Rethinking The Role Of Central Bank Currency Swaps To Strengthen The Global Financial Safety Net For Developing Countries: New Empirical Evidence

Since the 2007-09 global financial crisis, central bank currency swaps have emerged as a crucial component in the dynamically growing Global Financial Safety Net (GFSN). Yet, most developing countries are excluded from utilizing these instruments. Hence, the question arises: Why are certain countries excluded from access to swap liquidity, and how does this affect the GFSN’s ability to mitigate and alleviate the severity of financial crises? To fill this knowledge gap, we analyze a novel dataset on central bank currency swaps, covering 194 low-, middle- and high-income countries and 410 swap agreements between 2007 and 2022. The results indicate that access to swaps during a financial crisis largely hinges on the level of a country’s economic development, economic size, country risk, trade agreements, and geographical closeness. Another key finding is that advanced countries are more likely to receive swap lines in times of crisis, whereas the opposite is true for most middle-income countries, while low-income countries are entirely excluded from the swap safety net. Consequently, there is a pressing need to reform the GFSN to ensure equal access to crisis finance for all countries, including the least developed ones. We recommend three reform steps. First, multilateral, regional, and bilateral institutions in the GFSN should establish a governance mechanism that facilitates coordinated crisis financing with enhanced transparency and predictability. Second, more sources of crisis finance are required in those regions that are not yet part of a regional financing arrangement. Third, the IMF should increase unconditional lending, particularly to countries hit by external shocks that are not well covered by central bank currency swaps or regional financing arrangements.