Practice of over-board monetary austerity– whereby primarily using interest rate to control inflation, even when there is significant supply-side determination of inflation, resulting in over-squeeze of aggregate demand, and in turn causing unnecessarily high cost in terms economic growth– has on one hand caused a decline in fiscal space in terms of lower revenues, and on the other, have increased debt distress.
In addition, the cost of borrowing even on otherwise traditionally low-cost borrowing of resources from the International Monetary Fund (IMF) have also increased. Hence, as per a September 12 published policy brief by ‘Think20 (T20)’, and titled ‘Reforming the IMF surcharge rate policy to avoid procyclical lending’ the special drawing rights (SDRs) interest rate charged by IMF have overall steadily, and sharply increased from close to zero percent around third quarter of FY22, to a little more than four percent in fourth quarter of FY24.
Moreover, IMF continues to apply surcharges on its borrowing, which is a ‘junk fee’ and should not be charged. Hence, in addition to practice of over-board austerity policy, these surcharges have further increased the borrowing costs from IMF for countries, as an April 9, ‘Axios’ published article pointed out ‘The IMF, as a so-called super-senior creditor, always gets repaid – and therefore takes much less credit risk than other lenders. All the same, it now charges its largest borrowers – Argentina, Ukraine, and some 20 other countries – as much as 8.6% in their first year, declining only a little to 8.1% in year four. Fully 3 percentage points of that 8.6% is surcharges’, which end up making these loans significantly more costly than what individual U.S. homebuyers pay on their mortgages.’
In this regard, the same policy brief by T20 pointed out ‘IMF surcharges are additional fees levied by the IMF atop regular interest payments and service fees. If a member country’s debt exceeds 187.5 percent of its IMF quota, the country is subjected to an additional 200 basis point (bp) surcharge. When debt exceeds 187.5 percent for 36 or 51 months for Stand-by Arrangements or Extended Fund Facility, respectively, a time-levied surcharge of 100 bp is added. The surcharges have become particularly problematic with the recent large increases in the basic rates charges. The result is that some borrowers pay 8% interest rates on outstanding balances subject to surcharges.’
The same policy brief by T20, for instance, highlighted some of the costs of IMF surcharges to Pakistan, whereby in 2022, the country paid $256.1 million in surcharges, which was 0.6 percent of its exports, 2.6 percent of its revenues, 8.8 percent of its health expenditure, 3.5 percent of its education expenditure. These, indeed, are significant costs to an economy, which has little fiscal space to begin with, and these have to also pay for these surcharges.
Criticizing the application of surcharges by IMF, an article ‘The IMF must end its destructive surcharges’ published by Project Syndicate on September 6 pointed about ‘A group of 22 financially distressed countries, including Pakistan and Ukraine, has become the largest source of net revenue to the International Monetary Fund in recent years, with payments exceeding the Fund’s operating costs. The institution entrusted with providing the global public good of a well-functioning international financial system is, in effect, asking countries that are hardly able to pay their own bills to pick up the tab for the rest of the world. This unseemly state of affairs is the result of the IMF’s surcharge policy, which levies additional fees on countries that exceed thresholds for the amount or length of their borrowing from the Fund. Imposing fines on countries like war-torn Ukraine or Pakistan, a lower-middle-income country where flooding two years ago submerged one-third of its territory, seems antithetical to the IMF’s mission: maintaining stability in the global financial system.’
Resources that otherwise could be spent on much-needed enhancement of economic resilience, end up going into payment of IMF surcharges, and from countries that are already highly debt distressed, some of which are also highly climate change vulnerable, and overall have little fiscal space in the first place, mainly at the back of traditionally low tax base. The same policy brief by T20, for instance, highlighted some of the costs of IMF surcharges to Pakistan, whereby in 2022, the country paid $256.1 million in surcharges, which was 0.6 percent of its exports, 2.6 percent of its revenues, 8.8 percent of its health expenditure, 3.5 percent of its education expenditure. These, indeed, are significant costs to an economy, which has little fiscal space to begin with, and these to also pay for these surcharges.
The same PS published article pointed out with regard to a lack of rationale for applying these surcharges as ‘Supporters of the surcharges argue that the additional fees discourage debtors from borrowing excessively from the IMF. But this moral-hazard argument ignores that loans require approval from the Fund’s Executive Board, which could reject frivolous requests, and it overlooks the fact that surcharges make countries more dependent on the IMF, not less.’ Hence, it is important that IMF surcharges are discontinued at the earliest possible.
