The Short-term Liquidity Line: A New IMF Tool to Help in the Crisis
Challenging times for emerging markets
The COVID-19 pandemic has severely disrupted the global economy at every level. Across the world, financial conditions have tightened dramatically, with unprecedented portfolio outflows from emerging markets in terms of both size (a record of about $100 billion) and speed, and markets effectively frozen in some cases. This has created sizable demand for U.S. dollar liquidity, with emerging markets facing sharp liquidity shortages.
Several institutions have responded to this challenge: major central banks extended bilateral swap lines to each other and to more countries than during the global financial crisis, and the New York Federal Reserve’s repo program provides dollar liquidity to several more countries. However, the Fed and other central banks cannot provide swaps for all countries, and many emerging market members of the IMF are still experiencing liquidity shortages or will face the risk of occasional “sudden stops” for some time to come, and well after the swap lines are terminated. This exposes a critical gap in the global financial safety net, but one we moved quickly to fill.
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