EFSD Working Paper WP/19/1 «The Eurasian Fund for Stabilization and Development: A Regional Financing Arrangement and Its Place in the Global Financial Safety Net»

23 October 2019

The objective of the first working paper is to bridge the gap in understanding the dynamics of EFSD development and its place in the Global Financial Safety Net (GFSN) and the region’s financial architecture. The GFSN is the set of financial resources and institutional arrangements that provide a backstop during a financial or economic crisis. It comprises international reserves, central bank bilateral swap arrangements, regional financing arrangements (RFAs), and the IMF. 

Increased interconnections among countries have led to an accelerated spread of systemic risks and reduced the effectiveness of countries’ internal protective mechanisms. “The Global Financial Safety Net has grown very substantially over the decade since the global financial crisis,” - Evgeny Vinokurov, EFSD Chief Economist, comments. - “The role of RFAs has increased significantly due to their responsiveness, flexibility, and in-depth understanding of the regional context”. To avoid regional instability, two RFAs have been used most extensively since 2009 – the European Stability Mechanism during the sovereign debt crisis in the Eurozone, and the EFSD in Eurasia. In 2010–2018, the EFSD disbursed about 20% of the total funding received from all international financial institutions by Armenia, Belarus, the Kyrgyz Republic, and Tajikistan. 

Since late 2018, global economic growth rates have been slowing down while volatility in the world’s financial markets grew, increasing macroeconomic destabilisation risks at the global and country levels. The financial resources of the EFSD recipient countries at the first two layers of the GFSN (reserves and bilateral swap arrangements) may occur to be insufficient to effectively withstand severe shocks. The international reserves of the Fund’s four recipient countries in 2010-2018 averaged 2.4 months of imports of goods and services.  If necessary, the Fund’s resources, corresponding to an additional 1.1 months of imports, can boost the reserve positions of these countries. We may assume that in the event of a relatively mild regional shock, the EFSD can be effective on its own. In the case of global shocks, similar in strength and coverage to the 2008 crisis, the Fund’s support can become part of an effective response to crisis events for its borrowing countries, in cooperation with the IMF and other elements of the GFSN. 

The EFSD is unique among all other RFAs in its integrated approach, which involves macrostabilization and financing development. As of mid-2019, 90% of the Fund’s portfolio were loans extended as part of budget and balance of payments support. The remaining 10% were investment loans for infrastructure upgrade in line with the long-term development objectives of the recipient countries given the significant deterioration of the production base, along with the continuing deterioration in the quality of infrastructure.