October 27, 2021
On October 5, CEPR Co-Director Mark Weisbrot joined Nobel laureate economist Joseph Stiglitz, economics professor and CEPR Senior Fellow Jayati Ghosh, and Martín Abeles of Economic Commission for Latin America and the Caribbean (ECLAC) on a panel discussing the International Monetary Fund (IMF) surcharges policy. The discussion, “IMF Surcharges: A Necessary Tool or Counter-Productive Obstacle to a Just and Green Recovery,” was moderated by Marilou Uy, director of the G24, and was held at the Civil Society Policy Forum of the IMF. Though they were invited, the IMF did not send anyone to the event to defend the Fund’s surcharges policy. A recording of the event can be found here, while a full transcript of the event can be found here.
IMF surcharges are additional payments, on top of normal interest payments and other fees, that heavily indebted countries — whose debt exceeds a threshold of 187.5 percent of their IMF quota — are required to pay to the Fund. Two important critiques of the IMF surcharge policy were released shortly before the panel event: a report published by CEPR, and a policy brief by Stiglitz and Boston University’s Kevin P. Gallagher. Both studies found surcharges to be “counterproductive” and called for the IMF to abandon the policy.
While the panel’s main focus was on the IMF surcharges, broader issues of governance at the IMF were also raised and discussed by the panelists. Here are some of the main points that the panelists made:
IMF Surcharges: “Regressive,” “Counterproductive” and “Bad News for the World Economy”
Mark Weisbrot, CEPR co-director, presented the key findings of the report he coauthored. Weisbrot said surcharges “are regressive, because they’re hitting countries that are liquidity-constrained, often with balance of payments problems. And they’re procyclical; they’re more likely to hit economies that are slowing or in recession. Even worse,” he continued, surcharges “deprive vulnerable countries of hard currency during a pandemic with a very uneven [global] recovery.”
Weisbrot noted that the report found surcharges are no trivial matter: “We estimated that 45 percent of all nonprincipal debt service owed to the IMF, for the five largest borrowers, [is] surcharges.” Weisbrot offered the case of Argentina, one of those five countries, as an example: “From 2018 to 2023, [Argentina] will spend $3.3 billion on surcharges. This is nine times the amount that they would have to spend to fully vaccinate everyone in their country against COVID-19.”
Weisbrot also took aim at the IMF’s two explanations for the surcharges — that they limit demand for IMF loans and encourage timely repayment, while simultaneously generating income for the Fund — saying: “The borrowing countries already have a lot of incentives to not borrow more, and to pay back … There’s a stigma associated with IMF borrowing, which the IMF has acknowledged … and the loss of control over major economic policies. So they’re going to the IMF because they have no other place to go. In terms of credit risk,” he continued, “the IMF is a preferred creditor, and there really is no significant credit risk [for the IMF], as can be seen from just looking at the last 50 years of lending. There are arrears, but they’ve all been paid.”
As for the revenue generated from surcharges: “The IMF income from surcharges is very small relative to their other sources of funding …. The IMF has a trillion dollars in lending capacity during the pandemic recession, and we’re talking about a billion or two annually from surcharges …. It just doesn’t make sense to put countries at risk and deprive them of hard currency when the IMF has such vastly bigger resources.”
Jayati Ghosh, CEPR senior research fellow and professor of economics at the University of Massachusetts Amherst, argued that the surcharges policy is not only unjust, but due to the procyclicality of the surcharges, “It’s undermining the IMF’s own principles, and certainly … its own Articles of Agreement,” which state that IMF lending cannot “be destructive of national or international prosperity.”
“What the surcharges do,” Ghosh argued, “is actually force even greater fiscal adjustment on countries at a time, as has been noted by Mark, when they really cannot afford it. [This] will actually make the downswing worse, which will further constrain and compress expenditure, and will make it even harder for these countries to achieve any kind of recovery.”
Ghosh further rebuked the IMF’s justification of the surcharges policy as a revenue raising mechanism, stating that of the $970 billion the IMF has in available financing, “they have spent only $114 billion in new financing to 85 countries … less than 30 percent of [the $380 billion] they have available for emerging and developing countries.”
Ghosh closed her initial remarks with the following: “[The surcharges policy] is bad news for the IMF. It’s bad news for the world economy, because it means a global recovery is that much further away …. [I]n terms of climate change, we are going to see more and more exogenous shocks that impact economies [and] generate crises of different kinds, and greater difficulties of financing. We are already seeing a tightening of international credit markets for developing countries, which will inevitably have an impact on the ability to repay. And yet we have an IMF, which is being, first of all … completely inadequate in terms of its own lending, but secondly, creating an unnecessary further source of distress for developing countries by insisting on these surcharges. At the very least, this policy of surcharges must go.”
Martín Abeles, director of the Buenos Aires office of ECLAC, focused his remarks on what he called the “anticatalytic” effect of surcharges. “If the size of the Fund’s claims to a given country is too large,” he noted, “and more specifically, it is too large because of the existence of surcharges, the Fund may have the opposite effect of a catalytic effect. The Fund may end up discouraging the financial community to invest in that country rather than encouraging it.”
This, in turn, Abeles argued, means that surcharges do not only harm the borrowing country, but may also harm the investor community: “The fact that countries are not able to pay back their claims to the Fund may affect the market value of their private debt and eventually affect private bondholders, not just the country. So interestingly enough, revising the system of surcharges, as so many countries are suggesting — that the G24 is suggesting — may be in the interest not only of developing countries, not only of middle-income countries, but also of the investor community.”
Joseph Stiglitz, professor of economics at Columbia University, and president of the Initiative for Policy Dialogue, presented the findings of his recent study, “Understanding the Consequences of IMF Surcharges: The Need for Reform,” which studied the economic impacts of the surcharges.
In his remarks, Stiglitz stated: “The surcharges are going exactly against what [the IMF is] supposed to be doing. It’s supposed to be helping countries over a temporary liquidity problem, not extracting extra rents from them because of their dire need.”
Stiglitz continued: “One of the roles of the IMF traditionally has been as the creditor collection agency for the investors, figuring out how to squeeze more out of the country, after giving more to the investors, even if it means less to the country. And that’s one of the reasons why so many debt restructurings are followed within five years by another debt restructuring. In other words, they’ve taken so much away [from] the country, the remaining debt is not sustainable.”
Stiglitz also explained: “The magnitude of these surcharges as a result of some of the changes in the surcharge policy” — in 2016, the IMF lowered the threshold for surcharges from debt exceeding 300 percent of a country’s quota at the IMF, to 187.5 percent — “has elevated what was a minor problem into a major problem,” and one that will only be compounded as time goes on. “Surcharges have been a growing source of funding for the basic operations. The IMF expects [them] to grow to two-thirds of lending income by 2027, up from about a third in 2018, providing a large fraction of its operating cost.” Furthermore, Stiglitz concluded, “given the expected increase in the number of countries in dire straits as a result of the pandemic, the counterproductive role of these surcharges is likely to be much greater going forward.”
IMF Governance: “fundamentally undemocratic”
The discussion of surcharges led panelists to a broader discussion regarding the overall governance structure of the IMF.
Weisbrot concluded his initial remarks by saying: “I think this is fundamentally a governance problem …. Whether you look at the world by population or by GDP, the vast majority of the 190 members of the IMF have very little voice in [its] governance. I think if this voice was increased, the surcharges would not be there.”
Ghosh also contributed a broad critique of the IMF: “This is not the only terrible policy of the Fund that has remarkable resilience … Even when the [IMF] leadership is saying, ‘We do not want procyclical policies, we do not want a two-track recovery, we want developing countries to be able to spend more,’ on the ground the conditionalities remain as they were. Which is to say, talking about fiscal compression, cutting down public expenditure and so on. The surcharges, I would say it’s relatively low hanging fruit, it is relatively easy. And yet the resilience of that strategy, I think … is partly because those with voting power do not really care very much. And I think that comes back to the point that Mark was making earlier about the overall governance structure of the Fund, which is fundamentally undemocratic.”
Abeles’s remarks touched on the growing disparity between what middle-income countries contribute to the IMF’s operating budget and their representation in voting power at the Fund — noting that all 14 countries subject to surcharges as of July, 2021 were middle-income countries. “We know middle-income countries represent above 50 percent of the world’s economy, but only about 30 percent of the IMF’s quotas,” he said. “At the same time, surcharges are beginning to represent a growing share of the Fund’s operational income … [M]iddle-income countries are not only underrepresented at the Fund from the point of view of governance … the fact that they are underrepresented forces them to assume a disproportionately large share of the Fund’s functioning cost. So it’s a double burden; it’s an underrepresentation in terms of governance, and an overrepresentation in terms of financing the Fund’s operations.”
Stiglitz, for his part, continued this line of argument, saying: “One should view the IMF as providing a global public good that ensures financial market stability for the world. And if you think about it as providing a global public good, you say it should be funded on the principle of any global public good: according to those who are most able to contribute. So that would be on the principles of progressivity, that the advanced countries should pay a disproportionate share … I think a concomitant aspect of greater voice is greater responsibility of paying. I think the current system where the developed countries, advanced countries, get the voice and the developing countries have the obligation to pay — I think that’s hard to defend.”