The emergence of the coronavirus has put Latin America in check. Governments in the region need more resources to deal with the pandemic immediately and mitigate its economic consequences. And an urgent comprehensive plan, starting with a massive disbursement by the International Monetary Fund (IMF), is essential to prevent the health crisis from having dramatic and irreversible repercussions.This is the request that a group of Latin American leaders address to the international community. In a letter entitled Ethical and economic imperatives of the fight against covid-19: a Latin American perspective, four ex-presidents and a dozen former ministers of economy, teachers and central bank governors ask the Fund to deepen its involvement “both to address the needs countries' fiscal and exchange rates in the short term to continue supporting economies in the future ”.
The initiative - spearheaded by former Brazilian President Fernando Henrique Cardoso, Chilean Ricardo Lagos, Colombian Juan Manuel Santos, and Mexican Ernesto Zedillo - proposes the issuance of a billion Special Drawing Rights, the so-called SDRs. It is an asset created in 1969 by the IMF to support the reserves of the member countries that can be exchanged for current currencies such as the dollar or the euro. The value of a SDR is currently $ 1.3. And, although these funds are usually allocated to the States based on their quotas, the situation the continent is going through now justifies "a non-proportional allocation through a fund that accelerates fiscal support to the governments most in need." Furthermore, there is an urgent need for greater speed in disbursements.
Signatory leaders also appeal to central banks, which by issuing reserve currencies "can help reduce global exchange liquidity," expanding swaps and financial exchanges with other central banks. Issuing entities, in addition, "must use all the instruments at their disposal, innovating when necessary, to inject liquidity into the financial markets and the economy." Some of the main multilateral organizations such as the World Bank, the Inter-American Development Bank (IDB) and the Development Bank of Latin America (CAF) have to intervene in the plan. Then read the full letter.
Ethical and economic imperatives of the fight against Covid-19: a Latin American perspectiveThe COVID-19 pandemic is an unprecedented shock, of uncertain duration and catastrophic consequences that, if not adequately addressed, could become one of the most tragic episodes in the history of Latin America and the Caribbean. Although the crisis requires swift and decisive action on the part of governments, the political responses in our region have been uneven. In several cases it has reacted quickly, making the protection of public health the main objective. Unfortunately, some governments have tended to minimize the risks of the pandemic, misinforming citizens and ignoring both scientific evidence and the advice of their own experts. Instead of mobilizing all the capabilities at their disposal, some leaders have opted for a populist and divisive policy in the midst of the tragedy. Latin Americans deserve more than that.
Suppressing the epidemic to minimize its morbidity and mortality should be our top priority. Latin America should focus on improving its health systems, channeling resources to hospitals, temporarily adapting inactive infrastructure, such as hotels and convention centers, and dramatically increasing testing capacity.
In addition to the decrease in export volumes and prices, loss of income from tourism and remittances, and large capital outflows, in Latin American economies there is now added the massive interruption of national production. The sharp drop in supply, combined with a general drop in demand, can trigger a contractionary spiral. In this framework, it is essential to move forward with bold policies to protect people's and households' incomes, including cash transfers for those who remain in a vulnerable position due to the crisis, including informal and independent workers who cannot access subsidies of employment or unemployment insurance.
To preserve the jobs and income of workers, it is also essential to help companies, accompanying them during the period of social distancing, and stimulating them in the subsequent recovery. The subsidies for the payment of wages, conditioned to the maintenance of the payroll, protect both companies and workers and are crucial for a rapid improvement in the economy. Conversely, if widespread bankruptcies are not avoided, the next victim of the crisis would be the banking system, putting the payment system and the economy as a whole at risk of collapse.
Many companies, particularly small and medium-sized ones, will suffer significant loss of income for the duration of the crisis. Without support, illiquidity will become a solvency problem, and tax deferrals, loan refinancing, and subsidized credits will not suffice. This emergency requires unprecedented tax credit guarantees, as well as temporary changes in regulation, to encourage and sustain bank credit. Well-capitalized and managed public banks could play a leading role on this front.
Fiscal stimulus will also be crucial in the recovery phase, at which time governments must boost employment and economic activity without exacerbating health risks. Policies will differ between countries, but will require extraordinary resources during that phase.
All of this poses an exceptional challenge: Although fiscal needs are now much greater than during the 2008-2009 global financial crisis, fiscal resources in Latin American economies are today more limited. Stimulus costs will need to be offset by budgetary adjustments in lower priority areas. The commitment of our Executive and Legislative branches to correct the increase in the fiscal deficit within a reasonable period of time will serve to mitigate the risk of a deterioration in the credit rating that threatens several of our countries.
Latin American leaders must make a strong call for international cooperation to face the crisis, condemning controls on the export of medical supplies and other critical resources, and demanding an increase in funds for the World Health Organization, contrary to the reckless decision from the United States government. Stronger global coordination between health authorities is needed to improve the ability to test, treat and isolate patients, and develop a vaccine and cure, which will be the ultimate solution for the Covid-19 pandemic. Pharmaceutical companies must assist countries with reactive materials to expand the number of tests and with free access to the technology to produce them. In the financial arena, regulators, credit rating agencies and accounting standards institutions must adapt their criteria to deal with exceptionally adverse systemic circumstances.
External support for fiscal accounts and balance of payments is essential, especially for the smallest and least developed countries in Latin America. If both private companies and governments increase their deficits, the same will happen with the current account of the countries. Added to this is the capital outflows from emerging markets, which has already been the largest in history, and the resulting exchange rate depreciation, potentially destabilizing. For many economies in the region, much higher official external support will be the only way to deal with this unprecedented combination of adverse shocks.
The IMF has an essential role to play, both in addressing countries' fiscal and exchange rate needs in the short term and in continuing to support economies in the future, through a crisis of uncertain duration. The IMF needs more resources and the ability to disburse them quickly. Latin American governments should demand a new issue of a trillion Special Drawing Rights (SDR). And while these SDRs are allocated to member countries according to their respective quotas, a non-proportional allocation could be facilitated through a fund that accelerates fiscal support to the neediest governments. In addition, the immediate duplication of the New Loan Arrangements (NAP) would give the Fund the necessary capacity to meet the urgent demand for loans that is looming. Finally, since high-access programs are slow to approve for current emergencies, the IMF should significantly increase access to its fast-disbursing and light conditionality facilities, or create a new one for the pandemic.
Central banks that issue reserve currencies can help reduce global currency illiquidity by expanding their currency swaps with other central banks. This can be done directly between banks or, indirectly, through the intervention of the IMF or the Bank for International Settlements (BIS) as liquidity intermediaries. At the national level, central banks must use all the instruments at their disposal, innovating when necessary, to inject liquidity into financial markets and the economy.
Finally, multilateral development banks (MDBs) such as the World Bank, the Inter-American Development Bank, and CAF should double the amount of net loans to the region for budget support with very low conditionality, taking advantage of the great liquidity of the global markets of capital. In exceptional circumstances and in countries without market access, suspension of debt service could complement these official loans. MDBs should also provide countries with guidelines on the various policy areas involved in crisis response, including their own estimates of COVID-19 morbidity and mortality rates, especially in cases where governments are minimizing the threat to health. In the fight against the pandemic, there is no time to lose.
The challenge posed is unparalleled in recent history. The world, and Latin America and the Caribbean, cannot afford late or inadequate responses. Mutual trust, transparency and reason, not populism or demagoguery, are still the best guides in these uncertain times. The crisis cannot be an excuse to weaken our democracies, won with so much effort; on the contrary, it is an opportunity to demonstrate that democracy is in a position to respond to extreme challenges, complying fairly with its citizens.
This letter is signed by: Fernando Henrique Cardoso *, President of Brazil (1995-2002). Ricardo Lagos *, President of Chile (2000-2006). Juan Manuel Santos * , President of Colombia (2010-2018). Ernesto Zedillo Ponce de León * , President of Mexico (1994-2000); Yale University. Mauricio Cárdenas, Minister of Finance and Public Credit, Colombia (2012-2018); Center on Global Energy Policy, SIPA, Columbia University. Roberto Chang, Distinguished Professor of Economics, Rutgers University, USA. José De Gregorio, Minister of Economy, Mining and Energy of Chile (2000-2001); President of the Central Bank of Chile (2007-2011); Dean, Faculty of Economics and Business, Universidad de Chile. Ilan Goldfajn, President of the Central Bank of Brazil (2016-2019); Director and founder, Center for Public Policy Debates (CDPP). Ricardo Hausmann, Minister of Planning Venezuela (1992-1993); Professor, Kennedy School of Government, Harvard University. Eduardo Levy Yeyati, Dean, School of Government, Torcuato Di Tella University. Federico Sturzenegger, President of the Central Bank of Argentina (2015-2018); Plenary Professor, University of San Andrés. Rodrigo Valdés, Minister of Finance of Chile (2015-2017); School of Government, Universidad Catolica de Chile. Andrés Velasco, Minister of Finance of Chile (2006-2010); Dean, School of Public Policy, London School of Economics. * Member of The Elders.
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