IMF surcharges come under scrutiny from US lawmakers

A group of US Congress members have called on Treasury Secretary Janet Yellen to lead the charge against the International Monetary Fund’s (IMF) controversial surcharge policy. The appeal comes as the IMF faces mounting pressure to overhaul the practice ahead of a critical board vote on the topic on Friday.

“These surcharges significantly increase the cost of borrowing, can undermine efforts to reduce debt burdens to sustainable levels, and may divert valuable public resources away from other potential uses such as health, education, and climate adaptation,” a letter sent to Yellen says.

IMF surcharges, sometimes labelled “junk fees” by critics, sometimes push effective lending rates above 8%, rivalling private lender rates. These additional levies are imposed on top of regular interest payments and service charges on countries with high non-concessional debts and have been criticised for exacerbating financial strain on heavily-indebted economies. Experts say this increase in debt and fees makes it difficult for poorer countries to meet their climate goals. 

Amidst a global “polycrisis” of pandemic recovery, geopolitical tensions, climate change, and soaring sovereign debt, many middle-income developing economies have turned to the IMF’s general fund. Consequently, the number of countries paying surcharges has nearly tripled from eight in 2019 to 23 in 2024. The IMF is set to collect approximately US$13bn in surcharges over the next decade.

For some borrowers, surcharges constitute a significant portion of their IMF-related costs. Ecuador, for instance, sees surcharges account for 41% of its total IMF borrowing expenses.

A diverse coalition of House Democrats, led by Representatives Joyce Beatty and Jesús García is spearheading the review of this contentious policy, as the “the fund’s own analyses demonstrate that the likelihood of timely repayment and sustainable financing tend to decrease as debt burdens rise”. 

With a 70% majority required to alter the surcharge system, the US’s 16.5% vote share on the IMF board positions it as a pivotal player in this high-stakes financial reform effort.

Surcharges: exacerbating debt and climate vulnerabilities

Echoing statements made in the letter to Yellen, Nobel laureate economist Joseph Stiglitz has widely maintained that the purported benefits of surcharges – funding the IMF, encouraging repayment, and disincentivising excessive borrowing – do not withstand scrutiny.

Instead, he says the surcharges burden countries when they are least able to bear additional costs. This increases the chance of default rather than encouraging repayment.

For highly indebted countries, surcharges can “certainly exacerbate a vicious cycle between debt and climate crises”, Ivana Vasic-Lalovic, research associate at The Centre for Economic Policy Research (CEPR), told  Green Central Banking.

She said surcharges divert crucial resources from climate disaster response and resilience-building projects towards debt servicing. This comes at a time when climate-related disasters are increasing borrowing needs, potentially increasing surcharges further.

“When it comes to claims that surcharges reduce countries’ borrowing and provide incentives for faster repayments, in practice surcharges are really a penalty imposed on countries that are already fulfilling their obligations to the IMF. It’s really nonsensical and contradictory”. 

She emphasised that countries’ reliance on IMF funds is not due to a lack of deterrents, as IMF lending already carries significant political and economic costs and cautioned against the “perverse incentives” created by this system. 

By turning debt-stricken nations into sizeable revenue streams, critics have argued, surcharges may encourage the IMF to increase non-concessional and unsustainable lending.

Surcharge payment requirements can often precipitate balance of payments crises, in which nations are forced to deplete their foreign reserve currencies to cover additional and “unnecessary” debt servicing payments, Vasic-Lalovic said.

The IMF policy’s impact on climate finance efforts is particularly concerning, making it “difficult, if not impossible” to meet climate funding and development needs in affected countries, according to a recent G20 Taskforce policy note authored by a group of policy and economics professors from Columbia and Boston University.

Countries such as Pakistan, Sri Lanka, and Kenya, which have each faced recent and devastating flooding, will be required to pay hundreds of millions to the IMF in additional fees over the coming decade, according to estimates from CEPR’s surcharge database.

A warning against half measures and “symbolic reforms”

Vasic-Lalovic warned that continuing the policy risks seriously eroding global trust in the IMF, given widespread opposition from lawmakers, economists, and world leaders. While partial or “symbolic” reform could deliver a “substantial hit” to the organisation’s global credibility, she said

Andrés Arauz, former chief operating officer at Banco Central del Ecuador, has argued there is historical precedent for the IMF to end this policy altogether – as it has in the past when previous iterations of the policy ran into similar problems in 1974, 1981, and 1992.

Recent statements from IMF Managing Director Kristalina Georgieva have sparked optimism among policy critics that the IMF may be gearing up for a similar move at the fund’s annual meetings later this month.

During a G20 meeting, Georgieva suggested that the IMF’s ongoing surcharge review is mission critical, adding that:

“We [the IMF] have a strong income position and we have met our target for precautionary balances. Now we can deploy that income for the benefit of our emerging market and low-income members […] by working together, we can avoid getting stuck in a low-growth and unequal world and create a better future for all”.

 

Amended  on 15 October, 2024 to clarify information about the IMF’s effective lending rate.

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