October 08, 2024
Al Jazeera English
Ahead of the United Nations General Assembly this month, world leaders gathered in New York for the Summit of the Future, intended to generate ideas to improve conditions so that low- and middle-income countries can realistically achieve the Sustainable Development Goals, agreed to by all UN members in 2015 to eliminate poverty and hunger while protecting the environment and curbing climate emissions. But some of the most powerful institutions in Washington, ostensibly tasked with assisting countries’ economic development, are themselves hindering nations’ capacity to achieve the Goals.
The Summit convened as much of the world confronts multiple serious economic and social challenges. An estimated 79 countries are at risk of, or are already in, debt distress. Some 309 million people are facing chronic hunger, the World Food Programme warns, with more than 37 million at emergency levels. The International Monetary Fund (IMF) notes that its “forecast for global growth five years from now—at 3.1 percent—is at its lowest in decades.” Each year, climate-related disasters inflict costly damage on countries often ill-prepared for the scale of lives and property lost, to say nothing of the economic impact. Yet, IMF and World Bank responses to these crises are being scrutinized, and for good reason.
To take one example, the IMF is needlessly making the crises even worse by forcing its most indebted borrowers to pay extra fees ― surcharges. More and more countries are having to pay these unnecessary “junk fees,” as some opponents refer to them, as the debt crisis goes on. US Federal Reserve rate hikes in recent years are a significant part of the problem. “It is now conventional wisdom that global capital flows to the developing world are pro-cyclical, increasing when advanced economies ease monetary policy and retreating when their interest rates rise,” Marina Zucker-Marques and Kevin Gallagher recently wrote for Project Syndicate. Zucker-Marques and Gallagher cite UN data showing that “25 governments now spend more than one-fifth of their revenue on debt service.” Surcharges are hitting these countries in the midst of a historic global debt crisis.
Why are the surcharges unnecessary? First, the IMF does not need revenue from the surcharges ― one of the two main rationales it puts forward to justify the policy. As the Center for Economic and Policy Research recently noted, the Fund has met its precautionary balances target this year; it has enough money without needing to take more from cash-strapped countries struggling to feed their populations and respond to climate disasters.
The other justification the IMF puts forward for imposing its unfair junk fees? It claims that they discourage other countries from taking out unnecessary loans. But six additional countries are now paying surcharges just since 2022, contradicting the IMF’s claims. And as people in the Global South know too well, countries do not turn to the Fund unless they absolutely have to. The prevalence of “IMF riots” in country after country ― Kenya being just the latest ― is proof of this.
Morocco has just endured flooding that killed at least 18 people from a year’s worth of rain in just two days. This follows a devastating earthquake last year that killed some 3,000 people and affected over 600,000 (including 380,000 “temporarily or permanently homeless” according to the Red Cross). Morocco is also experiencing a water crisis. Certainly, Morocco can put its budget to much better use than IMF surcharges. Yet Morocco, too, is at “high risk” of soon having to pay the costly fees.
The Lowy Institute points to another reason why surcharges could worsen Morocco’s problems: “The most obvious problem with surcharges is they are procyclical – reinforcing economic downturns by further constraining fiscal space for governments during a crisis. Plenty of IMF research demonstrates the importance of countercyclical fiscal policy to combat economic crises. Imposing procyclical costs works directly against this rationale.”
Egypt’s recent experience shows what may be in store for Morocco. Egypt is one of over 20 countries forced to pay surcharges — $646 million over the next five years — on an $8 billion IMF loan. This year, the debt-strapped country quadrupled the price of subsidized bread, which “will affect an estimated 65 million Egyptians who rely on bread as their main food staple,” according to Middle East Eye. The decision, which will disproportionately affect low-income Egyptians, was driven, government officials say, by higher ingredient costs — and also by conditions the IMF itself attached to its loans; “financial austerity at the expense of low-income citizens,” as the Egypt-based Mada Masr described it. Without the surcharges, Egypt could instead spend the funds on the bread subsidy, which costs about $2 billion per year.
Bread isn’t the only essential item experiencing a price hike. “The prices of around 3,000 drugs and medicines are set to increase by between 25–40 percent,” Mada Masr reports. “Several key drugs and medicines are constantly absent from pharmacy shelves, as years of dollar scarcity and inflation have made it hard for pharmaceutical companies to import raw materials.”
With these price hikes comes the prospect of social unrest. There is already discontent in Egypt due to factors such as the thousands of Sudanese refugees now in Egypt, and Israel’s assaults on Gaza and Lebanon. A 2020 academic study of the experiences of Egypt, Morocco, and Syria during the Arab Spring concludes that “rising food prices increased the pre-existing social unrest, sparking protests in Egypt, Syria and Morocco, and probably also in other MENA countries.”
Why then would the IMF insist on Egypt continuing to pay unnecessary, unfair, and counterproductive surcharges? One doesn’t need to be an economist to see how the Fund is compounding Egypt’s debt woes and harming its ability to achieve the Sustainable Development Goals (SDGs), as it is with various other countries.
If Morocco begins paying IMF surcharges, it too can expect its problems to multiply and to worsen, and its chances of meeting the SDGs to diminish.
The IMF seems to have heard the message, and is currently conducting a review of the policy, with rumored changes expected to be announced at its Annual Meetings in October. TheSummit of the Future issued a final statement saying it “welcome[s] the IMF’s ongoing review,” but many civil society groups are wary that little may change.
In too many countries around the world, poor and working people effectively are subsidizing the IMF through surcharges, even as the IMF is pushing countries to enact unpopular austerity measures that could provoke unrest. We’ve seen this movie before, and unfortunately things always seem to get worse before they get better. Rich countries could put a check on the IMF’s power and greed by supporting an end to the surcharge policy and by demanding that the Fund end its push for austerity amid a polycrisis that disproportionately affects the poor and working class.
