At a time when the coronavirus pandemic is fueling a rapid rise in inequality and debt, a growing number of policymakers and economists are urging the International Monetary Fund to scrap additional fees it charges on loans to troubled nations because they are instead scarce Withdraw funds that could be used to fight Covid.
The fund, which has supported countries in financial distress for decades, charges these fees for loans that are unusually large or long-term. They are designed to protect against high losses from risky lending.
But critics argue the surcharges come at the worst possible time, when countries already desperately need funds to provide poverty relief and public health services. Some of the countries that pay the fees, including Egypt, Ukraine and Armenia, have only vaccinated about a third of their populations. The result, critics argue, is that the IMF ends up undermining financial well-being and stability precisely where it seeks to help.
In the most recent criticism, a letter this week to Treasury Secretary Janet L. Yellen, 18 congressional Democrats, including Rep. Alexandria Ocasio-Cortez of New York and Rep. Pramila Jayapal of Washington, called on the United States to support ending the surcharge policy.
The bid “deters investment in public health by developing countries,” the letter said. “This perverse outcome will undermine the global economic recovery.” The letter echoed several other calls from more than two dozen emerging economies, including Argentina, South Africa and Brazil, as well as economists.
“Attempts to force excessive repayments are counterproductive because they reduce the productive potential of the economy,” write Nobel Prize-winning economists Joseph E. Stiglitz and Kevin Gallagher, professor of global development at Boston University, in a recent analysis. “Both creditors and the country itself are worse off.”
They added: “The IMF should not work to profit from countries in distress.”
The fund primarily serves as a lender of last resort, although it has recently broadened its mission to reduce extreme inequality and tackle climate change.
In addition to creating a reserve, the surcharges should encourage borrowers to repay on time. The poorest countries are exempt.
Fees have become a major source of revenue for the IMF, which is funded 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 paid $4 billion in additional fees — on top of their regular interest payments — since the pandemic began in 2020.
The premium debate is emblematic of larger contradictions at the heart of the IMF’s structure and mission. The fund was created to provide a lifeline to struggling economies so they can recover “without resorting to measures that destroy national or international prosperity”.
But the conditions attached to its loans have added to the economic pain at times. “They punish countries at times when they are in an unfavorable situation, forcing them to make bigger cuts to pay down debt,” according to an analysis by the liberal Center for Economic and Policy Research in Washington.
Jan 14, 2022 6:54pm ET
“Demanding these surcharges during an extended pandemic-induced recession is even more contrary to the IMF’s founding principles,” the center argues.
Voting rights in managing the fund are based on each country’s monetary contribution, with only the United States having veto power. This means that the countries most in need have the least say in how the IMF carries out its role.
In a statement, the Treasury Department reiterated its support for the surcharges: “As the IMF’s principal shareholder, we have a duty to protect the IMF’s financial integrity.” And it pointed out that the fund’s interest rates are often well below market rates.
A review of surcharges last month by the fund’s chief executives ended with no agreement to stop the surcharge. A statement from the IMF explained that while “some Directors were willing to consider temporary surcharge relief” to free up resources to deal with the pandemic, most others would consider a later comprehensive review related to the “overall financial outlook.” of the fund’s favourites.
Troubled countries subject to the surcharges, such as Argentina, have previously resisted the additional payments, but their campaign has gathered momentum as Covid-19 spreads.
“I think the pandemic is making a big difference,” said Martín Guzmán, Argentina’s economy minister.
He argues that given the huge debt many countries have taken on to meet the rising costs, the pandemic has made something once considered unusual become commonplace. Emerging market sovereign debt is at its highest level in half a century.
The number of nations subject to the surcharge rose from 15 in 2020 to 21 last year, according to the IMF, including Pakistan, Egypt, Ukraine, Georgia, Albania, Tunisia and Ecuador.
Argentina, which has long had a contentious and acrid relationship with the fund over a series of bailouts and defaults going back decades, has been a leading opponent of the surcharges.
The country is trying to work out a new repayment plan for $45 billion that the previous government borrowed under a 2018 loan package. By the end of 2024, the government estimates that it will have to pay more than $5 billion in surcharges alone. This year, 70 percent of Argentina’s nearly $1.6 billion bill is earmarked for IMF surcharges.
“The charges will undermine the IMF’s mission, which is to ensure global stability and balance of payments,” Mr Guzmán said.
The World Bank estimates that 124 million people were pushed into poverty in 2020, eight out of ten of them in middle-income countries.
Meanwhile, the cost of basic necessities like food, heating and electricity are skyrocketing, adding to political tensions. This week, the IMF blog warned that ongoing Covid outbreaks coupled with rising inflation, debt and interest rates would mean emerging markets should “prepare for potential bouts of economic turmoil”.