October 05, 2021
Transcript of a CEPR event titled, “IMF Surcharges: A Necessary Tool or Counter-Productive Obstacle to a Just and Green Recovery?” Video available here.
Marilou Uy: [00:00:04] Well, welcome all to the webinar on IMF surcharges. I’m Marilou Uy, director of the G24 Secretariat, and I’ll be moderating the session today. Now, I would like to thank the International Monetary Fund for hosting this online panel session in the CSO Forum. I would also like to thank the organizers for co-sponsoring this event, the Bretton Woods Project; Center for Economic and Policy Research; Eurodad; Erlassjahr.de, or Jubilee Germany; and Boston University’s Global Development Policy Center. We also like to welcome all of those of you who are attending this panel by WebEx. You can address questions to the panelists using the WebEx chat.
Now, let me open with a brief introduction to our topic today. The IMF’s policy on surcharges is not an issue that is widely known, or even understood. It has recently gained a lot of attention from policymakers and development specialists on whether the policy is fit for purpose, especially given the financing challenges countries face due to the pandemic.
Let me start with a simple description of what the policy is. The IMF surcharges are levied on its lending in the Fund’s non concessional general resources account as an important part of the Fund’s risk management framework.
Level-based and time-based surcharges are levied over and above its existing lending rate, amounting to 200 basis points of outstanding credit above 187 percent of quota, resulting from purchases in the credit tranches and the EFF (or the Extended Fund Facility). One-hundred basis points is an additional time-based surcharge, which applies when credit has been outstanding for 36 months, in the case of purchases in the credit tranches, and more than 51 months in the case of purchases under the IMF’s Extended Fund Facility.
These surcharges have been intended to mitigate credit risk by providing incentives to members to limit their demand for IMF financing and timely repayments. The proceeds from the surcharges also generate income, so that the IMF can accumulate precautionary balances and fund its operational work.
Now, recently, developing countries, and among them a group of 24 countries, have sought a review of the surcharges policy specifically to correct the procyclicality and regressive character. Beyond this broad call, academics and development policy experts have recently undertaken analytical work analyzing the unintended consequences — in particular, the distributional effects of the surcharge policies and whether they serve the purpose they were intended to serve.
Today’s discussion will shed more light into this emerging debate. We are fortunate that our panel also includes authors of two very recent policy briefs on the IMF surcharges, one from the Center for Economic and Policy Research by Mark Weisbrot, and the Global Development Policy Center by Joseph Stiglitz and Kevin Gallagher. The links to these policy briefs will be posted in the chat box for your convenience.
Now with these remarks, let me now very briefly introduce our panelists so we can start with our discussion. The first one is Mark Weisbrot,co-director of the Center for Economic and Policy Research, and coauthor of the recently published report, “IMF Surcharges: Counterproductive and Unfair.” Jayati Ghosh is Professor of Economics at the University of Massachusetts Amherst and the Executive Secretary of International Development Economics Associates. Martín Abeles is the director of the Buenos Aires Office of the Economic Commission for Latin America and the Caribbean, or ECLAC. Joseph Stiglitz, our last speaker, is a professor of economics at Columbia University and the recipient of the 2001 Nobel Prize, the Nobel Memorial Prize in Economic Sciences. Joe, jointly with Kevin, as I mentioned recently, wrote the policy brief on “Understanding the Consequences of IMF Surcharges: The Need for Reform.” Now I’d like to say that Joseph Stiglitz has not yet joined us, but he’s probably going to join us around 11-ish or later in the session. Now we also reached out to the IMF in the hope that they could join this panel, but [were] unable to secure a speaker in time. Now, a quick reminder that each one has 10 to 15 minutes to speak. So let me now turn to our friend, speaker Mark Weisbrot, and Mark, the floor is yours.
Mark Weisbrot: [00:05:14] I want to thank all the panelists, and Marilou for that introduction and for everybody who’s come here to hear this, I think it’s an important topic, and I think it’s possible to correct this policy, which Marilou mentioned is regressive. And so I want to talk about that.
First of all, the IMF surcharges: the way they work is they add an extra 200 basis points for what are considered to be large loans, or a large amount of debt to the IMF — 187.5 percent or more of a country’s quota. And then there’s also an extra 100 basis points for a debt that’s been held for more than four years. So this adds up to real money. There aren’t exact surcharge amounts published by the IMF, so we estimated it, and we estimated that 45 percent of all nonprincipal debt service owed to the IMF, for the five largest borrowers, are surcharges. And that’s Argentina, Ecuador, Egypt, Pakistan, and Ukraine. Argentina over the next, from 2018 to 2023, will spend $3.3 billion on surcharges. This is nine times the amount that they would have to spend to fully vaccinate everyone in their country against COVID-19.
So these are regressive, because they’re hitting countries that are liquidity-constrained, often with balance of payments problems, and they’re procyclical — they’re more likely to hit economies that are slowing, or in recession, and even worse, I think, to deprive vulnerable countries of hard currency during a pandemic, and with a very uneven recovery globally.
So the question is: why? And here I’m going to quote from the IMF in their last review of surcharges, because I don’t want anybody to think I’m misrepresenting their arguments in defense of the surcharges. Here is the summary paragraph: “These level and time-based surcharges are intended to help mitigate credit risk by providing members with incentives to limit their demand for Fund assistance and encourage timely repurchases, while at the same time generating income for the Fund to accumulate precautionary balances.”
So let’s break this down a little; it’s saying several things. First of all, the borrowing countries already have a lot of incentives to not borrow more, and to pay back. First of all, the IMF conditions, they’re often procyclical. At the very least, they’re politically unpopular — spending cuts. There’s a stigma associated with IMF borrowing, which the IMF has acknowledged in this paper as well, and the loss of control over major economic policies. So they’re going to the IMF because they have no other place to go.
In terms of this credit risk, that’s credit risk to the IMF that the Fund is referring to, but the IMF is a preferred creditor and there really is no significant credit risk, as can be seen from just looking at the last 50 years of lending. There are arrears, but they’ve all been paid. And so, that’s not really an issue. And the issue of precautionary balances: now here, the IMF income from surcharges is very small relative to their other sources of funding.
The quotas, the new arrangements to borrow: from these sources, the IMF has a trillion dollars in lending capacity during the pandemic recession, and we’re talking about a billion or two annually from surcharges. So that’s three orders of magnitude smaller. It just doesn’t make sense to put countries at risk and deprive them of hard currency when the IMF has such vastly bigger resources.
Now, the last argument is that you’re encouraging to pay back in a timely manner and early, even. So, most of their repayers, people who repaid early, countries that paid early since 2009, are high-income European countries that had support from European Union institutions, and so they’re not typical of the usual recipients of IMF program lending.
The other examples — I’m just going to give two because they’re very big. You have Brazil, which paid back 15.5 billion of outstanding debt in 2005. And here you can see the reasons were, as the IMF acknowledged sometimes happens, the reasons were political. The Fund had played a huge role in Brazil for the prior 20 years, 25 years actually, and it had been a disaster in terms of policy outcomes. The income per person actually fell from all the way from 1980 to ‘94, and it barely grew after that. And then you had — when the Workers’ Party was running for election in 2002 — the IMF negotiated a very large $30 billion loan agreement, and that committed the government to running very large primary budget surpluses for four years. And that really interfered with the implementation of much of the Workers’ Party program, so it’s not surprising they paid it all off early.
And the other example, of course, is Argentina, which had also a traumatic experience during the depression of 1998 to 2002, and with the IMF, and then in the record sovereign default and debt restructuring that followed. And so the IMF conditions became a major political and even electoral issue in Argentina during this time, and there was very strong motivation and political support for getting rid of this debt. So they paid off 9.8 billion in 2006.
There are other cases, too, where the IMF acknowledges political considerations — Hungary and other countries. So that, I think, addresses the IMF’s defense of these surcharges.
I just want to end with a couple of comments on governance, because I think this is fundamentally a governance problem. If the vast majority of countries, whether you look at the world by population or by GDP, the vast majority of the […] 190 members of the IMF have very little voice in the governance. I think if this voice was increased, the surcharges would not be there. And this is a very striking example of the power of inertia. You know, when the IMF was formed, the US was the only standing industrial power in the world after World War II and it was kind of put in charge of the whole thing, and pretty much still is, with, you know, making decisions, with some input from the other high-income allies. And you can see this problem of governance right now in what our fellow panelist Joseph Stiglitz has called a “coup attempt” at the IMF, and [it] shows how dysfunctional it is to have this governance problem.
You have the World Bank, headed by a Trump appointee, [that] decides to hire one of the most expensive law firms in the United States to launch a very dubious and prosecutorial investigation targeting the managing director of the IMF. And it seems to be driven by, as much as anything, US domestic politics around China. Or maybe he doesn’t like the priorities, the Special Drawing Rights of Georgieva, her priorities, and so — you know, I won’t go into this more. We can talk about it in the question and answer if there’s time. But really, the IMF should not be disrupted by this because of, you know, one government’s politics. And I think this is the problem with the surcharges. We could get rid of these if the IMF was an organization that was more multilateral, I should say, where the majority of countries had more voice. And I’ll stop there. Thank you.
Marilou Uy: [00:15:56] Well, thank you very much, Mark, for both the microeconomic analysis, but also the link of surcharges to governance, the broader policy issue governance. So let me now turn to Jayati Ghosh. Jayati, you’ve been a leading thinker on financing for development and advocating for the perspectives of developing countries. What are your reactions to the work that Mark has just recently analyzed? Thank you.
Jayati Ghosh: [00:16:28] Thank you so much. Thank you, Marilou. Thanks so much for inviting me to this. I think it’s, as Mark said, it’s a very important discussion, and it is something that can be quite easily fixed. So I think it’s really important to bring this out in the public domain and talk about the implications.
I want to focus on one particular aspect of this whole issue, which is the procyclicality of it. And I want to argue that this actually goes against not just developing countries. It’s not just unjust and so on, but it’s actually completely the opposite of what the IMF was set up for. So in a sense, it’s undermining the IMF’s own principles, and certainly, as Mark mentioned, its own Articles of Agreement.
Let me just remind you of a quotation from a rather famous guy way back in 1933: “The decadent international but individualistic capitalism … is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods.” So this is John Maynard Keynes in 1933 talking about national self-sufficiency. But in a sense, this is kind of prescient, or rather, it’s unfortunately still relevant, because the problem today is that the international architecture that was set up, having realized these problems, is now again not delivering the goods.
And so what are the goods? Well, I mean, Keynes, of course, as you know, proposed an international clearing union, which was supposed to avoid unnecessary accumulation and liquidity, and avoid the deflationary impact of putting the burden of adjustment entirely on the deficit countries. That was not fully implemented, but the IMF, which is really, in a sense, the sort of grandchild of that attempt was … it’s specifically designed to make countercyclical loans to forestall the harshest adjustment of debtors. And that’s important because that’s how you ensure stability.
Again, let me just remind you, John Maynard Keynes pointed out that if you follow stable global capitalism, you need to have a minimum of three things. That is to say, either a global leader or global arrangements that ensure discounting and crises, that ensure countercyclical lending, and that provide a market for distressed exports of debtors. Now, that countercyclical lending is essential, and I would argue that unfortunately, in this particular crisis, the IMF has proved wanting.
It’s not just — I’m coming to the issue of surcharges in a minute — but it’s also the fact that, you know, of the nearly one trillion, as Mark mentioned, available resources, 970 billion, I think, is what they have. They have spent only 114 billion in new financing, to 85 countries. It’s true, all very hard-hit countries, but this is even less than 30 percent of what they have available for emerging and developing countries. They have nearly 400 billion available — I think $380 billion or something — to emerging and developing countries. They have spent less than 30 percent of that in this very, very major crisis, while advanced economies with reserve currencies have thrown everything and all of the so-called fiscal rules overboard and gone in for massive spending for recovery.
Now this, of course, means that the IMF is not doing what it should be doing in terms of countercyclical lending. But what’s making it worse, and what is also making governments even less inclined to approach the IMF is not just the stigma that’s associated with it, the fact that it immediately affects your rating in the international capital markets, the fact that you have very onerous conditions typically applied to any of these loans. It’s not just those, but it is these ridiculous surcharges. I think Mark has already made a very effective case for why these really are not necessary, either for ensuring the required capital for functioning, or making sure that governments repay.
There are some countries in Asia — the Philippines, and Pakistan are the most obvious examples — that have been on almost continuous IMF programs for the last half century; almost continuously they have been on IMF programs. And it’s not because they like to be on IMF programs, it’s not because they think it’s an easy source of money — it’s because they have no other choice. It’s also not because they don’t do what the IMF tells them. They have been very obedient in following all the policy conditionalities, but things keep getting worse.
Now the causation is another issue. We can come back to that. But certainly the imposition of the IMF conditions have not enabled them to repay any better. These are not countries that choose the IMF because it’s an easy money source. They are there because there’s no other resort. It is indeed the lender of absolutely last resort. And in fact, we have now come to the point when even countries that need that lender of last resort are unwilling to approach the IMF for that very reason.
And so, the procyclicality of these surcharges is adding to the overall tendency to, well, if not to be procyclical, to be certainly not countercyclical in the IMF strategy. And we already know — I think, there is IMF research; there is a working paper by Elva Bova, Carcenac, and Guerguil, which talks about how the greater use of fiscal rules is associated with continued procyclicality in most of the recipient countries.
Now, what the surcharges do is actually force an even greater fiscal adjustment on countries at a time, as has been noted by Mark, when they really cannot afford it, and which will actually make the downswing worse, which will further constrain and compress expenditure and will make it even harder for these countries to achieve any kind of recovery. So we are adding very, very significantly to this growth cyclicality. It is already a problem. It is unfair and unjust, certainly when it’s relating to a few countries.
But today we are talking about the IMF having massively increased relative to what it did in the past in its financing to 85 countries. It’s still very inadequate relative to the need, and it is certainly inadequate compared to the massive fiscal increases that we have seen in advanced economies. But nonetheless, it is widespread. If you have this significant widespread increase in lending associated with this threat of surcharges, once you exceed a certain part — a proportion of your quota, as was mentioned — or if you have had debt for more than four years, then that adds a major and more widespread element of procyclicality. And that’s bad news, not just for these countries. It’s bad news for the IMF. It’s bad news for the world economy because it means a global recovery is that much further away.
And of course, we have to bear in mind that, yes, the pandemic was a terrible, incredible shock. But let’s face it, it’s a piece of cake compared to what is already happening in terms of climate change. We are going to see more and more exogenous shocks that impact on economies, generate crises of different kinds, and greater difficulties of financing. We are already seeing a tightening of international credit markets for developing countries, which will inevitably have an impact on the ability to repay. And yet we have an IMF, which is being first of all, I would say, completely inadequate in terms of its own lending. But secondly, creating an unnecessary further source of distress for developing countries by insisting on these surcharges. At the very least, this policy of surcharges must go. Let me stop here.
Marilou Uy: [00:24:36] Thank you very much, Jayati. Now, before I turn to Martín, I’d like to remind the participants that you can post your questions in chat and you don’t have to wait till the last speaker to do that.
So I’d like to give the floor now to Martín Abeles. Martín, you will bring a distinct regional perspective to the panel. Can you speak about how countries in Latin America may be viewing the surcharge policy? So, Martín, over to you.
Martín Abeles: [00:25:11] Thank you, Marilou. Well, first, on behalf of Alicia Bárcena, our executive secretary, thanks so much for inviting ECLAC to this session. We have been working on the issue of surcharges for some time now, but still the usual disclaimer applies: I guess whatever I say here might be more my personal opinions and not necessarily reflect the point of view of ECLAC.
Let me begin by raising the report on surcharges put forth by Mark Weisbrot and colleagues. It is very informative and insightful. I think it’s a must read for anyone interested in this topic. For those interested in this topic and in this policy issue, that’s also a very good paper by Daniela Prates and Penelope Hawkins from UNCTAD — not so recent, but very insightful and informative as well. And of course, the policy note, just recently launched by Joseph Stiglitz and Kevin Gallagher, is also very clarifying, and in particular they suggest that surcharges, as chaotic as just said, may not be a good idea even in the Fund’s own terms, and I’d like to pick up that point later on.
Well, after listening to Mark and Jayati, I happen to agree with practically all of what they have said until now, especially with the idea that first, surcharges do not seem to serve the purpose of limiting large and prolonged use of IMF resources, as both have mentioned, or stigma issues, policy space issues, and so forth with, which made sure that countries do not overextend themselves and don’t indebt themselves with the International Monetary Fund. And second, I agree with the idea, as proposed by Mark: surcharges do not necessarily increase the Fund’s lending capacity.
So to what all has just been said, let me add two points: one related to the regressive practice of surcharges, and the second one related to what I would like to call the anticatalytic effect of surcharges. So, let me first go to the regressive character of surcharges, which has been mentioned before. Surcharges, as Mark and colleagues mentioned in the report, tend to apply to middle-income countries. By July of 2021, a few months ago, 14 countries in the world — member countries of the Fund — were subject to surcharges; all 14 of them are middle-income countries. A regressive impact of surcharges is proportional to the gap between the country’s economic size and their quotas. The smaller the quota, the larger the proportion of a Fund’s loan that is subject to surcharges. This should be dealt with case by case, of course, but on average, we know middle-income countries represent somewhere above 50 percent of the world’s economy, but only somewhere about 30 percent of the IMF’s quotas.
At the same time, surcharges are beginning to represent a growing share of the Fund’s operational income. This is also well-reported in Mark’s report. This means that middle-income countries are assuming a growing share of the Fund’s functioning cost, operation costs.
Summing up, middle-income countries are not only underrepresented at the Fund from the point of view of governance, as brought up by Mark Weisbrot, but the other surcharges system, and the fact that surcharges are increasing the share of the Fund’s operational income — the fact that they are underrepresented — forces them to assume a disproportionately large share of the Fund’s functioning cost. So it’s a double burden; it’s a misrepresentation in terms of governance, and an overrepresentation in terms of financing the Fund’s operations.
So, having read Mark’s report, and having seen other figures and Kevin Gallagher and Stiglitz’s report, it should not be too difficult to come up with a more progressive business model for the Fund. I think that is the type of discussion we’re headed towards, and the Fund is headed towards.
Second point, and last on this side, at least on the anticatalytic effect of surcharges: let me explain what I understand by anticatalytic effect by doing some little bit of history. During the first decades after the Fund was created, the type of balance of payment crisis the Fund was meant to resolve were typically due to current account imbalances. After financial liberalization in the past four decades, and especially as of the ‘90s, the type of balance of payment crises that the bank was called to resolve were mainly due to capital account problems, not current account problems (well, mainly financial linked to liquidity problems, with solvency problems). The size of the financial support required in these latter cases is several orders of magnitude larger than the type of resources needed to deal with current account problems right after the Second World War.
And the Fund started, the reasons for metrics, etc., would not fill the […] financial gaps required to solve this type, second type of balance of payment problems. How was the gap closed? Well, put very generally, the Fund still provided financial assistance to countries with balance of payment problems, plus a macroeconomic stabilization problem, typically, with a taste for austerity, as we know, like a seal of approval that would convince the financial community financial investors to chip in and provide the additional financial resources required. This is what is typically called the catalytic effect of a Fund’s program. The Fund is not feeling the entire financial needs of a country’s problem; it just supports the country with some of those resources, and the rest is brought by the investor community, which has the nest funded by agreement. If that is short-term, or a longer term Extended Fund Facility program with a macro package [is] in place, that convinces, or tries to convince, the financial community that the country in question is trustworthy.
My point is that if the size of the Fund’s claims to a given country is too large, and more specifically, it is too large because of the existence of surcharges, the Fund may have the opposite effect of a catalytic effect. The Fund may end up discouraging the financial community to invest in that country, rather than encouraging it.
So let me finish with a specific example from Latin America. Mark Weisbrot already mentioned Argentina, but take the case of Argentina. Argentina owes $45 billion to the Fund. If this claim is converted, as seems to be the case, into a 10-year Extended Fund Facility; if this loan is refinanced via an Extended Fund Facility, which is the 10-year program, as you know, Argentina would have to afford close to $10 billion of extra interest payments on top of regular interest payments, and on top of principle during the 10 years of the life of that program. In that context, it might be very difficult for Argentina to regain access to financial markets, and that is quite independently given the external constraint of Argentina’s economy on the macroeconomic program that it eventually agrees upon with the IMF.
Just for the sake of comparison, Argentina has been exporting, on average, around $75 billion in the five years previous, or prior to the pandemic, so a 45 billion principal debt, $10 [billion] just out of surcharges is really a tremendous financial burden, and a tremendous burden on Argentina’s balance of payments, of course.
And with this, I close my first remark, at least. Argentina stuck by agreement, but the Fund has problems of its own, not related to surcharges. I just wanted to illustrate how dysfunctional, or anticatalytic, surcharges could be. In a typical case of large uncertainty, prolonged use of IMF resources — and I believe that this is a kind of a Pareto inferior situation which Professor Stiglitz and Kevin Gallagher portray in their policy note when they suggest that surcharges policy, the surcharges system doesn’t only affect countries, but at the end of the day, may also affect the investor community.
Because, say, in the case of Argentina just mentioned, but other cases such as Ecuador, or others that could be put forth, the fact that countries are not able to pay back their claims to the Fund may affect the market value of their private debt and eventually affect private bondholders, not just the country. So interestingly enough, revising the system of surcharges that so many countries are suggesting — that the G24 is suggesting — may be in the interest not only of developing countries, not only of middle-income countries, but also of the investor community in the medium to long term. I leave there, thanks Marilou.
Uy: [00:37:05] Thank you very much, Martín. Participants, you’ve heard of barriers, I’d say the different dimensions of the policy, and surcharges. One is the regressive impact, the other is the procyclicality of it. And now Martín had also elaborated on the anticatalytic effect of surcharges. Now many of the speakers, actually, you link them all to the kind of broader issues of governance, but also the financing of the IMF. This is, after all, a major source of revenues for the IMF. And so, that also links up to the broader issue of financial governance, or how the IMF is funded.
So it is a complex issue, and I think this is my point — to highlight the complexity of moving from here to there, and knowing that the risk management framework of the IMF has got to be configured in a way that is going to benefit, and let’s say be fair to, developing countries. So let me just open the floor to questions. […]
Jayati Ghosh: [00:38:44] There is a question in the chat room.
Marilou Uy:[00:38:46] Yeah, there is a question here from Daniel Munevar that says, “There is a strong case for the suspension of the surcharges. However, given the central role that they have acquired in the funding of the IMF, what alternatives exist to plug this financing gap?”
Now there are a couple of questions, so I will read out the second question and address them to the panelists and please just speak to the questions that are posed. So the second question is about the governance problem of the IMF: “With one country and a handful of allies having so much power, and you know, and then linking it to the current attempt to say negative impact on the managing director. Do you see this as being part of a long-term governance problem at the IMF?” Oh, that’s a difficult question. So let me now turn to the panelists to address the set of two questions, and we’ll wait for Joe Stiglitz to join us. So who would like to address these questions from among the panelists?
Weisbrot: [00:40:10] Yeah, I can say something about it. Well, as I said, this is really a long-term problem. I don’t know if we’re going to live to see it resolved; It’s been more than 70 years.
I can remember, for example, in the early 2000s, there was a chief economist of the IMF — I won’t mention his name, but he was speaking to an audience here in Washington of NGOs and professors. And he said, you know, this is a time when the IMF was coming under a lot of criticism because of its handling of the Asian Financial Crisis. And he said, “you know, I don’t know why everybody says we’re unaccountable. With everything we do, we clear it with Treasury.”
So I think this is really how it operates, and people don’t talk about it that much. If you read about it in the media, it’ll usually say, well, the […] the United States is the biggest contributor, you know? But that really isn’t it. In fact, this whole fight about Georgieva and China, which is the argument, you know, they’re trying to say that the World Bank, under her management, was manipulating data to favor China. You know, if there was any negotiation going on with China in there, it was to get China to accept to having a voting power one-third the size of the United States’, which is — you know, their economy, is now on purchasing power parity basis, which is what economists use for international comparison — their economy is quite a bit bigger than the United States. And they’ve got a third of the voting power. So it isn’t that anybody was trying to favor China.
But the whole thing, this looks very bad. This whole attempt to oust her, coming from the United States, coming from the World Bank, looks very politicized. You know, I think Joe Stiglitz called the investigation a “hatchet job.” Why did they even go to a law firm to look at this Doing Business reform? There have been three evaluations of this report since 2000, the mid 2000s, and they were done by expert people who had some knowledge of how such an index could be constructed, and the index itself was widely discredited anyway. So the idea that her tenure at the IMF can be called into question by something that so seems so blatantly political and without foundation — this shows how big the problem is when you don’t have a democratic governance, and an organization with 190 countries.
Uy: [00:43:42] Thanks, Mark. Let me just say, and see if somebody could address the alternatives to funding of the IMF, which actually will have to, you know, it’s one of the impact of the surcharge policies. So, Jayati …
Ghosh: [00:43:58] Yeah, please, Martín, go ahead, Martín.
Abeles: [00:44:00] Just a few comments on that issue. Those […] surcharges have a long history. Some of it is reported in Mark’s paper. It is also very well documented in Prates and Hawkin’s paper on that. And one important point is that they were streamlined and became very important, especially after 2008/9, after a period where the Fund did not have too many resources due to a lack of programs. Mark mentioned Brazil and Argentina paying off.
And by the time of the 2008 crisis, the Fund was having a sort of “identity crisis,” and there was a lack of resources by the Fund. This is not the case at the present juncture. As Jayati mentioned, the 85 new member countries have different types of programs. As Mark mentions in his paper, the claims by the IMF have risen in the past year and a half from 90 billion to 130 billion. So aside from surcharges […] the Fund will have this backing business, so to speak, and its business model may well be able to afford its operational costs without so much being asked of surcharges.
Still, we don’t need to think of a full elimination of surcharges, say removing level-base surcharges, or bringing them down from 200 basis points to 100 basis points, would already be a lot of help. Restoring the 300 percent quota threshold prior to the 2016 reform would also mitigate the problems we are addressing. To be sure, in any case, political creativity aside, a temporary suspension of surcharges while the pandemic-related crisis is still on is a matter of urgency.
Ghosh: [00:46:23] Can I add to that, Marilou?
Uy: [00:46:24] Yes, please. Yeah, Jayati over to you.
Ghosh: [00:46:26] Thank you so much. You know, I find it really, Daniel’s question about, you know, this is an important source of revenue. There’s also a lot of revenue lost in the IMF for other reasons, and there’s very interesting stuff in the report that Mark and others have produced, which is that if you look at, first of all, the Fund’s own fund management, that is to say their management of their assets, it’s quite appalling. They have really not managed their own resources well in terms of generating sufficient returns to keep it going, so they’re a bit of a failure in terms of their own fund management.
But most significantly, they had a significant loss because of the pension payments due to employees, because of the change in the actuarial situation, as well as the lower interest on many of the pension fund things that they had applied. That’s a cost that was quietly accepted without comment, and it’s a very large cost. And nobody made any noise about that. This is the same Fund that goes to every single country and demands pension reform, demands that countries stop paying reasonable living pensions to their elderly, and so on.
So it’s quite interesting that various other things where the Fund could easily have saved some money do not ever get considered when you’re looking at … and then suddenly when it’s a question of the most obvious thing of not being so procyclical, and not being so unjust to developing countries that have no other choice, suddenly there’s a question about, “Oh, but you know what? How would we manage without this relatively small amount of money that the Fund gets from the surcharges?” So I think, you know, once again, it’s political.
It’s a bit what Mark was saying earlier, you know, you pick on certain things and the reason you pick on them is a political reason. I don’t buy this argument at all that the Fund needs the surcharges money in any way, shape, or form. And in fact, I will disagree with Martín. Why should we allow even a little bit of surcharges? No country goes to the Fund because it wants to. No country stays with the Fund if it can avoid it. So the disincentive part is meaningless.
And the other part that the Fund needs the money, that’s laughable. In any case, it’s not using the money it has. It has a trillion dollars. It just used around a tenth of that — slightly more than a tenth of that. So let’s not kid ourselves about where this is going and what the Fund is doing. I don’t think we should fall into that trap of saying that when they need this money, and therefore it’s important to find another source of that money if we cut out this one.
Uy: [00:49:15] Thank you very much, Martín and Jayati. I mean, it seems to me that it really calls for a thorough look at the overall funding framework for the IMF so that the options can be developed on how to fund it, because that is probably one of the more difficult kind of fallout of the removal of surcharges. So — and that probably is for another webinar — but I’m very happy to hear […]the possible avenues that could be considered at least to go from the near term to the medium term to perhaps a longer-term solution on that, say, the revenue structure of the IMF. Now, the question from Munevar the first question is, he said, that his intention was not to justify the surcharges, but it was precisely to understand and develop arguments to support their elimination. And that actually, I thought, was a really good point for this seminar and to open up thinking about what possibilities are. So let me now kind of open up the floor again, reopen the floor to those that might want to raise their hands or at least say in chat that they would wish to speak. I’m not seeing more questions.
Ghosh: [00:50:51] There is a question from Vanessa Jimenez.
Uy: [00:50:53] It just came up, sorry, I just saw that. “Can someone speak about who’s doing the official IMF surcharge review right now, and the timing of the release of the review, and possible expectations?” So over to the panelists. If there are any reactions to that, I think, pragmatic question.
Ghosh: [00:51:16] Mark might know best, I think.
Weisbrot: [00:51:21] I don’t actually know that much about the current review. Maybe if either of you had something? Go ahead.
Uy: [00:51:31] OK, well, why don’t I pick that up. The access limits and surcharge policy is due for review. The last review was in 2016. So now it’s due for, you know, the regular review. So, and as far as I know, the decision to review exactly when has not yet been made, and that discussion is going on. And that happens with the regular reviews; the IMF board meets and considers when to actually do that review. So the five-year cycle, I believe, is about due now. And so we probably will hear from the Fund what its decision is on when exactly to conduct the review. So let me see. I was hoping that Kevin […] from GDP Center would actually pipe in.
Now there is another question from Luis Viera: “Now, in light of the governor’s discussions and what seems to be quite a compelling case for the end of the surcharge policy, how do panelists explain its resilience?” I presume the resilience of the governance structure of the Fund, and to adjustments in the surcharge policy. So to explain the resilience of the policy. So please, if somebody wants to […] react to that question? It’s a very long-term question. So please feel free to raise your hand. Yeah, Jayati.
Ghosh: [00:53:19] Yeah, just to sort of open it. I’m sure the others will have much more to say. But you know, this is not the only terrible policy of the Fund that has remarkable resilience. Or, if you like, a capacity to revive […] I mean, there are so many things going on in terms of the Fund’s actual operational conditionalities on the ground. Even when the leadership is saying, “we do not want procyclical policies. We don’t want a two track recovery. We want developing countries to be able to spend more,” on the ground, the conditionalities remain as they were. Which is to say, talking about fiscal compression, cutting down public expenditure, and so on.
The surcharges, I would say, it’s relatively low hanging fruit; it is relatively easy. And yet the resilience of that strategy, I think partly, of course, is institutional inertia that is always this kind of inertia in these large organizations, but it’s partly because those with voting power don’t really care very much. And I think that comes back to the point that Mark was making earlier about the overall governance structure of the Fund, which is it’s fundamentally undemocratic. And it’s also, let’s face it, it’s completely out of date because we don’t have, anymore, the same global economic structure that we had then.
Oh, I see Joe Stiglitz has joined us. Hi, Joe. Great to see you. So let me finish quickly by saying that I do believe that if these strategies continue, it’s not just the surcharges, but the overall procyclicality, the overall tendency to ignore the needs and requirements of most of the developing world and the counterproductive nature of these strategies for the global economy. Then the IMF will doom itself to irrelevance. It was saved a little bit by the COVID pandemic, just as it was saved earlier by the Global Financial Crisis. It was on life support before that, just saved by the GFC. Now it’s being saved by the pandemic, but I don’t think it can persist in being saved in these measures. If the Fund persists in these strategies, it will increasingly become less relevant, and developing countries will look for regional or other global alternatives.
Uy: [00:55:34] And thanks very much, Jayati. Joe, welcome, welcome to the panel, and it’s really great to see you, personally, too. The panelists have spoken about the regressivity of the surcharge policy, its procyclicality and other dimensions, such as the anticatalytic effect in terms of financing of the policy. And then of course, this was linked to the broader issue of governance in the Fund, especially since this is a quota-based policy, but also to the broader, let’s say, financial governance, in terms of how the Fund, say, funds itself. So, you’ve just written a paper fresh off the printer. And we would really love to hear about the analytics that you have put into this, you know, rather recently emerging issue. Thank you. It’s over to you, Joe.
Joseph Stiglitz: [00:56:37] Thank you, Marilou. And let me, if I can,share a little brief PowerPoint. What I thought might be useful is to approach this from a fairly high-level perspective. Looking at this in terms of broader distributive and efficiency implications from, you might say, a very broad macro perspective.
And I want to begin with the observation that countries typically turn to [the] IMF only in extreme exigencies, such as a foreign exchange debt crisis. The reason for this is pretty obvious for anybody who’s watched IMF programs. It entails the loss of economic sovereignty. It’s an admission of failure of governments to manage crises on their own, and it has obviously, as a result, severe political consequences for those governments who turn to the IMF. So one can think about these countries as being extremist and are facing a bargaining frontier between the country and the creditors.
You can say it’s almost obvious: if more money goes to the creditors, there’s going to be less available for the country itself. But something that is not fully appreciated is that this is not a zero-sum game. It’s not as if there’s a fixed size of the economic pie. The creditors get more and the country in crisis gets less because of the adverse effects on growth of transfers to foreign creditors. The losses to the country typically will exceed the gains to the creditors. There’s going to be less growth. So the deprivation of resources available for investment is going to lead to the overall sum being smaller. And there is in fact, and a particular case I’m going to talk about. This can lead to an actual perversity, but in a more general case, there’s a maximum transfer to foreign creditors that is politically acceptable.
So this is just a very simple diagram which shows this trade-off, where if there’s more income to the country, there’s less investor repaid, less investor expected income. And I’ve labeled there the minimum acceptable. Taking more away from the country, i.e., giving more to the investor, is not feasible, and one can think of one of the roles of the IMF traditionally has been as the creditor collection agency for the investors and figuring out how to squeeze more out of the country, after giving more to the investors, even if it means less to the country. But in doing that, they get beyond the acceptable level. And that’s one of the reasons why so many debt restructurings are followed within five years by another debt restructuring. In other words, they’ve taken so much away that the country, the remaining debt is not sustainable, and I come back to that. But the extreme case that I mentioned, very briefly, is that the growth effects can be so adverse that if the creditors demand too much, the result is Pareto inferior — both the countries and the creditors are worse off. So that’s the case where, if you take the growth effects of taking away from the country are so adverse, that even the creditors are worse off. And the point is that any demand on the country that puts the country’s income below point A is Pareto inferior. Both are worse off.
So one way of thinking about the IMF surcharges, which are payments in foreign exchange, is that they transfer foreign exchange to the IMF, leaving less to be divided between the country and the IMF. So in a sense, in each of these cases, what they’re doing is if there’s a given frontier about how much is feasible, you shift that frontier downward, so you’re moving this curve inward. You’ve taken away income that could be divided between the two, and it goes to the IMF. The argument being, of course, that the provision of liquidity to the country advantages the country and moves the frontier out, but in many cases, the provision of liquidity in conjunction with the conditionalities doesn’t succeed in moving it out, or not moving it out very much. And the adverse effect of moving, of acting as a creditor collection agency, means that again, there’ll be another debt restructuring within a short period of time. In this particular case, when you take out more money and pay it to the IMF, it moves. It has a particularly adverse effect, and especially so if the creditors have already bargained.
So, this is where we bring in debt sustainability analysis, that implies the amount that can be given to the creditors is reduced. If you ask what is the maximum debt that’s sustainable, and if we take our money and pay it to the IMF, there’s less that’s available for others. Well, the IMF has an important role in these debt sustainability analyses. The intercreditor conflicts may result in their demands going beyond the sustainable levels, and again, the evidence of that is ample in terms of the large number of debt restructurings that are followed by another debt restructuring within five years. And this pernicious effect is particularly strong in the second case that I described before. There are big international political implications, because the acceptance of the IMF DSA and its implications will be undermined if other creditors believe the IMF’s policies are enriching the IMF at the expense of other creditors, particularly if that enrichment cannot be justified. The point is the surcharges lower the expected returns received by other creditors, simply because they increase the default probability and lower economic growth.
So there are a couple of justifications of these surcharges, and if you look at them, not very persuasive. You’ve probably already discussed that. One is the compensation for risk of nonrepayment, but given the preferred creditor status of the IMF, the amounts being demanded are far in excess. And in fact, one should be mindful of the fact that there can be multiple equilibriums, and the surcharges increase the default probability. It would be a disaster if the high surcharges result in a high default probability that justify the surcharges themselves. This multiplicity of equilibria, high interest rates leading to high default probabilities justifying the high interest rate, is in the work of Calvo, and work that Bruce Greenwald and I have done, [and] many others.
The second argument is moral hazard. Countries do not turn to the IMF unless they have to. The moral hazard argument I find very unpersuasive. More to the point, there is no automatic right to access the funds. The moral hazard argument might have some validity if there were an automatic right, but there’s not. The IMF decides who gets funds, on what terms, and on what conditions, so the moral hazard argument that you sometimes hear absolutely makes no sense.
And again, as I think you probably already discussed, the surcharges have been a growing source of funding for the basic operations. The IMF expected to grow to two-thirds of lending income by 2027, up from about a third in 2018, providing a large fraction of its operating cost. It’s inequitable; it’s asking countries in dire straits to fund a global public good. It’s counterproductive because it’s procyclical. As I said, it increases the probability of default crisis, and there are better ways of funding the IMF. And in our paper, we discuss the way one ought to conceive of the IMF as a cooperative, and this clearly undermines that.
So with those words, let me stop. The magnitude of these surcharges, as a result of some of the changes in the surcharge policy, has elevated what was a minor problem into a major problem. And given the expected increase in the number of countries in dire straits as a result of the pandemic, the counterproductive role of these surcharges is likely to be much greater going forward.
Uy: [01:08:41] Thank you very much, Joe, for this, you say, high-level analysis of the surcharges. I’m sure it’s going to be a very useful input to the forthcoming review of surcharge policy, if at all, if the IMF decides to do so. Now, you mentioned something on the alternative sources of funding for the IMF. There was a very historic paper, actually archived paper, from the Group of 24 in the ‘80s that assessed the relative balance of funding of the IMF between the creditor countries and — or non-borrowing countries versus borrowing countries — and the balance has tipped towards the borrowing countries, that more and more of the IMF funding has come from from developing countries. And that has evolved over time from what essentially was a smaller share initially, when the IMF was created, and the first two decades, and then gradually then until now, really where quite the bulk of it is coming from developing countries. Now that said, the comment you made about the revenue implications, or the structural funding of the IMF, would actually mean looking at this balance. Would you have a view on that?
Stiglitz: [01:10:03] Well, my view is basically that one should view the IMF as providing a global public good that ensures financial market stability for the world. And if you think about it as providing a global public good, you say it should be funded on the principle of any global public good: according to those who are most able to contribute. So that would be on the principles of progressivity that the advanced countries should pay a disproportionate share.
There’s another way you could look at it, which is in terms of the benefits, and here there are two perspectives. One of them is that those who are wealthier benefit from a stable global financial system. And that would say that, again, the wealthier countries should have an obligation to support this disproportionately because they are the ones who benefit from the global financial system. You know, poor countries in Africa benefit, but nowhere near to the extent that the rich countries who partake in this global financial system benefit, enormously.
On the other hand, obviously the countries that are poor are more likely to draw upon the funds of the IMF. And that says, since you could make an argument that since they are more likely to draw upon those funds, they ought to pay a larger share. But if you took that view, you would have to say they ought to have a greater voice in the operation of the system. If you say that this is basically an organization that is concerned with global financial stability, that’s one where the voice, the governance, is disproportionately in the hands of the wealthier countries with the quotas. And that says, if that’s the way you’re thinking about this, with those who are wealthier and having a greater voice, I think a concomitant aspect of greater voice is greater responsibility of paying. I think the current system where the developed countries — advanced countries — get the voice and the developing countries have the obligation to pay. I think that’s hard to defend.
Uy: [01:13:21] Thank you, that’s very useful. I’d like to see the reactions from the other panelists, and also from our participants. Again, put your question in chat or raise your hand. Ok, Mark. Yes, please. The floor is yours.
Weisbrot: [01:13:38] Yeah, just briefly, and thanks Joe for that excellent presentation. I think you do have — you know, there’s been a lot of criticism, including from me — of the IMF, but there’s one positive change that’s very important, and that brings the IMF maybe closer to what Jayati was talking about: Keynes’s vision for what it could have been. And that is the Special Drawing Rights. You now have this issuance of $650 billion, with about $250 billion going to low- and middle-income countries. The biggest issuance ever, I think — two and a half times the last one.
And so this is a very important development. It’s very different from other programs of the IMF. And I should say […] the US Congress actually has now passed three times, including this year, mandating Treasury — I’m sorry, the US House passed it, the Republicans are blocking in the Senate. But this is a big issue because they wanted two trillion SDRs, or $2.8 trillion worth.
And so it is possible for some of these problems we’re talking about to be resolved. Even though the IMF is not a central bank, it can do something that resembles quantitative easing, and it allows countries to pay off the Fund itself and reduce the level of their debt with the IMF, with the SDRs. So this is — again going back to Joe’s idea, this isn’t a zero sum game. This is something that could benefit everyone that has no cost to the IMF, or the high-income countries. And that’s, I think, something that really does have to be expanded going forward. Again, there’s no loans involved here, and there’s no conditions attached. So it’s very different from most IMF practice.
Uy: [01:15:57] Thanks, Mark. Jayati, I think you wanted to say something too.
Ghosh: [01:16:04] No, not really. I just wanted to very strongly support the point that Joe made about, essentially, the IMF would really function and meet its vision if it functioned as a cooperative. And I think the other point that was very telling in terms of, you know, who’s actually funding the day-to-day operations of the Fund as opposed to who has the power over the day-to-day operations of the Fund, are very important. But just to pick up on Mark’s point about SDRs, and I’m sure Joe will also have a lot to say about this: isn’t it important, therefore, to think we may or may not get the two trillion? I mean, I don’t think we’re going to get it immediately. But given that you have the $650 billion, it’s much more critical right now to be thinking of ways of recycling the SDRs that countries that are not going to use them will receive.
And the current discussions are skewing a bit too much towards putting money into the Poverty Reduction and Growth Trust, which I think would be a big mistake because you’re back to the conditional lending, therefore. And so I think that along with all of the other discussions here, it’s critical to think of ways in which this money can be quickly and easily recycled to countries in need and to meet other global public goods, whether they are vaccines or they’re technology for climate change, or there is a whole range, or there’s a global social protection fund. But we really do need to think of recycling the SDRs, $400 billion of which are basically going to countries that don’t need them and won’t use them.
Uy: [01:17:38] Thank you, Jayati. Yes, Martín.
Abeles: [01:17:41] Thank you. And thanks, Professor Stiglitz, for a great, insightful presentation. Just a last comment on surcharges. And to recall for the audience that surcharges can make interest rates on IMF loans go up to above 400 basis points, and this is really a very high charge on what are supposed to be concessional loans that provide the public good of global financial stability, as Professor Stiglitz just said. If these surcharges lead, as was suggested, to further debt restructurings because of their burden, that is the opposite [of] the alleged catalytic effect of Fund programs, and cannot only be counterproductive, but can be perceived as disruptive. So, just to pick up one of the previous questions, someone asked: why are these still in place? What about their resilience? Well, if what Joseph Stiglitz had just said is right, that shouldn’t be because the financial markets are supporting it, because they are there to lose if the surcharges remain in place as they are right now. So that’s my final comment. Thanks, Marilou. And, thanks, fellow panelists, for a great discussion.
Uy: [01:19:09] OK, so I think you’ll have the last chance to speak, Joe.
Stiglitz: [01:19:14] I just want to reiterate the rule of the IMF as a provider of public good and stability, and that, as just mentioned, the surcharges are going exactly against what it’s supposed to be doing. It’s supposed to be helping countries over a temporary liquidity problem, not extracting extra rents from them because of their dire need and increasing the probability of another debt restructuring down the line, weakening the sustainability of the levels of debt that they have.
The point that Mark made was an important one: that evidence of that kind of public good role is manifested in the SDR issuance that we’ve just seen. But the disjunction between the various roles of the IMF, where most of the money goes to the advanced countries that don’t need it, and only about 40 percent or less goes to the countries that need it, is illustrated by the way the SDRs are issued. It isn’t really providing the public good in the way that ought to be, the way you would design it if you were optimizing on the global public good. But the positive aspect of it is that there has been this discussion of recycling the money in ways that make the money more available for the provision of global public goods, as Jayati pointed out, for climate change and health, rather than the kinds of programs that they’ve had in the past. And I think that’s really important, that these new facilities be created.
But I would like to go one step further, and to say that I think there’s a role for an annual admission of SDRs for the support of these global public goods, that it ought to be a regular feature. Every year, in effect, several hundred billions of dollars are buried in the ground, as it were, in reserves, undermining global aggregate demand. And countries have been disciplined about spending beyond their current income, and this would be a way of offsetting the deflationary effect of the buildup of reserves, and the exact amount to be issued annually could depend on the amount of aggregate reserve accumulation, but it should be directed to the emerging markets and developing countries for the provision of global public goods like health, and climate change.
Uy: [01:22:56] Thank you. Thank you very much, Joe. Now we’ve run out of time, but we’re very happy that you were able to join us today or the last third part of it. It really contributed a lot to the discussion. So, as you know, this is an important issue of IMF policy, recent debate of course, and one wonders why it hasn’t been debated much earlier on. But the literature is actually being defined by ongoing policy analysis and of thinkers like you. So, new ideas are clearly emerging on how to address [the] surcharge policy. But beyond that, also the implications in [the] IMF’s financial governance, and overall governance of the IMF. So I look forward to more discussion spaces, which I think will be very useful contributions when the IMF actually reviews its surcharge policies. So, well, thank you very much to all, and we look forward to seeing you again.
