Why Is the IMF Collecting Surcharges from Developing Countries?

October 13, 2022

The Hill

See article on the original site | Surcharges Fact Sheet

The International Monetary Fund (IMF) is often described as a “lender of last resort,” which of course is not meant to flatter the governments that find themselves in need of borrowing from them. But many do, and their citizens often chafe under the policy conditions attached to the loans. 

For example, the IMF, now 75 years old, made its largest loan ever — $57 billion dollars — to a right-wing government in Argentina in 2018. The conditions that the IMF attached to the money threw the economy into a recession, along with soaring inflation and unsustainable public debt. In an unprecedented report last year, IMF economists even acknowledged the fund’s terrible failure in their own evaluation of the episode. Unfortunately, Argentina’s experience has been all too common.

Borrowing countries can also take a serious hit from some of the fine print of their IMF agreements. The IMF collects surcharges on loan payments for countries that borrow either “too much” or for “too long.” “Too much” is defined as 187.5 percent of the country’s quota, i.e., membership dues. “Too long” is more than three years, despite that many IMF loans have maturities that are significantly longer.

These surcharges have recently come under fire from economists and civil society organizations all over the world, mainly because they are so regressive. In January, 18 members of Congress wrote to Treasury Secretary Janet Yellen calling for the elimination of the surcharges. They noted that the policy “endangers public health, jeopardizes our global recovery from COVID-19” and that in 2019, “64 countries spent more resources servicing foreign debts than they did on health care expenditure.”

The surcharges add to the debt burden of countries that can least afford it since by definition these governments are almost always already suffering from too much debt when the surcharges are triggered. And the impact of surcharges can be quite large. For the 16 countries currently paying surcharges, surcharge costs are greater than the originally contracted interest payments on the loans.

Now comes the U.S. Federal Reserve, with its most aggressive interest rate hikes in four decades. This pushes up the base lending rate at the IMF too; a fully surcharged loan that less than a year ago carried an interest rate of 4 percent is now at 6 percent — a 50 percent increase in the cost of these loans. 

But that’s just the tip of the iceberg: When the Fed sneezes like this, half the world can catch pneumonia. More than 75 central banks have followed the Fed, thus jacking up international borrowing rates from other sources as well for developing countries. The most severe crises make the news — Sri Lanka, Lebanon, and Pakistan. But there are many more countries in trouble. Twenty-five percent of emerging market countries, according to the IMF, are “in or near debt distress” — and the list is growing.

And when these countries have to borrow from the IMF, the loans are likely to come with austerity — i.e., required spending cuts and/or tax increases. As in the Argentine case noted above, this budget tightening can push the country into a self-reinforcing downward spiral of a shrinking economy, more spending cuts — as well as interest rate hikes — and prolonged recession or even depression. Other serious problems, including balance of payments crises in which countries run short of dollars to pay for essential imports, are also a serious risk.

This is the world in which IMF surcharges are adding to developing countries’ debt burdens, at an accelerating rate. There are 16 countries paying surcharges now, but 38 are projected by 2024. Among the five biggest debtors to the IMF hit by surcharges right now: Ukraine, with its war-ravaged economy projected to shrink by 35 percent this year; Egypt, which has 25 million people (26 percent of the population) in poverty; and Pakistan, where more than 33 million people were displaced by floods last month.

The human cost of the global economic slowdown is already staggering, with life-threatening shortages of food for 345 million people, as noted by the IMF. Last week, the fund approved a new borrowing window for emergency assistance for some countries hard hit by the food crisis, although the details, and when disbursements might happen, are not yet clear.

But why not “first, do no harm,” by eliminating the regressive surcharges that worsen crises in countries already in financial and economic trouble? The IMF has $1 trillion in lending capacity — the $2 billion or so per year that it extracts in surcharges is inconsequential next to the fund’s mountain of resources. There is no excuse for taking this money at a time when tens of millions of people in the countries that must pay it are facing increasing adversity.

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