Should IMF ditch surcharges? Some economists and lawmakers think so

Should nations facing debt distress have to pay more to the International Monetary Fund to get support? It’s a question now being asked by a disparate coalition of economists and U.S. lawmakers voicing concern that countries are being squeezed for fees at precisely the time when they are most cash-strapped. This long-standing surcharge practice, they argue, hampers governments’ ability to pay back the loans, leaving both creditors and debtors worse off. IMF surcharges are extra fees for countries that need to borrow large sums of money over several years from the lender of last resort. Nobel Memorial Prize-winning economist Joseph Stiglitz, in a paper written with Boston University’s Kevin Gallagher, said the charges are “akin to the penalty rates imposed by banks.” The surcharge matter slid under the radar during much of the COVID-19 pandemic, in part because global interest rates have been at historically low levels. However, mechanisms such as the Debt Service Suspension Initiative — launched by the G-20 group of nations for 73 lower-income countries — have ended, and central banks are either hiking rates or signaling that increases are coming. This means the cost of borrowing will rise and more countries will struggle to make payments, particularly with the surcharges added on. “If the IMF interest charges are part of a destabilizing escalation of interest rate and debt servicing charges, that would make it difficult for countries to repay and possibly lead to disorderly debt restructuring, which can cause an enormous amount of losses,” said Patrick Honohan, a former governor of the Central Bank of Ireland, in an interview with Devex. “That makes me start to worry about the ability of heavily indebted countries to recover” economically, he added. The size of the surcharges is significant: In the last fiscal year, the total owed to IMF was estimated at about $1.4 billion. Stiglitz and Gallagher’s analysis said that by the end of this calendar year, the global institution will rake in $4 billion in surcharges from members — on top of regular interest payments and fees — since the COVID-19 pandemic started. Surcharges kick in when a country borrows more than 187.5% of its IMF quota share — the number that determines a state’s stake in the institution. This method leaves many countries, especially middle-income nations, structurally more vulnerable to the fees. Notably, surcharge income for IMF is up due to emergency lending during the pandemic, according to its financial statements — meaning this revenue stream is increasing precisely as countries enter into crisis. Stiglitz and Gallagher estimated that almost two-thirds of IMF’s lending income is on track to come from these fees by fiscal 2027 — double the proportion of fiscal 2018. “The IMF should not be in the business of making a profit off of countries in dire straits,” they wrote. The world is facing a worsening debt crisis that comes as IMF itself has urged countries to spend to support their health sectors and reboot their economies during the COVID-19 pandemic, Honohan said. “It’s certainly an argument for saying this is a time where you could suspend the surcharges,” Honohan said. The issue is becoming more acute as the debt burden in many countries becomes unsustainable, and a series of defaults may be on the horizon. IMF warned in January that 60% of low-income countries are already in or at risk of debt distress. The World Bank has been pushing G-20 members to step up debt relief, with finance ministers from the group of nations set to meet later this month. In a recent paper for the Peterson Institute for International Economics, Honohan argued that IMF is in a strong enough position financially to reduce the fees it charges and set in motion a positive chain reaction. “It would be easier for the IMF to nudge the other lenders in this direction if it, too, is charging lower rates. Even if such a reduction were only temporary, it could ease a likely post-pandemic debt crisis,” he wrote. On Jan. 10, a group of U.S. lawmakers wrote to U.S. Treasury Secretary Janet Yellen, asking her to review the IMF policy. The surcharges are “an obstacle to growth and social investment in developing countries” and hurt their recovery, the 18 members of Congress said in the letter. “The IMF’s surcharge policy undermines developing country governments’ capacity to pay their debt service to private creditors while maintaining the IMF’s own unique status as a preferred creditor, relative to others,” the letter said. “This arrangement could increase the likelihood of sovereign defaults, while exacerbating the difficulties in reaching a fair settlement with private creditors,” the lawmakers warned. A spokesperson for Rep. Jesús “Chuy” García, a Democratic lawmaker from Illinois who spearheaded the letter, said their office had not received a response from Yellen. The Treasury Department did not respond to a request from Devex for comment, nor did IMF. However, even the economists making the arguments against excessive surcharges say that there is a logic to them. The fees are designed to ensure that countries do not become too reliant on IMF for liquidity and to keep resources available for other nations in need. As Honohan wrote in his paper — and as was the case when Ireland took loans from IMF after the global financial crisis — the surcharges “do incentivize early repayment and a return to borrowing from the private sector.” The issue, at least right now, centers around the timing, given the pandemic and historic levels of debt.