The IMF’s fees to war-torn countries are about to be phased out. They ‘increase poverty and stunt our global economic recovery,’ one MP said
WASHINGTON – The International Monetary Fund is facing pressure to reevaluate how it imposes fees on loans it distributes to impoverished nations like war-torn Ukraine – which is a of the fund’s largest borrowers.
The move comes as many countries will need to turn to the IMF, as food prices and international inflation continue to rise.
The surcharge is an additional fee on loans that applies to countries that are heavily indebted to the IMF.
Deputy Treasury Secretary Wally Adeyemo told the Aspen newspaper last month that the finance ministers of several countries realize they have to pay the price for Russia’s war in Ukraine, especially as food prices rise.
“They will have to go to the IMF, they will need to find support,” Adeyemo said.
However, the IMF fee system is subject to change through US legislation. An amendment to the National Defense Authorization Act, also known as the defense spending bill, would suspend IMF surcharges while their effectiveness and burden on indebted countries are determined. research.
That was passed by the US House of Representatives in July. The Senate is expected to vote on the defense bill in September. A representative of the Senate Armed Services Committee said an amendment could be introduced in the next few weeks or even on the floor. The Senate.
As the largest shareholder of the IMF and a member of the Fund’s executive board, the United States can drive policy decisions and unilaterally veto some board decisions.
Taking the example of the worsening financial crises in Sri Lanka and Pakistan, some accuse China of engaging in debt-trap diplomacy – or plunging countries into debt so much that they have to endure it in international affairs.
Advocates and civil rights groups have made similar complaints against the Fund, arguing that it has reduced its role as a core lender to countries in vulnerable positions to pay.
With the worsening risk of a global debt crisis and rising interest rates, the issue becomes more pressing for countries looking to reduce deficits.
However, some economists and fund representatives argue that surcharges influence responsible lending behavior, as they create an incentive for members with large balances to repay loans. their loans immediately. This especially applies to countries that may not receive financing from private lenders.
As a lender of last resort, the Fund’s ability to lend is critical to low- and middle-income countries, said Maurice obsfeld, a Berkeley economics professor and former head of IMF research. face rising interest rates.
“The Fund’s staff are few and in crisis, and the Foundation’s efforts are better deployed to serve the needs of member countries,” he said in an email to The Associated Press. “The surcharges may be relaxed temporarily in the face of intense pressure on the borrowing countries, but at the cost of the Fund’s ability to service its membership in the long term. “
Illinois Congressman Jesús “Chuy” García, who has proposed the defense spending amendment, told the Associated Press that “it is not fair for the IMF to ask countries like heavily indebted Ukraine to pay surcharges. These surcharges increase poverty and stunt our global economic recovery.”
According to IMF data, Ukraine’s expected real GDP will shrink by 35%, largely due to Russia’s invasion of Ukraine.
The country, which is engaged in a never-ending war, has an outstanding balance of SDR 7.5 billion – an IMF accounting unit valued at around $9.8 billion according to central banks. Ukraine. The latest figures estimate 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 debt repayment reduces the productive potential of the borrowing country, but also harms creditors” and require borrowers “to pay more at the time when they are mostly forced from market access in any other way”.
Serhiy Nikolaychuk, vice president of the National Bank of Ukraine, said Ukraine was continuing to repay its debt “despite Russia’s all-out war against Ukraine.”
“Our country will repay debt and surcharges under previous programs and fulfill its obligations to the IMF,” Nikolaychuk said. “It will be difficult, but we will pay the price.”
For years, lawmakers, economists and civil rights groups have called on the IMF, which has loaned billions of dollars to low-income countries for decades, to end the surcharge.
In January, 18 left-leaning lawmakers wrote to the Treasury calling for the removal of the surcharge policy. And in April, a group of 150 civil society organizations and individuals signed an open letter to the IMF, asking for the same thing, calling the surcharge “declining”.
A spokesman for the fund said the surcharges were designed to discourage large and prolonged use of IMF resources.
“They only apply to countries with particularly large outstanding balances,” Mayada Ghazala said in an emailed statement, adding that the poorest countries are exempt from the surcharges.
Fund management met in December 2021 and discussed the role of surcharges – they ultimately decided not to make changes to fees, but said they would review them in the future.
The IMF was established in 1944 at the United Nations Bretton Woods Conference – one of its missions was to lend to maintain the financial stability of countries. Out of its 190 countries, it lends out about $1 trillion, according to the organization’s website.
An April review of the fund’s financial position for fiscal years 2022 and 2023 said that loan income excluding surcharges “remains strong and is expected to exceed expenses in fiscal year 2023––” 2024.”
Andrés Arauz, a senior research fellow at the Center for Liberal Policy and Economic Research, said that the IMF’s financial position shows “unnecessary surcharges for sound financing”.
“There is no reason for the IMF to punish countries experiencing debt stress with surcharges,” he said. “There is also no logic to it, the amount the IMF collects from the surcharge is insignificant compared to its income and capacity.”
“I’m proud that the House has passed my amendment to support the pause and review of the IMF surcharges, and I will continue the fight until the President signs it into law,” Garcia said.
Separately, the United States has sent about $7.3 billion in aid to Ukraine since the war began in late February, including a new $775 million defense aid package announced Friday.
