IMF faces pressure to abandon surge charge on war-torn countries

The International Monetary Fund is facing pressure to reevaluate how it imposes fees on loans it disperses to needy countries like war-torn Ukraine — which is one of the fund’s biggest borrowers.

The move comes as more countries will need to turn to the IMF, as food prices and inflation internationally continues to rise.

Surcharges are added fees on loans imposed on countries that are heavily indebted to the IMF.

Treasury Deputy Secretary Wally Adeyemo said in Aspen last month that finance ministers of several countries realize they have to pay a price for Russia’s invasion of Ukraine, especially with food prices going up.

“They’re going to have to go to the IMF, they’re going to need to find assistance,” Adeyemo said.

However, the IMF fee system could change through US legislation. An amendment to the National Defense Authorization Act, otherwise known as the defense spending bill, would suspend IMF surcharges while their effectiveness and burden on indebted countries is studied.

That was passed by the US House in July. The Senate is expected to vote on its defense bill in September. A representative of the Senate Armed Services Committee said an amendment may be offered in the next few weeks or even on the Senate floor.

As the largest IMF shareholder and member of the Fund’s executive board, the US can push for policy decisions and unilaterally veto some board decisions.

Citing worsening financial crises in Sri Lanka and Pakistan as examples, some accuse China of engaging in debt trap diplomacy — or having countries falls so deeply in debt to that they are beholden to it on international issues.

Advocates and civil rights organisations lodge the same complaint against the Fund, who claim the organisation undercuts its core lender-of-last-resort role with countries in vulnerable positions to pay back debt.

With an ever-worsening risk of a global debt crisis and rising interest rates, the issue has become more pressing for countries looking to reduce their deficits.

However, some economists and representatives of the fund say the surcharges amount to responsible lending behavior, as they provide an incentive for members with large outstanding balances to repay their loans promptly. This applies especially for countries that may otherwise may not be able to obtain financing from private lenders.

Maurice Obstfeld, a Berkeley economics professor and former IMF research department director said as a lender of last resort, the Fund's ability to lend is important as low and middle income countries face rising interest rates.

“The Fund’s staff is small and in a crisis, its efforts are better deployed serving member countries’ needs," he said in an email to The Associated Press. “Surcharges could be relaxed temporarily in the face of intense pressures on borrowing countries, but at the expense of the Fund’s ability to serve its membership in the longer term.”

Illinois Congressman Jesús “Chuy” García, who offered the defense spending amendment, told The Associated Press “it is unfair for the IMF to require countries like Ukraine that are already deep in debt to pay surcharge fees. These surcharges increase poverty and hold back our global economic recovery.”

Ukraine’s projected real GDP is expected to decline by 35 percent, due in large part to Russia’s invasion of Ukraine, according to IMF data.

The country, engaged in a war with no projected end, has an outstanding balance of 7.5 billion SDRs — an IMF accounting unit valued at around $9.8 billion according to Ukrainian central bankers. The latest figures estimate that Ukraine will owe the IMF $360 million in surcharges between 2021 and 2023.

Economists Joseph Stiglitz at Columbia University and Kevin P. Gallagher at Boston University wrote earlier this year that “forcing excessive repayments lowers the productive potential of the borrowing country, but also harms creditors” and requires borrowers “to pay more at exactly the moment when they are most squeezed from market access in any other form.”

Serhiy Nikolaychuk, Deputy Chairman of the National Bank of Ukraine, said Ukraine is continuing to pay its debts “despite Russia’s full-scale war against Ukraine.”

"Our country will pay its debt and surcharges under previous programs and fulfill its obligations to the IMF," Nikolaychuk said. "It will be difficult, but we will pay.”

For years, lawmakers, economists and civil rights organisations have called on the IMF, which has for decades loaned billions to low-income countries, to end its surcharge policy.

In January, 18 left-leaning lawmakers wrote to Treasury calling for the surcharge policy to be eliminated. And in April, a group of 150 civil society groups and individuals signed an open letter to the IMF, asking for the same, calling surcharges “regressive.”

A spokesperson for the fund says the surcharges are designed to discourage large and prolonged use of IMF resources.

“They only apply to countries with particularly large outstanding loans,” Mayada Ghazala said in an emailed statement, adding that poorest countries are exempt from the surcharges.

The fund’s executive board met in December 2021 and discussed the role of surcharges —it ultimately decided not to make a change to the fees, but said they would review them again in the future.

The IMF was created in 1944 at the United Nations Bretton Woods Conference — one of its missions is lending to maintain the financial stability of countries. Among its 190 countries, it lends around $1 trillion, according to the organization’s website.

An April review of the fund’s financial health for fiscal year 2022 and 2023 states that lending income excluding surcharges “remain strong and are expected to exceed expenses in FY 2023–2024”.

Andrés Arauz, a senior research fellow at the liberal Center for Economic and Policy Research says the IMF’s financial position shows “the surcharges are not necessary for sound finances.”

“There is no excuse for the IMF to be punishing countries under debt stress with surcharges,” he said. “There is also no logic to it, the amount of money that the IMF raises from surcharges is trivial relative to its income and capacity.”

Garcia said “I’m proud the House passed my amendment to support a pause and review of surcharges at the IMF, and I will keep up the fight until the President signs it into law.”

Separately, the US has sent roughly $7.3 billion in aid to Ukraine since the war began in late February, including a new $775 million defense aid package announced Friday.