integration (including flight and road infrastructure).

According to the report, with an average score of 0.327 out of a possible 1, African countries as a whole are not well integrated. The authors argue that this lag in integration will continue to be detrimental to the growth and development of the continent because regional integration holds tremendous promise for Africa to expand markets and trade, enhance cooperation, mitigate economic risk, and improve regional stability. Figure 1 breaks this score down by each of the five dimensions of regional integration and shows that African countries perform relatively better on the free movement of people, macroeconomic integration, and trade integration dimensions, and relatively worse on infrastructural integration and productive integration. The report states that the continent’s low score on productive integration is driven by weak regional networks of production, trade, and value chains. According to the report, the low score on infrastructural integration is exacerbated by poor planning, low levels of financing, and a lack of transparency during all stages of infrastructure projects.

Figure 1. Africa’s scores on the 5 dimensions of regional integration

Figure 1. Africa’s scores on the 5 dimensions of regional integration

Note: Scores are calculated on a linear scale from 0 (not at all integrated) to 1 (fully integrated). A score of 0.5 is considered moderate or average.

Source: Africa Regional Integration Index 2019.

The continent-wide scores belie some differences in integration levels between regional communities. In its analysis of Africa’s regional economic communities, for example, the report finds that the East African Community has the highest regional integration score of any African regional group, at 0.537. In contrast, the most weakly integrated economic community, the Southern African Development Community, has an overall score of only 0.337. Some regional communities also outperform on specific dimensions, despite overall low scores; for example, as Figure 2 shows, the Economic Community of West African States (ECOWAS) scores very highly on the free movement of people, but has a moderate overall score of 0.425, and particularly struggles with productive integration and infrastructural integration.

Figure 2. ECOWAS’ scores on the 5 dimensions of regional integration

Figure 2. ECOWAS’s scores on the 5 dimensions of regional integrationFigure 1. Africa’s scores on the 5 dimensions of regional integration

Note: The dotted lines represent Africa’s scores.

Source: Africa Regional Integration Index 2019.

The report argues that productive integration should be the continent’s first priority when improving regional integration because Africa’s very weak performance in this dimension hinders progress toward effective overall integration across the continent. In order to improve this dimension, the report recommends that more be done to build regional value chain frameworks, reduce non-tariff barriers, and improve Africa’s human capital by identifying skills gaps and developing cross-border skills development programs. The report also argues that the second priority for African countries should be infrastructural integration, as poor infrastructure is a major deterrent to trade, production, and investment.

For more on the promise of the AfCFTA for both regional integration and to mitigate the effects of crises like COVID-19, see “How the AfCFTA will improve access to ‘essential products’ and bolster Africa’s resilience to respond to future pandemics” by Landry Signé and Colette van der Ven and “The African Continental Free Trade Area and measures to facilitate trade could significantly mitigate COVID-19’s economic impact in Africa” by Nassim Oulmane, Mustapha Sadni Jallab, and Patrice Rélouendé Zidouemba. For more on East Africa’s demonstrated mettle in addressing recent trade and value chain disruptions, see “Trade in uncertain times: Prioritizing regional over global value chains to accelerate economic development in East Africa” by Andrew Mold and Anthony Mveyange.

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Macro Analysis / Global

Fiscal Policies for the Recovery from COVID-19

International Monetary Fund
6 May 2020

Fiscal policies have provided large emergency lifelines to people and firms during the COVID-19 pandemic. They are also invaluable to increase a country’s readiness to respond to a crisis and to help with the recovery and beyond.

When the Great Lockdown finally ends, a strong economic recovery that benefits everyone will depend on improved social safety nets and broad-based fiscal support. This includes public investment in health care, infrastructure, and climate change. Countries with high debt levels will have to carefully balance short-term fiscal support for the recovery stage with long-term debt sustainability.

Countries need to invest $20 trillion more over the next 20 years in climate change and other SDGs.

The new Fiscal Monitor helps policymakers choose how to invest for the future in a fiscally prudent way, adopt well-planned discretionary policies to stimulate demand, and enhance social safety nets and unemployment benefits.

Enhance social safety nets for people

The pandemic has shown how vulnerable people are and served as a wakeup call for action.

In response, countries have temporarily extended unemployment benefits and expanded social safety nets to varying degrees. For example, the United States has legislated larger temporary lifelines in response to the COVID-19 pandemic than Europe partly because its social safety net has traditionally been smaller.

While some of these temporary lifelines will expire over time, making parts of these provisions permanent and upgrading the tax-benefits systems can also automatically stabilize people’s incomes in future epidemics and crises.

But what are the attributes of a good social safety net? Three matter the most:

  • First, provide broad coverage and adequate benefits to vulnerable groups in a progressive way—that is, more generous benefits to the poorest.
  •  Second, preserve work incentives and help beneficiaries find jobs, obtain health care, and attend education and training.
  • Third, strive to avoid a fragmented, complex web of social protection programs that ends up being more costly to run and not benefiting people in a fair and consistent way.

Against these yardsticks, governments in advanced economies can improve social safety nets by covering more people within existing programs and by improving the impact the benefits have on people’s lives.

In emerging market and developing countries, governments can fill gaps in coverage by expanding existing programs and using other delivery instruments. These include mobile phone networks and in-kind provision of goods and services—especially health, food, and transportation—to reach people most in need or currently left out.

Social safety nets could result in a better redistribution if a larger share of the poorest 20 percent of the population receive more benefits relative to the richest 20 percent of the population.

Plan discretionary policies

To help businesses rehire workers after the pandemic, governments could plan temporary payroll tax cuts to encourage firms to hire. To get people to spend, they can use time-bound value-added-tax reductions or consumption vouchers. Smaller investment projects can be accelerated. More broadly, countries can legislate in advance measures that would automatically activate in downturns, for example some social benefits and tax relief. This would get much needed fiscal support to people faster. At the same time, the scope of support depends on a country’s ability to finance these measures.

Invest for the future

Quality public investment is necessary in health care systems to protect people and minimize the risks from future epidemics. Other priorities include infrastructure, green technologies like wind and solar energy, and progress toward other Sustainable Development Goals such as education and access to clean water and sanitation. Additional investment needs are likely to exceed $20 trillion, globally at current prices, over the next two decades.

Considering the long lead time of capital projects like roads, bridges, and clean energy, governments should start now to review the investment pipeline. This will give them time to resolve bottlenecks and prepare a set of ready-to-implement projects they can deploy once the Great Lockdown ends.

Decisions, including whether and how much to scale up quality public investment, will depend on the needs in specific sectors and their economic and social benefits, financing capacity, and the efficiency of public investment. This last point is critical for all countries because one-third of funds for public infrastructure is lost worldwide to inefficiency and corruption.

For advanced economies with ample room in the budget such as Germany and the Netherlands, spending more on public investment is worthwhile because the value of the resulting assets will likely exceed the liabilities incurred given how low interest rates are. This in turn improves the public sector’s net worth. For countries with less room to maneuver when it comes to spending, such as Italy and Spain, they can redirect revenues and expenditures to increase investment.

In emerging markets and developing economies such as Brazil and South Africa, high debt levels and rising interest payments call for financing development in a prudent and sustainable way. These countries should try to achieve more with less. Raising tax revenues over the long term would be crucial for low-income developing countries such as Nigeria.

Managing higher government debt loads

Supporting the recovery with fiscal tools while managing higher government debt levels is a delicate balancing act. The pandemic and its economic fallout, along with policy responses, have contributed to a major increase in fiscal deficits and government debt ratios. As the pandemic abates and the economy recovers, government debt ratios are expected to stabilize, albeit at new—higher—levels. If the recovery takes longer than expected, debt dynamics could be more unfavorable.

As the pandemic subsides, countries can support their economic rebound with an eye on advancing credible medium-term reform plans.

Related links:
Fiscal Policies to Contain the Damage from COVID-19

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Macro Analysis / Global

IMF emergency financing tracker: Half its members have now sought emergency help

  • 17 countries have so far had emergency financing approved
  • Most recent approvals include El Salvador, Panama and Pakistan
  • IMF also introduces a new lending facility, the Short-term Liquidity Line (SLL)
Stuart Culverhouse @
Tellimer Research
17 April 2020

Our updated tracker seeks to identify countries that have requested IMF financial support, under its different guises, in order to help them deal with the impact of Covid-19. We do not claim it is exhaustive, but hope it provides a useful guide to investors on the current state of play. It is based on information that has been reported by the IMF itself, various media or national governments. We aim to produce regular updates.

The IMF Managing Director Kristalina Georgieva said on 15 April in her opening remarks to the IMF/WB Spring Meetings that 102 countries had requested emergency financing from the Fund so far and that the Board will have approved half of these requests by the end of this month. She noted 15 (at that time) had received disbursements already "in a record short time". With demand running at 102 countries, that's over half (54%) of the Fund's 189 members.

Our tracker captures 31 countries that we know of so far that have either sought, or are seeking, emergency help or have made drawings under their existing arrangements, or are seeking new ones (this is up from 25 in our last update). Since our last update on Tuesday 14 April, we identify seven countries that have had emergency financing facilities approved, including El Salvador, Panama and most recently Pakistan (this includes two  Chad and Pakistan  that were already pending), taking the total number of countries now to 17. In addition, the IMF confirmed at its Sub-Saharan Africa press briefing on 15 April that discussions are underway for an RCF for Mozambique and Georgia reached staff level agreement on its existing EFF with augmented access (but this had been flagged before). 

The IMF also announced on 15 April that it had created a new lending facility to strengthen its crisis response. The Short-term Liquidity Line (SLL) is a revolving and renewable backstop for member countries with very strong policies and fundamentals in need of short-term moderate balance of payments support. The SLL will provide revolving access of up to 145% of quota. We're not sure how it will work, but it seems to us to fill a gap between the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL).

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