July 03, 2024
Bretton Woods Observer
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The International Monetary Fund (IMF) announced in April that it will be initiating a review of its controversial surcharge policy. For the global movement that has sought to discontinue the policy in recent years, this represents a key window of opportunity. But surcharges defenders have fallen back on disproven old arguments – and are even considering new policies that could stand in the way of meaningful reform.
Surcharges are fees that the IMF levies, on top of regular interest and service costs, on borrowers whose outstanding debt to the Fund exceeds a certain threshold and/or beyond a specified amount of time (see Inside the Institutions, What are IMF surcharges?). Because surcharges only apply to heavily indebted borrowers, the policy has been criticized as regressive and counterproductive, further punishing countries already facing crushing debt burdens. Ukraine, which is currently in the midst of a war, and Pakistan, which, in 2022, saw one-third of its territory flooded as a result of climate change, are two of the top five countries most impacted by surcharges (see Observer Summer 2024).
By our organization’s (the Center for Economic and Policy Research) estimates, the IMF will charge its members $9.8 billion in surcharges over the next five years. Ukraine alone is projected to pay $2.9 billion from 2024 to 2033. Today, 22 countries are affected by these fees, nearly three times the number before the Covid-19 pandemic. Eleven of these countries are considered to be particularly vulnerable to climate change, while 12 are in, or at risk of, debt distress.
The fact that the IMF is conducting an internal review of the policy is a testament to the growing global pressure to suspend or eliminate surcharges, including from international civil society, the G77 and G24 developing country groups (see Dispatch Springs 2024), UN bodies, UN human rights experts, leading economists, and – of particular significance given the outsized role of the US at the Fund – the US Congress (see Observer Spring 2022, Summer 2021). But a review alone is not a guarantee of progress, and much of the discourse surrounding surcharges – which were developed 40 years after the IMF’s creation and aren’t contemplated in its Articles of Agreement – rests on dubious premises.
The policy’s proponents contend that surcharges disincentivize overreliance on the Fund. But this assumes that the accumulation of debt is driven by a lack of adequate punitive incentive, and ignores that a major disincentive is already built into IMF lending: the loss of economic sovereignty resulting from conditionalities, which are frequently procyclical in nature. Governments typically only turn to the Fund as a last resort.
One concern that is likely motivating resistance to reform, primarily from wealthy countries, is that surcharges are a major source of income for the Fund’s precautionary balances, which are meant to act as a buffer to protect against potential losses. Given the Fund’s current lending firepower of $1 trillion, it is debatable whether these reserves – which the IMF aims to maintain at $25 billion – are actually needed. But in any case, the Fund’s precautionary balances target was already hit earlier this year and is projected to increase further in the years to come, even without surcharge income. So why force highly indebted countries to continue paying surcharges?
Surcharges as a Source of Indirect Funding for the PRGT – a Broken Logic
Some countries may have an additional motivation to keep surcharges in place. The US and other advanced economies have recently discussed channeling net income from the Fund’s non-concessional lending to the Poverty Reduction and Growth Trust (PRGT), a concessional lending facility for low-income countries that is expected to soon face funding shortfalls due to an expanding portfolio coupled with declining wealthy country contributions.
This net income would normally go toward the further funding of precautionary balances. If it is diverted for other uses, then it becomes more difficult to maintain the balances without relying on surcharges. In effect, concessional lending meant to help low-income countries would be financed by a tax on some of the most vulnerable and heavily indebted (largely middle-income) developing countries in order to compensate for the failure of high-income countries to meet the PRGT’s future funding needs. These same high-income countries, meanwhile, contribute to the conditions that drive indebtedness by consistently failing to meet their aid and climate finance commitments to support developing countries.
Wealthy countries should step up their contributions to the PRGT, but if they are unwilling to do so, there are far better options than a continued reliance on surcharges – such sale or revaluation of a fraction of the IMF’s vast, and largely untapped, gold reserves.
As Nobel laureate economist Joseph Stiglitz has noted, surcharges go “exactly against what [the IMF is] supposed to be doing. It’s supposed to be helping countries…not extracting extra rents from them because of their dire need.” It never made sense – and may even violate international law – to rely on the most indebted debtors to finance the Fund’s reserves. It makes even less sense to cover the shortfalls in wealthy country contributions through this same reliance on revenue from highly indebted countries.
As the IMF conducts its review of the surcharge policy over the coming months, it should reject this broken logic. The upcoming review should not be merely a checked box; it should involve a thorough, objective assessment of the impact of surcharges on countries’ economies and on the livelihoods and welfare of ordinary people. It should examine potential alternatives to funding precautionary balances down the road. And it should seriously consider the complete discontinuation of the surcharge policy. Anything less will be a missed opportunity for meaningful reform.
