© IMF Photo/Kim Haughton
The International Monetary Fund (IMF) has reformed its contentious surcharge policy, reducing borrowing costs for affected countries. But critics say opting to maintain the policy, albeit with lower costs, will allow harmful impacts on debt-stricken and climate vulnerable economies to persist.
These surcharges are additional fees imposed on countries borrowing large amounts or for extended periods from the IMF’s general fund, levied on top of general interest rates and service costs. The policy has come under intense scrutiny in light of successive global economic shocks, including extreme weather events, forcing many countries to increase IMF borrowing.
This has led to record numbers of countries paying surcharges and increased borrowing costs for many climate vulnerable nations, diverting valuable public resources away from climate adaptation.
The IMF executive board approved a set of reforms in early October that will significantly reduce annual total borrowing costs from the general fund, from US$1.9bn to about US$1.2bn — approximately 36%.
By fiscal year 2025, the number of surcharge-paying countries is expected to decrease from 20 to 11, but the IMF expects this number to increase to 13 by 2026, suggesting countries close to the new threshold, such as Suriname and Kenya, may soon be subjected to these fees again.
Key elements of the reforms, set to take effect on 1 November, include:
- Reducing the basic rate on general fund loans
- Raising the threshold for surcharges which are triggered when outstanding credit exceeds the IMF-determined national quota, from 187.5% to 300%
- Lowering the rate for surcharges applied to credit outstanding after three years, from 100 to 75 basis points
- Introducing a regular five-year review of surcharges
IMF Managing Director Kristalina Georgieva stated: “In a challenging global environment and at a time of high interest rates, our membership has reached consensus on a comprehensive package that substantially reduces the cost of borrowing, while safeguarding the IMF’s financial capacity to support countries in need”.
Opposition to IMF’s surcharge policy
Ivana Vasic-Lalovic, research associate at the Centre for Economic Policy Research (CEPR), told Green Central Banking that eliminating surcharges would have been an “easy win” in addressing unsustainable debt. Instead, the IMF chose “at most a half measure, leaving the structure in place”.
Consequently, the most heavily indebted countries like Ukraine, Pakistan and Argentina will continue bearing the highest costs, paying additional fees when they are least able to afford it.
The IMF defended its policy, stating it helps “accumulate reserves to protect against financial risks, and provide[s] incentives for prudent borrowing”.
Since the IMF decides how much a country can borrow, surcharges are not needed to promote prudent borrowing, say opponents.
“It doesn’t make sense to have a penalty on an obligation that’s being fulfilled”, Vasic-Lalovic said. Due to the significant political and economic costs of IMF borrowing, “countries approach the IMF when they have little to no options left” not because of a lack of negative deterrents.
Critics warn that relying on indebted countries to cushion the fund’s reserves may create perverse incentives for the IMF to increase unsustainable lending, in contradiction of its mandate.
Ongoing challenges for climate resilience
Even with reforms, surcharge-paying countries still face substantial borrowing costs, projected by the IMF to reach up to 5.2% in fiscal year 2026. Critics argue these rates are unsustainable and counter-productive as they limit fiscal space for investments needed to build climate resilience and break debt cycles.
The impact of climate change on countries’ debt burdens is a growing concern. Vasic-Lalovic noted: “In the context of the connected debt and climate crisis, often the reason why countries are becoming more and more indebted is because they can’t finance a proper response to climate disasters, which as we know, are becoming more frequent”.
As climate finance is primarily dispersed as loans rather than grants, climate vulnerable countries may be forced to borrow from the IMF to service climate-related debt in addition to recovery costs, she said. This increases their risk of incurring (larger) surcharges, feeding a “vicious cycle” that further hinders investments in climate resilience and adaptation.
Andrés Arauz, former chief operating officer at Banco Central del Ecuador, criticised the reforms, telling Green Central Banking: “While any debt relief from an institution with record-earnings is always welcome, surcharges have to be eliminated altogether.”
He likened the current situation to the third world debt crisis, when the IMF made marginal adjustments for six years, between 1986 and 1992, before eliminating surcharges altogether.
If the IMF continues to have record earnings at the expense of some of its most debt-distressed members, he suggested, even conservative countries may conclude surcharges should be eliminated before the scheduled review in 2029.
Arauz predicts “the IMF will end up foregoing surcharges, but the damage it inflicts in the meantime will not be small.”
This page was last updated October 23, 2024
Written by
Ike Walker, a Green Central Banking contributor since 2023, has a decade's experience in research writing. An Utrecht-based scholar, Ingrid specialises in transformative justice, green finance, law and systems change. They are an Utrecht University's Bright Minds scholar and previously worked for Cambridge University and various justice-based NGOs.
