Authorities have taken quick action to pump liquidity into financial markets in response to the coronavirus pandemic, including steps to improve access to US dollars across the world. For emerging markets, however, the dollar shortage remains acute, and could have serious consequences for the financial and economic stability of these countries.

As we pointed out in a recent letter sent jointly with the Institute of International Finance (IIF) to Group-of-20 finance ministers and central bank governors, many emerging market countries are heavily reliant on US dollars in various ways, but have seen an estimated $100 billion in capital outflows since the coronavirus crisis began, rapidly depleting foreign exchange reserves and depreciating local currencies amid a flight to safety in the current crisis. Unable to access dollars easily to replenish reserves or service outstanding dollar debt, these countries face a very real economic shock that could reverberate across the globe.

The Federal Reserve has taken important steps to ease the strain on US dollar funding by opening swap lines with a group of foreign central banks and establishing a temporary repo facility for central banks and international monetary authorities to exchange their US Treasury holdings for dollars. However, the swap lines are mostly with developed markets, while many emerging markets do not hold a large stock of US Treasuries.

At the start of its 2020 spring meetings, which will run this week, the International Monetary Fund (IMF) has also announced bold steps to help emerging markets, including a doubling of its emergency financing facilities to $100 billion and a plan to increase the Catastrophe Containment and Relief Trust, which provides grants for debt relief to low-income countries, to $1.4 trillion

But further action is needed to protect emerging markets – something the IMF has also recognized. In the joint ISDA/IIF letter, we set out a number of possible solutions to specifically help address the shortage of dollars in emerging market countries. This includes a substantial increase of the current cap on the IMF’s Rapid Financing Instrument – a mechanism that provides quick financial assistance to member countries in specific circumstances like natural disasters.

We also propose the development of new or existing facilities that would enable emerging markets to take advantage of the Federal Reserve’s new repo facility. Additionally, we recommend that the IMF brings forward an already announced proposal to double its borrowing facilities with member countries (the so-called new arrangements to borrow).

The coronavirus pandemic will hit the global economy hard, but the impact will be particularly severe for emerging markets. These countries need urgent access to dollars in order to ensure stability of their markets and economies. We need to solve this, and ISDA stands ready to assist however we can.