The G20 has been reiterating its commitment to maintaining an effective Global Financial Safety Net (GFSN). The GFSN is an international multi-level system of financial institutions that provide financial support to countries in the event of a crisis or to prevent the onset of one. The GFSN comprises four layers: Foreign exchange reserves at the national level, bilateral central bank swap lines, regional financing arrangements (RFAs), and the International Monetary Fund (IMF)—the global lender of last resort. Over the past few years, social and geopolitical divides have widened, underlining the need to strengthen international financial support and coordination among different elements of the GFSN in facilitating global post-pandemic economic recovery.

Despite the growth of available resources in GFSN, the coverage of the safety net is uneven, with sizeable financing gaps in many emerging and developing economies, undermining its effectiveness in preventing crises. More than half of the world’s economies have access to only one element of the GFSN: The IMF. Moreover, most countries would need to use several components of the GFSN to fully cover their financing needs, which could probably raise coordination issues.

GFSN is constantly evolving. RFAs have emerged as an important line of defence of the safety net to safeguard financial and macroeconomic stability in the regions they cover. For instance, from the Global Financial Crisis, we have seen the creation of new RFAs with large lending capacities as well as the strengthening of existing institutions. RFAs are currently operational in Asia-Pacific, post-Soviet Eurasia, Europe, Latin America, and the Middle East. RFAs have served their member countries well and saved a few of them from economic and financial instability. Since the beginning of the COVID‑19 crisis, RFAs have been actively involved in the work to help their member states. The measures were broadly of three types: Revision of lending instruments and policies; financing their members through different lending modalities; and timely economic monitoring and provision of technical assistance. From the currently existing RFAs, the Arab Monetary Fund and Eurasian Fund for Stabilisation and Development (EFSD) provided financial support to member countries, partly in combination with IMF programmes. Moreover, in Eurasia, EFSD approved nearly the same amount of stabilisation financing from the year of its establishment as the IMF did.

Effectively, the RFAs currently do not cover most of Africa, including Sub-Saharan Africa, as well as significant parts of Eurasia and Latin America while all of these regions and sub-regions are prone to sizeable financial shocks. For instance, the absence of a such financial stability mechanism leaves indebted African countries to cope with situations of debt distress alone or with only the support of the IMF. Failing to solve the issue of uneven geographical coverage leads to a significant shortfall in inclusive stabilisation, and failure to address macro stabilisation and other emerging issues, such as climate, in many lower-middle and low-income economies.

These challenges could be addressed from various angles:

First, the general taxonomy of stabilisation instruments and resources needs to be defined. For the RFAs and IMF part, a solid comparative analysis has been completed for RFA/IMF toolkits by the European Stability Mechanism. The main takeaway is the following: Where appropriate and applicable, the IMF and RFAs should leverage their instrument diversity to provide coherent and complementary assistance to common members. The same work should be implemented for non-GFSN institutions, in particular, the MDBs that are involved in the stabilisation agenda. The taxonomy of the MDBs stabilisation financing should be benchmarked towards GFSN instruments. The G20 could review stabilisation financing that is channelled through the non-GFSN institutions, and consider ruling principles for an optimal allocation of resources between GFSN and other mechanisms. That might lead to MDB rethinking the MDBs’ involvement in the stabilisation agenda. This suggestion is particularly relevant in connection to the G20 efforts to enhance MDBs’ capital adequacy frameworks.

Second, the geographical coverage of existing RFAs needs to be widened and an RFA for Africa needs to be established. For example, Africa, particularly the Sub-Sahara region, still lacks its own RFA. Meanwhile, the region experiences protracted fiscal and balance of payments deficits, and further actions are needed to address acute challenges such as food insecurity and inflation pressures. We support establishing a regional financing arrangement for Africa as a desired institutional solution to enhance macro-fiscal and financial resilience. Such type of emergency support could complement the existing architecture and provide much-needed fiscal space, contribute to preventing these countries from falling into illiquidity and ending up insolvent, and therefore limit regional spillovers. African RFAs would protect the continent from financial crises and help resolve those crises that have already emerged. As a complement to the global safety net articulated around the IMF, this mechanism would help drive the regionalisation of fiscal rules and drive home-grown green structural reforms that promote long-term and sustainable growth in Africa. In addition, Eurasia is only partially covered by the Eurasian Fund for Stabilisation and Development as a regional crisis mitigation and prevention mechanism.

All in all, to increase resilience, especially for emerging and developing economies, the authors suggest further strengthening of GFSN. This is expedient for effective counteraction to inevitable crises in the future. MDBs stabilisation financing should be benchmarked towards GFSN instruments to better understand the number of funds available for crisis response, and their specific terms and conditions.

This essay is a part of the commentary series on G20-Think20 TF 5 – Purpose & Performance: Reassessing the Global Financial Order