On February 17, 2022, the House Financial Services Committee (HFSC) Subcommittee on National Security, International Development and Monetary Policy held a virtual hearing titled “The Role of the International Monetary Fund in a Changing Global Landscape.” The hearing addressed critical issues facing developing countries in their efforts to recover from the fallout of the COVID-19 pandemic, and proposed key steps forward for the International Monetary Fund (IMF, or Fund).
IMF Surcharges: Procyclical, Illogical, Unjust
One of the central topics of discussion was the IMF’s policy of imposing punitive and opaque surcharges, onerous fees that the Fund adds to the loan payments of countries with high levels of IMF debt. In recent years, the procyclical and regressive nature of these surcharges has gained increased attention, with civil society, development experts, and human rights advocates increasingly calling for their elimination. This growing demand for a reconsideration of IMF surcharge policy continued at the HFSC hearing.
“The IMF surcharges policy, which imposes extra, often hidden fees on to countries with high levels of debt, has been widely denounced as an unjust burden and a hindrance to our global … economic recovery by development experts and civil society organizations,” said Rep. Ayanna Pressley.
Hearing witness, Nobel laureate, and CEPR Advisory Board member Joseph Stiglitz is one such expert: “The IMF has come to increasingly rely on surcharges on borrowing countries to finance its operations. This is inappropriate and counterproductive. The IMF is supposed to help countries dealing with foreign exchange problems. It is now contributing to their foreign exchange problems through surcharges,” he said, adding: “Surcharges are procyclical. They go exactly against the objective of good economic policy.”
Another witness, CEPR Senior Research Fellow Jayati Ghosh stated, “There is no logical reason for the surcharges … it’s a completely unnecessary imposition on countries that are distressed and cannot afford it.”
Citing CEPR research on the deadly costs of these surcharges, Rep. Pressley noted that “There was a recent report that reported that Argentina will spend more than $3 billion covering surcharges through 2023. I want us to sit with that. That is nine times the amount it would cost to vaccinate every single Argentinian against COVID-19.”
As Rep. Chuy García put it: “To me, this looks like the business model of payday lenders here in Chicago, not an economic development agency.” García went on to note the specific burden of surcharges on Ukraine: “We all know Ukraine is currently at risk of attack from Russia. What’s more? It’s only vaccinated about a third of its population, but Ukraine has to pay surcharge fees to the IMF.”
Rep. Stephen Lynch also cited the case of Ukraine, among others: “We got into this issue about surcharges on so-called middle-income countries. And just to be clear, we’re talking about Ukraine. We’re talking about Egypt, Argentina, Brazil. There hasn’t been any relief for those countries in terms of the surcharges that have been applied by the IMF… During the period of this pandemic, there’ll be about $4 billion paid by these countries to the IMF in terms of surcharge fees.” Lynch went on to call for the suspension of IMF surcharges.
Asked whether these surcharges should be halted during the pandemic, Ghosh responded: “Absolutely. I believe that right now in the continuing pandemic there should absolutely be a review. I believe the IMF should actually cancel this program altogether because it really does not make sense and it is not justified. I believe the U.S. government should actively propose this.” Rep. Pressley concurred: “Indeed, surcharges are an obstacle to our global economic recovery and our efforts to end this pandemic. And I agree, they should be abolished.”
Following the criticism of surcharges expressed by multiple witnesses and members of Congress, Subcommittee Chair Rep. Jim Himes committed to taking on the issue.
Special Drawing Rights For a Global COVID Response
Also a focus of discussion were IMF Special Drawing Rights (SDRs). SDRs are a unique, global reserve asset that can be issued to support developing countries in responding to the pandemic and encouraging an equitable global recovery — all at no cost to the United States.
In August of 2021, the IMF approved a $650 billion SDR issuance, which was distributed according to IMF quotas. Though a positive step with a tremendous impact for countries around the world, this initial issuance remains insufficient. Civil society and Congressional leaders have called for an allocation of an additional $2-$3.5 billion, and for the fair rechanneling of SDRs held by wealthy countries like the United States to those that need them most. At the HFSC hearing:
Stiglitz described the initial issuance as “of extraordinary importance.” Ghosh agreed, stating that “The release of new SDRs has been crucial even though they are unequally distributed, because SDRs are automatic, they are debt free… they do not require fiscal conditionalities… and they are effectively costless.” Citing CEPR research, Ghosh noted that “At least 80 countries have already used their SDRs.. to add to their imports… to pay back the IMF… and for their own budget increases… This has added to some degree to helping the world economy revive, but it’s also helped the United States’ economy” by boosting demand for exports.
Rep. García similarly praised the initial allocation — stating that “last year’s issuance of SDRs was a tremendous success,” — and went on to call for more, citing his bill supporting the issuance of an additional $2 trillion in SDRs that was already approved by the House of representatives. Ghosh expressed her support for this proposal, stating that “a large allocation would play a huge role in determining a future recovery in the global economy.” Stiglitz agreed, and called for not only a new one-time issuance, but for regular annual issuances for years to come: “The international community has made a commitment to help developing countries make the green transition. An annual emission of SDRs would be a reliable way to achieve our climate commitments.”
Ghosh also highlighted the importance of rechanneling SDRs held by the United States, but criticized the IMF’s proposed rechanneling mechanism, the Resilience and Sustainability Trust (RST), citing its inadequate scale, its limited scope, the fact that it will add to national debt burdens, and the harmful conditionality that will likely come with it.
Daouda Sembene, Distinguished Non-Resident Fellow at the Center for Global Development, also called on wealthy countries to rechannel their SDRs to the countries that need them, and proposed that they partner with regional multilateral development banks to do so, stating, “We — especially the US and all the large shareholders — have to make sure that the IMF handles and manages these resources in the most effective way by partnering with other multilateral development banks… to make sure that they can take advantage of their expertise to fight climate change. That’s for one. The second issue is we are talking about $50 billion [in proposed SDR rechanneling], but don’t you forget that the G20 members have accumulated more than $440 billion out of the SDR allocation of $650 billion, so we are talking about money that is sitting there at the IMF not serving any purpose. Why wouldn’t the G20 accept on top of the $100 billion that it has pledged… to add all of that and use SDRs… [in] the fight of climate change?… It can go through the World Bank, it can go through regional development banks like ADP, or the African Development Bank… I think that would be the most effective way to mobilize more meaningful resources on the fight against climate change.”
Though the International Monetary Fund has a number of structural deficiencies limiting its ability to support a sustainable and equitable global recovery, addressing the issues discussed in this hearing — eliminating harmful surcharges, and re-issuing and fairly rechanneling SDRs — would be critical steps in the right direction. Read more about IMF surcharges here, and Special Drawing Rights here.
Watch the full hearing here.