COVID-19 - Changes Required To Address The Current International Financial And Fiscal System's (IFFS) Flaws.

The COVID-19 crisis revealed that the current IFFS is incapable of providing adequate emergency and development finance to the world's most vulnerable countries and populations, exacerbating global inequality and impeding the achievement of the Sustainable Development Goals by 2030 (see also Mukhtarov et al., 2021). 

As a result, reforming the IFFS is a first-order priority. 

The pandemic's global dimension may provide momentum for change, but political impediments remain formidable. 

Without attempting to be comprehensive, we focus on four key reform proposals: 

 (i) Much stronger international tax coordination, including harmonizing higher corporate tax rates (especially on profits of globally operating firms) and reducing Base Erosion and Profit Shifting (BEPS) in developing countries; 

 (ii) Sovereign debt restructuring and relief; 

 (iii) Reform of policy conditionality attached to lending by international financial institutions (IFIs); and 

 (iv) Reform of policy conditionality attached to lending by international financial institutions ( In the aftermath of the COVID-19 epidemic, lower taxes and different types of tax dodging have left governments with less resources to address vital concerns. 

40% of overseas profits are diverted to tax havens due to tax evasion. 

This "profit shifting" is predicted to cost the government between $500 billion and $600 billion per year in income (FACTI, 2021). 

Rich people's tax evasion and illegal financial activities contribute to the huge sums of money lost to the government. 

During the epidemic, the number of illegal fowl is believed to have risen. 

The following modifications to the international tax system have been recommended by the Independent Commission for the Reform of International Taxation (ICRIT): a higher corporate tax rate for large corporations in oligopolistic markets, allowing them to earn higher rates of return; a global minimum effective corporate tax rate of 25% to prevent base erosion and profit shifting; progressive digital services taxes on the economic rents captured by multinational corporations; country-by-country reporting for all corporations receiving government support; publication of data on offshore wealth to enable all jurisdictions to adopt eft (ICRIT, 2020). 

These policies would significantly expand fiscal flexibility in low- and middle-income nations. 

Restructuring and Relief from Sovereign Debt.

Many countries are still in precarious debt positions twenty years after the start of the HIPC initiative for debt relief and restructuring. 

The Commission on Global Economic Transformation (led by Nobel Prize-winning economists Joseph Stiglitz and Michael Spence) observed that while attention to poor countries' debt relief and restructuring needs regained some traction in 2020 when the pandemic broke out, this soon fzzled out: 'in the beg of the beg of the beg of Others, particularly the business sector, were expected to join. 

They did not, though. 

The absence of comprehensive involvement has a terrible effect: individuals who would be ready to participate are unwilling to do so because they view the net beneficiary as the refractory creditors, rather than the impoverished people in the poor nation (INET, 2021: 11). 

The international community should make it easier for governments to restructure their debt. 

The catastrophic situation created by the COVID-19 epidemic provides enough justification for accepting the concept of force majeure, which states that governments should not be compelled to repay debts they cannot afford. 

Gallagher et al. (2021) suggest the establishment of a suitable Sovereign Debt Restructuring Regime, drawing on earlier ideas made in the aftermath of the global financial crisis (see, for example, Herman et al., 2010). 

Although current processes for renegotiating sovereign debts with private creditors have improved, they are still insufficient due to the complexity of debt arrangements, some of which lack collective action provisions. 

As a result, a worldwide institutional process for renegotiating national debts should be established as soon as practicable. 

Many developing nations were already on the verge of defaulting on their external debt, thanks in part to the recent spike in private foreign borrowing, as previously mentioned. 

The massive capital flight and exchange rate depreciation that occurred in 2020 has exacerbated developing-country debt distress, raising the risk of default and emphasizing the need for orderly sovereign debt workouts, not only to bailout debt-stressed countries, but also to protect global financial stability. 

Policy Conditionality Attached to IFI Lending Reform.

In response to the COVID-19 issue, we highlighted the substantial inequalities in fscal assistance between nations at various stages of development. 

The IMF has a significant influence in the macroeconomic policies pursued by borrowing developing nations, particularly those who are experiencing balance-of-payments difficulties and seek its guidance and assistance. 

The Commission on Global Transformation is pleased that the IMF leadership has aggressively supported the United States' and most European nations' massive multi-year fiscal stimulus for COVID-19 recovery. 

The IMF has also acknowledged the necessity for developing-country governments, even those in financial crisis, to increase public expenditure. 

Unfortunately, the IMF has continued to provide pro-cyclical policy advice to borrowing countries, as seen by the policy conditions connected to its loans, which advocate for fiscal restraint rather than deficit spending when economies are in recession. 

The IMF authorized a another US$18.6 billion in fresh loans to 16 countries between October 2020 and March 2021, bringing the total amount of funding sanctioned during the epidemic to US$107 billion. 

Only 3% of the increased financing went to Sub-Saharan Africa, 2% to Asia and the Pacific, and 2% to North Africa, the Middle East, and Central Asia, with almost all (93%) going to relieve financial stress in Latin America and the Caribbean. 

17 of the 18 new loans required recipient governments to implement fiscal austerity measures (Oxfam, 2021b). 

The IMF has included flexibility provisions in certain non-emergency loans, enabling nations to expand social expenditure if the epidemic develops, according to the Oxfam study. 

The significance of safeguarding social expenditure is emphasized even more in the context of fiscal consolidation. 

However, the wording in the Letters of Agreement is often ambiguous when it comes to this flexibility, but plain and specific when it comes to fiscal consolidation and expenditure cutting objectives. 

For example, when the IMF urges countries to safeguard social expenditure, it simultaneously recommends states to reduce pandemic-related social spending as soon as "the crisis subsides" in the same documents. 

This is concerning, given that the majority of nations were woefully equipped to deal with the crisis, with significantly inadequate social investment. 

The IMF's focus on fiscal restraint by countries receiving financial assistance highlights the inadequacy of contingency financing to offer the fiscal space required to alleviate the pandemic's severe effects on livelihoods. 

As reviewed by Gallagher and Carlin (2020) after evaluating a pre-pandemic collection of IMF loans, the practice of IMF policy conditionality appears very much like it did before the pandemic. 

Any policy conditionality attached to lending policies by IFIs should be more consistently based on principles of supporting a countercyclical macroeconomic policy stance by recipient countries; any policy conditionality attached to lending policies by IFIs should be more consistently based on principles of supporting a countercyclical macroeconomic policy stance by recipient countries. 

In addition, short-term financing to address balance-of-payments issues should be balanced with enough long-term development finance to fulfill the Sustainable Development Goals. 

An Increase in Special Drawing Rights (SDRs) with Special Use for Developing Countries. 

The IMF was anticipated to authorize the issue of US$650 billion in additional Special Drawing Rights (SDRs) at the time of writing, and it did so in June 2021. 

The benefit of this method of generating foreign liquidity is that it is practically free. 

Fears that this may be inflationary were unfounded in the present global economic environment, particularly as it pales in comparison to the monetary growth in developed nations. 

This rise offers poor nations with an instant boost in reserves, allowing them to participate in much-needed public spending without having to worry about the impact on the external balance; it may also provide a method of repayment for countries with severe external debt difficulties. 

However, since SDR allocations are presently determined in accordance with IMF quotas, this effect of the new SDR production is not automatic (which in turn are linked to voting rights). 

As a result, the majority of the additional SDRs will be made accessible to wealthier nations with less need for balance of payments financing, and many of the new SDRs may end up as unused reserves at the IMF. 

In a variety of methods, any unused SDR reserves might be made accessible to poor nations (INET, 2021: 9; United Nations, 2021). 

  1. First, it may be chosen to utilize a portion of the funds to write off or reduce impoverished nations' external public obligations. 
  2. Second, certain nations with substantial balance-of-payments stress might be provided or loaned SDRs. 
  3. Third, as has been suggested in the past (see, for example, Haan, 1971; United Nations, 2012; Ocampo, 2015; Vos, 2017), a portion of idle SDRs that are not required as a fair reserve buffer might be utilized to finance development (through issuance of international bonds backed by those unused SDRs).

~ Jai Krishna Ponnappan.

You may also want to read more analysis about the COVID-19 Pandemic here.

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