A guide to IMF surcharges
IMF surcharges are a system of fees on loans from this institution which places an unfair burden on vulnerable countries that are in need of financial support. This guide explores how IMF surcharges work and provides an overview of the costs they impose on IMF borrowing at the global and country level. The large costs associated with surcharges are unjustified in the current global health crisis.
The International Monetary Fund (IMF) is the lender of last resort for the global economy. Its role is to provide support to countries experiencing a balance of payments crisis. The Fund is in a position to provide medium and long-term financing at low interest rates to countries on the mend. However, it has chosen to profit from vulnerable countries. The IMF has secured a growing surplus which arises from lending operations that impose surcharges on top of basic interest rate fees. The surcharges are meant to encourage early repayment of IMF loans. However, these additional charges have placed an unfair burden on vulnerable countries that are in need of financial support. As a growing number of countries struggle to tackle the pandemic, it is unacceptable for the Fund to profit from it. The upcoming review of IMF surcharges policy must immediately suspend and eventually eliminate these additional charges.
This article provides an overview of the costs imposed by the IMF on vulnerable countries through surcharges. It is structured as follows:
- A description of the origins and use of IMF surcharges is outlined.
- It then proceeds to identify the countries affected by surcharges, the amounts these are projected to pay to the IMF, as well as their distribution and impact on borrowing costs.
- It concludes by supporting the growing number of Civil Society Organisations asking the IMF to immediately suspend and eventually eliminate the system of punitive fees embodied in the surcharges policy.
A brief introduction to IMF surcharges
IMF surcharges were first established in 1997. They were introduced in response to the systemic increase in borrowing requirements of developing countries from the IMF. As the size of individual programs increased, the Fund considered it necessary to protect its lending capacity. Surcharges were meant to accomplish this goal by increasing the cost of borrowing from the IMF. Higher borrowing costs linked to the use of surcharges were framed as an incentive for early repayment of large loans outstanding for long periods of time. This dynamic allows the IMF to free up its balance sheet and be prepared to lend to other crisis-hit countries.
The IMF has continuously modified the cost and structure of surcharges over the last two decades. Currently there are two types of surcharges. Quota-based surcharges apply to outstanding credit based on the size of the loan. Credits above 187.5 per cent of the IMF country quota are subject to a surcharge of 200 basis points. Time-based surcharges apply to loans outstanding after 36 or 51 months, depending on the credit facility. These can add an additional 100 basis points to the interest rate costs. Taken together, both sets of fees can impose substantial costs on vulnerable developing countries as can be explored in this complementary guide on how IMF surcharges work.
It's important to highlight that not all IMF credits accrue surcharges. This depends on the source of funding used by the IMF to provide a loan. The Fund has two main accounts: the General Resources Account (GRA) and the Poverty Reduction and Growth Trust (PRGT). The GRA is the principal account of the IMF and handles most of the lending operations with middle and high-income countries. Surcharges accrue only to balances due on GRA credit. In contrast, low-income countries access funding in concessional terms through the IMF Poverty Reduction and Growth Trust (PRGT). Following the recent review of the PRGT, low-income countries will access financing exclusively through this facility. As a result, surcharges do not apply to loans provided by the IMF to these countries.
Which countries are affected by IMF surcharges?
The IMF has US$ 125.4 billion in outstanding GRA loans provided to 52 countries as of November 2021. Figure 1 shows the list of the 30 countries with the largest IMF loans as a share of their IMF quota. Surcharges only apply to countries with loans above 187.5 per cent of their quota. Using this criteria it is possible to identify 14 countries with a total of US$ 96.1 billion in outstanding loans which are affected by surcharges. This group includes Argentina, Ecuador, Egypt, Angola, Ukraine. Mongolia, Gabon, Tunisia, Barbados, Albania, Jordan, Pakistan, Armenia and Georgia.
In every case, the IMF loans which triggered the surcharges were granted before the Covid-19 pandemic in 2020 (Figure 2). Nine of these countries have ongoing IMF programs. Some of these have a long and complex relationship with sequential IMF programs dating as far back as 2014. This includes several iterations of programs that remain operative until now and are the cause of ongoing surcharge payments. For this group, the start of their IMF programs dates back on average by 60 months. The remaining five countries have concluded the operative portion of their IMF programs. The starting date of the IMF programs for these countries dates back on average by 76 months.
For these 14 countries, the impact of the pandemic has represented a substantial setback in their efforts to stabilise their economies. Nine of these countries have required additional assistance from the IMF in the context of the current crisis. This group includes Pakistan, Ukraine, Jordan, Egypt, Gabon, Ecuador, Albania, Tunisia and Mongolia. The IMF emergency loans further exposed them to surcharges. These countries are being penalised for seeking multilateral support as a result of an unprecedented global health crisis.
What is the cost of IMF surcharges for these countries?
While countries are struggling to tackle the pandemic, the IMF is set to experience a financial windfall linked to surcharges. Projected interest payments by countries affected by surcharges are set to reach US$ 12.9 billion between 2021 and 2028. 39 per cent of this amount is linked to regular GRA service fees and charges paid by all countries borrowing from the IMF. The remaining 69 per cent would be due to surcharges (Figure 3). These could reach as much as US$ 7.9 billion over this period, with most of the payments scheduled to take place between 2021 and 2023. An overview of the impact of surcharges at the country level can be found here.
To place the figures of surcharges in context, countries affected by these fees are set to transfer to the IMF almost ten times more resources than those provided by the US, EU, UK and Japan to provide debt payment cancellation for low-income countries through the IMF Catastrophe Containment Relief Trust, equivalent to US$ 851 million.
How are IMF surcharges distributed across countries?
Payment of surcharges is concentrated in a few countries. Argentina represents 51.6 per cent of projected surcharge payments for the period between 2021 and 2028 (Figure 4). This is equivalent to US$ 4.1 billion. The next four countries include Egypt (US$ 1.5 billion), Ecuador (US$ 939 million), Ukraine (US$ 483 million) and Pakistan (US$ 392 million). This reveals once again the problematic nature of the existing Global Financial Safety Net. With the exception of Pakistan, which is eligible to participate in both the G20 Debt Service Suspension Initiative (DSSI) and the Common Framework, the remaining four countries did not have a multilateral safety net to provide support in the middle of the pandemic. On the contrary, surcharges are effectively siphoning resources out of them.
How much do IMF surcharges increase the cost of borrowing?
Surcharges substantially increase the cost of borrowing from the IMF. For the 14 countries affected by surcharges, these are estimated to increase IMF borrowing costs on average by 64.1 per cent (Figure 5). For some countries, surcharges effectively double their borrowing costs. For example, in the case of Ecuador, surcharges increase their borrowing costs by 148 per cent. This is a result of both the size of the IMF loan - equivalent to 700 per cent of the country quota - as well as its duration as the pandemic forced a renegotiation of the IMF program, which started in 2019. Taking together the timing and project increase in borrowing costs caused by surcharges highlights their pro-cyclical nature. These are diverting resources away from countries at a time they are urgently needed to finance the response to the pandemic.
What should be done with the IMF surcharges?
It is unconscionable that the IMF should profit from surcharge during the pandemic. In most cases, the loans linked to the surcharges long predate the current crisis. The substantial increase in borrowing costs triggered by this system of additional fees penalises vulnerable middle-income countries at the worst possible time. Every dollar used to pay an IMF surcharge fee is a dollar less that is available to purchase vaccines, get children back to school and people back to work. Middle-income countries shouldn't be forced to choose between the rights of their population and their international commitments.
Against this background, a growing number of Civil Society Organisations, which include the Center for Economic Policy and Research, the Boston University Global Development Policy Center, Erlassjahr and the Bretton Woods Project are highlighting the urgent need to reform the IMF surcharges policy. The negative impact of surcharges on vulnerable countries makes it imperative for the IMF to immediately suspend the collection of payments linked to them. The suspension must remain in place until a comprehensive review of the surcharges policy is completed. The review must eliminate this system of punitive fees. This will help to ensure that the IMF plays the supportive role that is expected of it in the process of recovery of countries from the Covid-19 crisis.
IMF surcharges in the case of the fictitious country of Debtlandia
Debtlandia has been devastated by the pandemic in 2020. The country has requested an IMF loan for US$ 1 billion to finance its response to the crisis. At the time of the request, the country quota at the IMF was equivalent to US$ 200 million. The loan represents 500 per cent of its IMF quota.
After performing an assessment, the IMF has approved the loan to Debtlandia under a Stand-By-Agreement with a series of conditions:
- The IMF imposes a yearly cap on disbursements equivalent to 200 per cent of the county IMF quota. This figure is equivalent to US$ 400 million per year. As a result, the disbursement of the US$ 1 billion loan will take place between 2020 and 2022 (Figure 1).
- Principal repayments will take place three years after a disbursement has been made. Each disbursement is paid over two years, in eight equal installments (Figure 1).
In addition to principal repayments, the country has to pay the IMF a set of three different charges and surcharges (Figure 2):
- Service and GRA charge: These are the standard charges that apply to all IMF loans. The service charge is equal to 0.5 per cent of each disbursement made by the IMF. There is also a GRA charge, equivalent to the basic SDR interest rate. This rate fluctuates and is currently 1.1 per cent.
- GRA Surcharge - Quota-based: Equal to 2 per cent on outstanding credit above 187.5 per cent of each country’s assigned IMF quota.
- GRA Surcharge - Time-based: These add an additional 1 per cent to the interest on credit above the GRA surcharge threshold of 187.5 per cent rate that has been outstanding for more than 36 months.
The IMF surcharges effectively double the borrowing costs of Debtlandia throughout the life of the loan. Surcharges account for nearly half of the total interest payments (Figure 3).