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International Monetary Fund. Strategy, Policy, & Review Department, International Monetary Fund. Finance Dept., and International Monetary Fund. Legal Dept.
The challenges from the pandemic, spillovers from geopolitical shocks, and long-standing structural problems pose an enormous impediment for balance of payments stability and resilient and sustainable growth, especially for low-income and vulnerable middle-income countries. The $650 billion SDR allocation in August 2021 has helped support economic stability by supplementing members’ reserves. There is scope to amplify the effect of these SDRs by channeling them from countries with strong external positions to countries where the needs are the greatest.
International Monetary Fund. Strategy, Policy, & Review Department, International Monetary Fund. Finance Dept., and International Monetary Fund. Legal Dept.

inform pandemic policy response; and, Creating policy buffers and financing contingency frameworks (akin to climate change) to provide a stronger and timely response during a pandemic. 16. RST financing is intended to enhance the overall longer-term policy space of member countries . As with all Fund lending, RST loans are provided as liquid and fungible BoP support and are not earmarked for specific projects. RST loans can be used to (i) cover shorter-term BoP needs stemming from the implementation of policy measures supported under the RST, (ii) increase medium

International Monetary Fund. Strategy, Policy, & Review Department, International Monetary Fund. Finance Dept., and International Monetary Fund. Legal Dept.

-supported reforms and the augmentation of longer-term policy space and financial buffers to manage risks to prospective BoP stability. RST loans would initially support measures addressing climate change and enhancing pandemic preparedness given their global public good nature; other challenges could be added overtime. Eligibility and financing terms . Members eligible to request RST support include all PRGT-eligible low-income countries, all small states (population under 1.5 million) with per capita GNI below 25 times the 2021 IDA operational cutoff, and all middle

Fernando Broner, Aitor Erce, Alberto Martin, and Jaume Ventura
In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.
Mr. Ananthakrishnan Prasad, Ms. Elena Loukoianova, Alan Xiaochen Feng, and William Oman

attract private investments . The IMF’s engagement could help improve countries’ policy frameworks and allow them to access other sources of climate finance in equity and debt. The RST extends the IMF’s existing lending toolkit to longer-term lending programs associated with climate change. There is potential to leverage the RST loans to catalyze private sector investments for climate-related finance. Box 5. Case Study on Climate Financing for Replacing Coal with Renewables The study titled “The Great Carbon Arbitrage” (Adrian, Bolton, and Kleinnijenhuis, 2022

Mr. Ananthakrishnan Prasad, Ms. Elena Loukoianova, Alan Xiaochen Feng, and William Oman
Global investment to achieve the Paris Agreement’s temperature and adaptation goals requires immediate actions—first and foremost—on climate policies. Policies should be accompanied by commensurate financing flows to close the large financing gap globally, and in emerging market and developing economies (EMDEs) in particular. This note discusses potential ways to mobilize domestic and foreign private sector capital in climate finance, as a complement to climate-related policies, by mitigating relevant risks and constraints through public-private partnerships involving multilateral, regional, and national development banks. It also overviews the role the IMF can play in the process.