A new report from the Center for Economic and Policy Research (CEPR) examines International Monetary Fund (IMF) surcharges and finds that they “can have a damaging impact on the economies of countries facing deep economic difficulties” by diverting hard currency when countries most need it, and by adding interest payments for heavily indebted borrowers. The report concludes that surcharges go against the IMF’s Articles of Agreement, which states that IMF lending cannot be “destructive of national or international prosperity.”
“Surcharges are a counterproductive and harmful instrument; they are regressive and pro-cyclical in their impact,” CEPR co-director, and report co-author Mark Weisbrot said. “They go against the Fund’s own Articles of Agreement, and the Fund has yet to provide a legitimate or defensible reason for them. Yet they continue to impose them.”
Surcharges levy extra costs significantly above the headline interest rate to larger and longer loans. If the surcharge policy is not modified, the CEPR report estimates that between 2018 and 2029, surcharges will divert $3.3 billion in hard currency from Argentina, $1.8 billion from Egypt, $1.0 billion from Ecuador, $581 million from Pakistan, and $359 million from Ukraine.
The CEPR report notes that the IMF lists two reasons it requires surcharges from countries in crisis: limiting demand for IMF assistance while also encouraging repayment, and to generate income for itself. But the Fund does not depend on revenue from surcharges, and its “outstanding loan portfolio is the largest it has ever been,” the report points out. The report also shows that the former argument is contradicted by the fact that borrowing countries often cannot borrow from private markets, and that countries that have paid off their IMF debts early, such as Brazil in 2005, Argentina in 2006, and Hungary in 2013, have often had other much more compelling considerations that led them to do so.
“IMF surcharges penalize countries most in need simply for being in great need,” the report states. “We estimate here that surcharges are 45 percent of all non-principal 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.”
The surcharges are especially ill-timed during the COVID-19 pandemic, the report concludes. “As of 2019, 64 countries spent more resources on servicing foreign debts than they did on health care expenditure for their citizens.” Yet IMF surcharges add to countries’ debt burdens. “Procyclical surcharges should not be part of the list of measures that contribute to [COVID-19 deaths and the specter of yet another lost decade], and/or to the ongoing crisis,” the report states.
“Countries in need can end up paying surcharges instead of addressing the urgent health and economic crises their populations are facing,” CEPR senior research fellow and report co-author Andrés Arauz said. “The surcharges were propped up at a time of extremely low IMF lending. The IMF projects a record level of 53 new large loans due to the pandemic; it should immediately forego surcharge-related windfall revenue and stop overcharging countries that have better uses for this hard currency.”