by Fatima Hussein | The Associated Press
WASHINGTON (AP) — The International Monetary Fund is under pressure to reassess how it offsets loans to countries in need like war-torn Ukraine — one of the fund’s biggest borrowers.
The move comes as more countries look to the IMF as international food prices and inflation continue to rise.
A surcharge is imposed on loans imposed on countries that are heavily indebted to the IMF.
Deputy Treasury Secretary Wally Adeyemo said in Aspen last month that finance ministers in many countries have realized there is a price to pay for Russia’s war in Ukraine, particularly with soaring food prices.
“They have to go to the IMF, they have to find help,” Ademo said.
However, the IMF fee system is subject to change by US law. Amendments to the National Defense Authorization Act, also known as the Defense Spending Bill, will suspend IMF surcharges while their effectiveness and burden on indebted countries are examined.
It was passed by the US House of Representatives in July. The Senate is expected to vote on its defense bill in September. A representative of the Senate Armed Services Committee said the amendment could be offered in the next few weeks or even in the Senate.
As the IMF’s largest shareholder and a member of the Fund’s Executive Board, the US can enforce policy decisions and unilaterally veto certain board decisions.
Citing the deepening financial crises in Sri Lanka and Pakistan, for example, some accuse China of engaging in debt-trap diplomacy — or countries so heavily indebted that they are sensitive to it in international affairs.
Advocates and civil rights organizations are filing the same complaint against the fund, claiming that the organization is diluting its primary role as lender of last resort with countries in a vulnerable position to repay loans.
With the risk of the global debt crisis deepening and interest rates rising, the problem has become more pressing for countries looking to reduce their deficits.
However, some economists and fund officials believe the surcharges amount to responsible lending behavior as they provide an incentive for members with large outstanding balances to repay their loans promptly. This is especially true for countries that otherwise might not be able to obtain financing from private lenders.
As a lender of last resort, the fund’s lending ability is critical as low- and middle-income countries face rising interest rates, said Maurice Obstfeld, an economics professor at Berkeley and a former director of the IMF’s research department.
“Although the fund’s staff is small and in crisis, its efforts are optimally positioned to meet the needs of member states,” he told the Associated Press in an email. “The surcharge may be eased temporarily due to intense pressure on borrowing countries, but at the expense of the fund’s ability to service its membership over the long term.”
Illinois Congressman Jesus “Chuy” Garcia, who offered to change defense spending, told the Associated Press, “It is unfair that the IMF is asking countries like Ukraine that are already in debt to pay surcharges. These surcharges are increasing poverty and stifling our global economic recovery.”
According to IMF data, Ukraine’s projected real GDP is expected to fall by 35 percent, in large part due to the Russian invasion of Ukraine.
The war, which is raging with no predicted end, owes the country 7.5 billion SDRs — an IMF unit of account worth about $9.8 billion, according to Ukrainian central bankers. The latest figures suggest that Ukraine will receive a $360 million IMF surcharge between 2021 and 2023.
Economists Joseph Stiglitz of Columbia University and Kevin P. Gallagher wrote earlier this year that “excessive payments reduce the borrower country’s productive capacity but also hurt creditors” and require borrowers to “credit more at exactly the same time as borrowers do.” to count”. They are the most excluded from market access in every other form.”
Serhi Nikolaychuk, vice-president of the National Bank of Ukraine, said Ukraine continued to pay its debts “despite Russia’s all-out war against Ukraine.”
“Our country will pay its debts and surcharges from previous programs and honor its obligations to the IMF,” Nikolaychuk said. “It will be difficult, but we will pay.”
For years, legislators, economists and civil rights organizations have been calling on the IMF, which has been lending billions to low-income countries for decades, to end its surcharge policy.
In January, 18 left-leaning MPs wrote to the Treasury Department demanding an end to the pay-as-you-go policy. And in April, a group of 150 civil society groups and individuals signed an open letter to the IMF, demanding the same and calling the surcharge “regressive.”
A spokesman for the fund said the surcharge is intended to prevent IMF resources from being used on a large scale and over a long period of time.
“They only apply to countries with particularly high outstanding debts,” Mayada Ghazala said in an emailed statement, adding that the poorest countries are exempt from the surcharge.
The fund’s board met in December 2021 to discuss the role of the surcharge – and eventually decided not to change the fees but said it would review them again in the future.
Founded in 1944 at the United Nations Bretton Woods Conference, the IMF is one of its missions to provide credit to maintain countries’ financial stability. According to the organization’s website, it lends around $1 trillion across its 190 countries.
The April review of the fund’s financial health for fiscal years 2022 and 2023 said borrowing income net of surcharges “remains strong and is expected to exceed spending in fiscal years 2023-2024.”
Andres Arouz, a senior research fellow at the Liberal Center for Economic and Policy Research, says the IMF’s financial position shows that “surcharges are not necessary for sound funding.”
“The IMF has no excuse for punishing debt-stressed countries with surcharges,” he said. “This is not logical, the amount of money the IMF collects from surcharges is insignificant relative to its income and potential.”
“I’m proud that the House of Representatives passed my amendment to support a review and suspension of surcharges at the IMF, and I will keep fighting until the President enacts it,” Garcia said.
Separately, the US has sent nearly $7.3 billion in aid to Ukraine since the war began in late February, including a new $775 million defense aid package announced on Friday.