October 21, 2024
In September 2021, CEPR published a report shedding light on one of the International Monetary Fund’s (IMF) most harmful but under-discussed policies: surcharges. This month, after three years of growing pressure from global civil society, members of the US Congress, and Global South governments, the IMF announced a set of reforms intended to allay concerns.
These policy adjustments are a small victory that will provide a welcome dose of relief to some highly indebted developing countries. But they fall far short of what’s truly needed: the complete elimination of surcharges.
What Are IMF Surcharges?
When developing countries borrow from the IMF’s main lending facility — the General Resources Account (GRA) — they must repay their loans with interest and fees. Since 1997, borrowers with levels of IMF debt that surpass a certain threshold must pay an additional fee called a “surcharge.”
Prior to the reforms announced earlier this month, if a country’s outstanding GRA debt exceeded 187.5 percent of its quota, the Fund levied a 200 basis point “level-based surcharge” on top of the regular costs of a loan. If outstanding GRA debt exceeded this threshold for 36 or 51 months, depending on the lending facility, the Fund levied an additional “time-based surcharge” of 100 basis points. In other words, countries paying both level-based and time-based surcharges were saddled with fees equivalent to an additional 3 percentage points of interest on top of regular GRA interest and fees.
What Are the Impacts of Surcharges?
IMF surcharges tend to have a procyclical effect: a country that has accumulated heavy debt burdens is likely to be experiencing severe economic difficulties; hefty fines will only curtail its ability to spur economic recovery. Surcharges dramatically increase the cost of borrowing, make onerous debt burdens even more unsustainable, and siphon away billions of dollars in direly needed resources that governments could otherwise spend to restore economic growth or meet the needs of their people. The top five countries paying surcharges — Ukraine, Pakistan, Ecuador, Argentina, and Egypt — alone collectively pay the IMF over $1.8 billion per year in these punitive fees.
By the IMF’s reasoning, these fees are needed to disincentivize relying on IMF lending. But the reality is that developing countries are only likely to turn to the IMF as a last resort. There are already enormous economic and political disincentives from taking on IMF loans, which often come with painful austerity conditions. Moreover, the accumulation of excessive debt is often due to circumstances beyond the control of national governments. Case in point: as a result of the COVID-19 pandemic, the war in Ukraine, climate disasters, and high interest rates in wealthy countries, the number of countries paying surcharges nearly tripled from 2019 to 2024.
Why Did the IMF Reform Its Surcharge Policy?
The IMF reformed its surcharge policy thanks to the concerted efforts of a global coalition including civil society groups, trade unions, parliamentarians, and Global South governments.
Following the publication of CEPR’s report, which attempted to quantify surcharges’ impacts, members of the US Congress wrote a letter calling to abolish the policy that drew national media attention. Over the last three years, hundreds of civil society groups from around the world — including IMF-watchers like Oxfam, the Bretton Woods Project, Eurodad, Latindadd, Afrodad, MenaFem Movement, and others — have written repeated letters calling to end the policy. Top economists, such as Nobel laureate Joseph Stiglitz, the Boston University Global Development Policy Center’s Kevin Gallagher and Marilou Uy, and CEPR Senior Research Fellows Jayati Ghosh and Martín Guzmán, have made the case against surcharges in reports, letters, and congressional hearings. Current and former UN experts have questioned the policy’s legality and its impacts on human rights. Members of the US Congress, led by champions Reps. Chuy García (D-IL) and Joyce Beatty (D-OH), have written letters and introduced legislation promoting a reassessment of the policy. And China and the G77, a governmental grouping that represents nearly every developing country in the world, and the G24, a subset of this group focused on monetary issues, have by consensus repeatedly demanded the policy’s discontinuation.
Along the way, CEPR has released regular estimates of surcharges (the IMF does not release complete data quantifying surcharges), assessed and contested counterarguments to surcharge reform — such as the baseless claim that the IMF is reliant on their income, hosted events at the IMF discussing surcharges’ impacts, unearthed historical precedents for the elimination of the policy, and much more.
What Are the IMF’s Recent Reforms?
As a result of this sustained pressure, the IMF ultimately agreed this summer to initiate a formal review of the surcharge policy. While the results of this review have not been published in report form, on October 11, the IMF announced a set of reforms intended to address the concerns about surcharges:
- The threshold at which surcharges are applied was raised from 187.5 to 300 percent of quota.
- The time-based surcharge was decreased from 100 to 75 basis points.
Additional reforms were made to non-surcharge borrowing costs:
- The basic IMF lending rate is determined by the interest rates of five currencies, plus a lending margin. This margin was reduced from 100 to 60 basis points.
- The threshold at which “commitment fees” — essentially deposits that are returned at the completion of an IMF program — apply was raised from 115 to 200 percent of quota annually, and from 575 to 600 percent cumulatively.
The IMF also agreed to automatically review its surcharge policy every five years, which may prove beneficial given the significant effort required to initiate this year’s ad hoc review.
What Are the Impacts of the IMF’s Recent Reforms?
By the IMF’s estimates, these reforms will lower total borrowing costs for all IMF members combined by $1.6 billion per year, while reducing the number of countries paying surcharges in 2026 from 20 to 13. CEPR is preparing its own estimates (as we explain in our last estimate of countries’ surcharge payments, the IMF has previously provided incomplete estimates).
This is a welcome measure of relief for certain highly indebted countries, particularly the seven for which surcharges will no longer apply. This is a small but meaningful victory that would not have happened if not for the efforts of the above advocates of surcharge elimination. But it is far from enough.
While the increase in the surcharge threshold is considerable, it rather nonsensically remains far below the IMF’s own definition of what is “exceptional” lending; the Fund’s “exceptional access” rules typically only apply at 435 percent of quota, which was even temporarily raised to 600 percent in 2024. If exceptional lending — and now commitment fees — both only apply at 600 percent of quota, by what rationale should surcharges apply at half of that threshold?
Moreover, decreasing time-based surcharges — which constitute less than a third of total surcharge payments — by a mere 25 basis points, while leaving level-based surcharges untouched, is meager relief at best. In other words, countries paying both level-based and time-based surcharges will now pay the equivalent of 2.75 additional percentage points of additional interest on loans, down from 3 percentage points previously. The impact of this reform can be considered marginal.
Why Should the IMF End Its Surcharge Policy?
Ultimately, these reforms amount to tweaks at the margins of a fundamentally broken policy, despite a clear global majority favoring its total elimination. The reasons are clear: the IMF remains an undemocratic institution, in which wealthy countries — and particularly the United States — hold disproportionate power. In this case, there’s reason to believe that the United States and certain allies blocked deeper reform because income from surcharges can be used to finance the IMF’s concessional lending facility for low-income borrowers, effectively compensating for their own unwillingness to meet these countries’ funding needs by squeezing highly indebted developing countries.
The problem of surcharges is not that a sound policy went too far, but that they are harmful and counterproductive in their very logic. In fact, multiple times throughout its history, the IMF has attempted to implement surcharge-like policies. In each previous instance, it ultimately recognized the policy to be a failure and discontinued it. These latest reforms have just delayed the inevitable. This month’s announcement can be claimed as a small victory. But with debt distress mounting throughout the Global South, ending surcharges altogether remains as urgent as ever.
