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The Rationale for IMF Surcharges Remains Valid - But Reforms Can Be Made [1]
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Date: 2024-10
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A fierce debate has emerged about the future of IMF surcharges, an issue now before the IMF Executive Board.
Many voices decry surcharges, arguing that they trap countries in debt. They are calling for overhauling, suspending or dismantling surcharges. The voices include Mia Mottley, the Prime Minister of Barbados, who recently wrote an eloquent and thoughtful blog for the IMF, Nobel Prize winning economist Joseph Stiglitz and my friend Kevin Gallagher, several US Congressional representatives, think tanks and many CSOs. Their work offers offer a highly constructive contribution to the debate about the IMF and debt.
Other perspectives emphasizing greater support for retaining surcharges, while backing reform, have received less attention. The IMF is a big tent. While borrowers understandably prefer lower interest costs, the IMF is a financial institution, and creditors must sustain support for it.
Perhaps a more careful balancing of contrasting perspectives could factor into the debate and help forge compromise on reforming the surcharge regime.
What are IMF surcharges? On top of the basic rate of charge – now roughly 5% -- the Fund applies a 200-basis point surcharge on lending in excess of 187.5% of the country’s quota and a 100 basis point surcharge, essentially when that lending is outstanding for 51 months.1 The basic rate of charge is 100 basis point on top of the SDR rate, which is a floating short term rate, reflecting a weighted average official three-month rate of the US, Eurozone, China, Japan and the UK – among the most creditworthy sovereigns in the world.
While it is now argued that the maximum charge could be 8%, perceptions regarding the onerousness of surcharges need to be carefully weighed.
The surcharges apply to Fund lending on its general resources, NOT lending to low-income countries at a zero percent rate of interest under its Poverty Reduction and Growth Trust. 2
They apply only to the marginal amounts above the thresholds.
The SDR interest rate is presently high in contrast with the past decade, given the current stance of monetary policy in the US and Eurozone, thus adding to country repayment burdens to the IMF. But the SDR rate will soon likely fall. The ECB has already cut rates, and there is widespread expectation that the Fed and Bank of England will very soon follow suit. Japanese and Chinese short-term rates remain low.
While the SDR is a short-term rate, in contrast, an IMF extended loan has an average maturity of some seven years. Further, most Fund borrowers have little if any access to global capital markets.
Key aspects of the rationale for surcharges remain valid.
Surcharges were first adopted in the late 1990s for large-scale lending as a means of fostering incentives for early repayment, underscoring the Fund’s systemic role as a short-term monetary lender. Surcharges also served as a risk mitigation tool, reflecting the need to compensate the IMF for the higher risks associated with large-scale lending, particularly at a time when the Fund’s capital (precautionary balances) was relatively low.
Due in large part to the cumulative impact of years of large income gains from surcharges, the Fund’s capital is now strong. The role of surcharges in encouraging early repayment has declined, as IMF lending has shifted from standbys (generally 1-2 year loans with 3-1/4 to 5 year repayment terms) to extended fund facility loans (generally 3-4 year loans with a 4-1/2 to 10 year repayment period). The stretching out of disbursements and the repayment period when surcharges kick in has helped lower surcharges, but these can still remain significant.
In principle, however, surcharges still provide a useful – even if weaker -- signal and incentive for early repayment. Given continued significant risks on the Fund’s balance sheet, surcharges still serve as a useful risk mitigant. Moreover, there are debates in the IMF now about using further surcharge earnings to provide subsidy resources for the Fund’s low-income lending.
The argument that surcharges trap borrowers in debt also merits careful consideration. There are now four standbys and 20 extended programs. The shift in Fund lending over many years from standbys – long said to be the workhorse instrument of the Fund – to extended programs reflects the reality that today’s IMF borrowers, rather than experiencing short term macroeconomic disequilibria, often face protracted weak performance due to longstanding political and structural problems which have not been tackled. One might cite Argentina, Egypt, Pakistan, Ecuador, and Sri Lanka among others. What trapped these countries in debt is their longstanding poor performance, not surcharges.
These observations are by no means intended to minimize the problem of country indebtedness. While surcharges do add to country repayment obligations, the IMF is a de facto preferred creditor. Lower income and frontier emerging markets are weighed down by official bilateral as well as private debts and woefully insufficient debt relief.
A Path Forward?
For all intents and purposes, the IMF’s global role remains that of a short-term lender, an emergency responder, and an architect of macroeconomic stabilization programs, even if that role is increasingly challenged by protracted lending in the face of underlying country structural and developmental problems. The principle that a financial institution – including a public one – would assess surcharges on high-risk lending, let alone with lengthier maturities, remains valid despite the original rationale having receded to some extent over time.
Thus, there is a strong rationale for continuing to maintain surcharges.
That does not mean the current structure of surcharges should be enshrined or regarded as an all-or-nothing proposition. Many reform options could be considered to ease some of the burden. The 200-basis point level-based surcharge can be reduced. So could the 100-basis point time-based surcharge. Also, the 187.5% of quota threshold at which surcharges kick in could be raised. These options are not mutually exclusive. Undoubtedly, other options could be envisaged, though one must be mindful of the precedents that are set.
That said, the reconsideration of the surcharges should be accompanied by a push from the IMF Board to review more broadly Fund general resource lending and the dramatic shift from standbys to extended and lengthier programs. Fund Management and staff have strongly pushed extended and prolonged lending over the last decade, contributing to exacerbating the debates surrounding surcharges. This review should examine whether the Fund’s conditionality is best handling the repeated protracted engagement with weak performers that have consistently not addressed underlying problems, whether the IMF has advocated for debt relief with anywhere near sufficient strength, as well as whether the generalized push toward longer-term engagement properly comports with the Fund’s purposes.
The IMF is remarkable for bringing together the international financial community as a collegial body able to find good solutions amid differing viewpoints. Addressing IMF surcharges should be no different.
1. 36 months under a standby loan; 51 months under an extended fund facility loan.
2. Surcharges are also not applied to IMF lending under its Resilience and Sustainability Trust.
Mark Sobel is a member of the Bretton Woods Committee Advisory Council, US Chair of OMFIF, and former US Treasury Deputy Assistant Secretary for International Monetary and Financial Policy and US representative in the IMF.
All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.
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