The authors wish to thank Alex Main, Amy Xu, Brett Heinz, Dan Beeton, and Romina Muni.
This report finds that International Monetary Fund (IMF) surcharges are inappropriate and unjustifiable, particularly during a pandemic combined with a very uneven recovery from a pandemic-driven world recession.
The IMF’s advertised headline lending rate is low, but it charges significant additional costs— surcharges— for countries more more heavily in debt to the IMF and for those outstanding after four years. In a 2016 review of its surcharges policy, the IMF claims that the policy “appears to have broadly achieved its objectives.”1 However, our review finds that:
• IMF surcharges can have a damaging impact on the economies of countries facing deep economic difficulties, diverting hard currency from countries when they most need it. Surcharges add additional interest payments to some of the most heavily indebted borrowing countries. For example, Argentina will spend US $3.3 billion on surcharges from 2018 to 2023. This is equivalent to nine times the amount it would have to spend to fully vaccinate every Argentine against COVID-19.
• The surcharges therefore contravene the IMF Articles of Agreement. Article 1 states that IMF lending cannot be “destructive of national or international prosperity.”2
• The IMF has two main stated rationales for requiring these surcharges from countries in crisis:
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.3
The IMF argues that it needs surcharges in order to increase its revenue and build up its equity capital (also labeled by the Fund as “precautionary balances”). But the capital base and the lending capacity of the IMF depend on political agreements such as quota reviews, new arrangements to borrow, and bilateral borrowing agreements.4. Looking at the $1 trillion firepower figure cited5 by the IMF’s managing director amid the pandemic as an indication of the true availability of funds for lending, the IMF does not depend on revenue from surcharges; surcharge revenue is three orders of magnitude smaller (about US $1 billion in 2020).6
• As for “providing members with incentives to limit their demand for Fund assistance and encourage timely repurchases,”7 this is contradicted by the circumstances faced by borrowing countries that pay surcharges: they often cannot borrow from private markets, and when they can, history shows that often other incentives have already moved them away from IMF lending.
Of the few countries that have made early repayments, most of the repayers since 2009 are high-income European countries that have support from European Union institutions, and are atypical compared to the usual recipients of IMF program loans.8 Of the countries that did not fit the above categories, there were clear domestic and economic policy-making considerations that drove the repayments — for example, in the large early repayments made by Brazil and Argentina in 2005-2006.
In Brazil, the IMF played a major role in economic policy-making in the decades prior to the election of the Workers’ Party candidate, Lula da Silva, in 2002. Economic outcomes during this period had been disastrous: e.g., from 1995 t0 2002, GDP per capita had grown by just 0.4 percent annually,9 and it actually fell from 1980 to 1994. During the summer and fall of 2002, as financial markets reacted badly to the prospect of Lula’s election, the IMF negotiated a very large $30 billion loan agreement described as “build[ing] a solid bridge to the new administration in 2003.”10 This committed the next government to running large primary budget surpluses — 3.75 percent of GDP annually — through 2004, which arguably postponed, for years, the implementation of much of the Workers’ Party program.
It is therefore not surprising that in December 2005, Brazil repaid early all of its $15.5 billion outstanding debt to the IMF. In January 2006, Argentina prepaid all of its $9.8 billion loan owed to the Fund. Much has been written about Argentina’s long and bitter experience with the IMF and the Fund’s policy conditions and failures there;11 through the depression of 1998–2002, and in the (then record) sovereign default and debt restructuring that followed. There is no doubt that IMF conditions became a major political and even electoral issue in Argentina during this time; there was therefore strong motivation and political support for paying off this debt so as to be free from IMF influence.
The IMF also noted that in Hungary, early repayments in 2013 “may have reflected political considerations as well as the perceived stigma associated with Fund financing.”12
• IMF surcharges penalize countries most in need simply for being in great need — i.e., currently, countries with a debt to the IMF greater than 187.5 percent of their quota. We estimate here that surcharges are 45 percent of all nonprincipal debt service owed to the Fund for the five largest borrowers. The IMF demands higher payments at a time when the borrowing countries are the most liquidity-constrained. Surcharges increase the debt burden for crisis-ridden countries, even as the IMF’s own debt sustainability analyses demonstrate that a lower debt burden is necessary to ensure a higher probability of timely repayment and sustainable financing. Surcharges are procyclical, because they tend to increase the borrowers’ payments to the Fund — and therefore drain government spending from the domestic economy — at times when the economy is slowing, or in recession.
• As of 2019, 64 countries spent more resources on servicing foreign debts than they did on health care expenditure for their citizens.13 According to the UN Economic Commission for Latin America (ECLAC), “the coronavirus disease (COVID-19) pandemic unleashed the most severe economic and social crisis in the recent history of Latin America and the Caribbean. GDP is estimated to have declined by 7.7% in 2020, representing the largest contraction in the past 120 years.”14 The LAC region has been overwhelmed by COVID-19 deaths and the specter of yet another lost decade. Procyclical surcharges should not be part of the list of measures that contribute to this outcome, and/or to the ongoing crisis.
• The IMF’s outstanding loan portfolio is the largest it has ever been. The IMF estimates 53 new upper-tranche loans in the medium term.15 Expected regular lending charges will also be record-breaking. Surcharges become unnecessary in this context. Even if lending charges are not enough to cover expenses, the IMF should withstand a dent to its reserves, just as it has tolerated pension-related losses due to crisis-related volatility in the actuarial discount rate.
Today, with many countries still in crisis, IMF managing director Kristalina Georgieva has emphasized the need for a more robust response than in 2009:
After the 2009 crisis, we issued $250 billion in SDRs [Special Drawing Rights]. 90 percent of those SDRs were used simply to boost reserves. This is necessary today, too. But we have to do more. We have to use this unique opportunity for strategic transformation of countries — transformation that is going to be driven by this crisis.16
But many of these SDRs could be used up by countries paying surcharges. The IMF should take this opportunity to eliminate these regressive charges, freeing up resources in some of the most suffering economies to spend on vital services.