The rise of bilateral currency swaps – a threat to the IMF?

13 December 2023

Managing Director Kristalina Georgieva meets Alberto Fernández, the President of Argentina. Credit: IMF Photo/Kim Haughton

Argentina – the IMF’s largest debtor with a total outstanding debt of $46 billion – has recently used $2.8 billion equivalent of Yuan from a bilateral currency swap with China, to cover just over half of two repayments outstanding from a 2018 IMF loan, in order to avoid a default to the Fund. While the move will help unlock further IMF finance, it highlights a fundamental flaw with the Global Financial Safety Net (GFSN) system.

The IMF’s capacity to ensure financial stability and manage global financial crises is increasingly undermined due to its growing inability to boost its resource capacity and reform its governance system. This exposes significant gaps in the GFSN and is forcing countries to rely on currency swaps that entrench asymmetrical power relations and perpetuate the status quo. Indeed, the Covid-19 crisis has shown the IMF fell short of providing the necessary $2.5 trillion liquidity estimated by the UN. Not only did the $650 billion Special Drawing Rights (SDRs) allocation prove insufficient, it was also unequally distributed, with countries with the most pressing needs receiving the lowest allocation.

Absence of IMF governance reform – breeding ground for alternatives sources of finance

Boston University’ GFSN tracker reveals that the IMF is no longer the single most important crisis prevention and backstop source for all income groups, with an increased preference for bilateral central bank currency swaps by those countries that can access them. For example, during the 2008 global financial crisis, US swap agreements rose to $850 billion, four times the IMF’s gross assets. On 19 March 2020, the Federal Reserve reactivated the swap lines with nine central banks and doubled their swap limits.

While central bank swap lines are meant to relieve external funding pressures, their access is mostly determined by geopolitical and economic interests. Countries are known to use them as political tools to internationalise their currency – as in the case of China – or maintain currency hierarchy and dominate the status of international lender of last resort – as in the case of the US (see Observer Autumn 2022).

The danger with accessing central bank currency swaps in contrast to IMF finance is that access to currency swaps are not predictable and not based on multilaterally agreed rules. This potentially undermines key elements of the GFSN, such as multilateral lending standards and predictability of access to crisis finance. In addition to the geopolitical contingent nature of currency swaps, they exclude a vast majority of low- and middle-income countries and thus further reinforce the existing asymmetries of the international financial system.

The only way to solve this systemic issue is to make SDRs the main source of counter-cyclical finance and reform the IMF governance system, by decoupling SDRs from the quota system and ensuring a fairer representation of countries in the Fund’s decision-making process (see Observer Autumn 2023). While IMF shareholders remain cautious about using SDRs as an instrument of the GFSN, civil society organisations have called for years for fresh SDR allocations to boost reserves and stabilise economies after the pandemic, and for a fairer distribution based on countries financing needs instead of the quota system. IMF’s urgent governance reform remains the single most viable solution for a well-functioning GFSN to ensure the stability of the multilateral system in a time of increasing instability.