The post-pandemic G-20 role in the global financial architecture

Context: Recently, in the 15^th G-20 summit, leaders discussed the health of Global Financial Architecture (GFC) in addressing the COVID-related economic crisis.

Overview and issues within Global Financial Architecture: can be seen as a triptych (a picture carved on three panels)

• International capital markets dominated by advanced economies: These markets are exposed to the vagaries of shifts in the US federal reserve, sudden stops and Balance of Payment (BoP) crisis.
  • For E.g. This has resulted in the Latin American debt crisis (the 1980s), Indian BoP crisis(1991) and the Asia Financial Crisis(1997) and the Global Financial crisis(2008).
• Bilateral and multilateral assistance: The resources of Multilateral Financial Institutions (MFIs) were inadequate, as the fiscal space of their advanced-economy donors shrank with their declining growth.
  • This led to the stigma effect of International Monetary Fund (IMF) packages on the market that raised their borrowing costs.
• Large self-insurance mechanism (forex reserves): of emerging economies aided by a strategy of export-led hyper-growth.

Failure during the current crisis: Inability of Asian countries to operationalize their regional financial safety net through the Chiang Mai Initiative Multilateralization has been a major failure.

Significance of G-20 in strengthening the MFIs:

• Adopted a nimbler approach: For E.g. it was the Federal Reserve which provided global liquidity during the GFC, well before the IMF, through swap agreements.
  • The US Fed has made dollar funding available to other central banks during the ongoing pandemic.
  • Of the $150 billion mobilized as emergency multilateral assistance for covid-19 to date, about two-thirds have come from the IMF.
  • Over 90% of the spending has gone to the western hemisphere, which is worst affected by COVID, including Sub Saharan Africa, the Middle East and Central Asia.
  • G-20 took the initiative to suspend debt repayments by poor countries during the pandemic and pressure MFIs to use their existing tools and resources effectively.

 Conclusion: The G-20 might remain the most effective extent international institution to address the challenges that arise from globalization.