Critics say IMF loan fees are hurting countries that desperately need them
At a time when the coronavirus pandemic is fueling a rapid rise in inequality and debt, a growing number of policymakers and economists are pressuring the International Monetary Fund to eliminate the additional fees it charges on loans to countries in difficulty, as they divert scarce funds which could instead be used to fight Covid.
The fund, which has supported countries in financial difficulty for decades, imposes these fees for exceptionally large or long-term loans. They were designed to help protect against heavy losses associated with high-risk loans.
But critics argue the surcharges come at the worst possible time, when countries are already desperate for funds to provide poverty relief and public health services. Some of the fee-paying countries, including Egypt, Ukraine and Armenia, have vaccinated only about a third of their population. The result, critics say, is that the IMF ends up undermining the financial well-being and stability of the very places it tries to help.
In the latest criticism, a letter this week to Treasury Secretary Janet L. Yellen from 18 congressional Democrats, including Reps. Alexandria Ocasio-Cortez of New York and Pramila Jayapal of Washington, called on the United States to support the end of surcharge policy.
The surcharge “discourages public health investment in developing countries,” the letter says. “This perverse outcome will undermine the global economic recovery.” The letter echoed several other calls from more than two dozen emerging countries, including Argentina, South Africa and Brazil, as well as economists.
“Attempts to impose excessive reimbursements are counterproductive because they reduce the productive potential of the economy,” wrote Nobel Prize-winning economist Joseph E. Stiglitz and Kevin Gallagher, professor of global development at the University. of Boston, in a recent analysis. “Creditors and the country itself are worse off.”
They added: “The IMF should not be in the business of taking advantage of countries in deep trouble.
The fund primarily serves as a lender of last resort, although it has recently expanded its mission to include reducing extreme inequality and tackling climate change.
In addition to building up a reserve, the surcharges were intended to encourage borrowers to repay on time. The poorest countries are exempt.
The fees have become a major source of revenue for the IMF, which is financed primarily by its 190 member countries, with the United States paying the largest share. The fund estimates that by the end of this year, borrowers will have forked out $4 billion in additional fees – on top of their regular interest payments – since the pandemic began in 2020.
The debate over the surcharge is emblematic of broader contradictions at the heart of the IMF’s structure and mission. The fund was created to provide a lifeline to struggling economies to recover “without resorting to measures that destroy national or international prosperity”.
But the terms and conditions that come with its loans have sometimes added to the economic pain. “They penalize countries at a time when they are in a bad situation, forcing them to make bigger cuts to pay off their debts,” according to an analysis by the liberal Center for Economic and Policy Research in Washington.
“Demanding these surcharges during an ongoing pandemic-induced recession goes even further against” the founding principles of the IMF, the center argues.
Voting power in fund governance is based on the size of each country’s monetary contribution, with only the United States having veto power. This means that the countries that need it the most have the least say in how the IMF performs its role.
In a statement, the Treasury Department reiterated its support for the surcharges: “As a major shareholder of the IMF, we have an obligation to protect the financial integrity of the IMF.” And he pointed out that the interest rates charged by the fund were often well below market rates. .
A review of surcharges last month by the fund’s executive directors ended with no agreement to stop the charges. An IMF statement explained that while “some directors were willing to explore temporary relief from the surcharge” to free up resources to deal with the pandemic, most others preferred a full review later in the context of the “financial outlook.” of the fund.
Cash-strapped countries that are subject to surcharges like Argentina balked earlier at additional payments, but their campaign has gained momentum with the spread of Covid-19.
“I think the pandemic is making a big difference,” said Martín Guzmán, Argentina’s economy minister.
He argues that the pandemic has turned what were once considered unusual circumstances into commonplace, given the huge debt many countries have taken on to meet rising costs. The public debt of emerging countries has reached its highest level for half a century.
The number of countries subject to surcharges rose to 21 last year from 15 in 2020, according to the IMF. Pakistan, Egypt, Ukraine, Georgia, Albania, Tunisia and Ecuador are among those paying.
Argentina, which has a long and contentious relationship with the fund over a series of bailouts and defaults that date back decades, has been a leading opponent of the surcharges.
The country is trying to work out a new repayment schedule for $45 billion that the previous government borrowed under a 2018 loan program. By the end of 2024, the government estimates it will have accumulated over $5 billion in surtaxes alone. This year, 70% of Argentina’s nearly $1.6 billion IMF bill is for surcharges.
“The accusations will undermine the mission of the IMF, which is to ensure global stability and the balance of payments,” Guzmán said.
According to World Bank estimates, 124 million people were pushed into poverty in 2020, eight out of 10 of them in middle-income countries.
Meanwhile, the costs of basic necessities like food, heat and electricity are rising, adding to political tensions. This week, the IMF warned in its blog that continued Covid outbreaks, combined with rising inflation, debt and interest rates, mean emerging economies should “prepare for possible periods of economic turbulence”.