Economic resilience and IMF surcharges

‘Supporters of the surcharges argue that the additional fees discourage debtors from borrowing excessively from the IMF. But this moral-hazard argument ignores that loans require approval from the Fund’s Executive Board, which could reject frivolous requests, and it overlooks the fact that surcharges make countries more dependent on the IMF, not less.’ – An excerpt from a September 16, Project Syndicate (PS) published article ‘The IMF must end its destructive surcharges’

The climate change crisis is fast-unfolding, which means that the frequency and intensity of climate change-related natural disasters have continued to rise over the last four decades – a point in time, which the scientists in general think of as the tipping point, after which the pace of this crisis increased quite alarmingly – and the last few years in general have seen tripping annual record for heat temperatures.

A September 6, Financial Times (FT) published article ‘World to set heat record for 2024 after warmest northern summer’ pointed out in this regard: ‘The world has experienced its hottest northern hemisphere summer on record, as a swath of countries baked in stifling heat, putting 2024 firmly on course to be the warmest on the books, scientists said.’

The alarming part is that this indicates that the window of keeping global annual average temperature below 1.5C is fast-closing; an upper limit beyond which scientists believe that the impact of global warming will enter an irreversible territory.

The same article substantiated the extent of global warming as ’The average temperature globally for the June to August period was 16.8C, 0.69C above the 1991-2020 average and 1.5C above 1850-1900 pre-industrial levels, the Copernicus earth observation agency said.

A temporary rise of 1.5C in the average global temperature is distinct from the Paris Agreement goal of limiting long-term global warming to 1.5C.’

This calls for urgent policy action to prepare countries, especially the most vulnerable to climate change, including Pakistan – a country among the top-ten most vulnerable countries to climate change –in terms of enhancing their overall economic resilience, and in particulate enhancing disaster management and health sector-related resilience. Yet not only over-board practice of monetary austerity policy has rendered unnecessarily high growth sacrifice, and that too for limited, and unsustainable macroeconomic stability, it has also enhanced the issue of twin deficit, and with it debt sustainability.

So, on one hand, lack of revenues due to weak economic growth, and traditionally low tax base in a number of developing countries, including Pakistan, which are also debt distressed, and on other, high debt repayment needs, especially in the wake of growth restraining Covid pandemic, have all squeezed fiscal space with countries to enhance their economic resilience.

In addition, weak multilateral spirit meant little debt relief/moratorium on one hand, and a limited global wealth tax architecture, lack of release of climate change related special drawing rights (SDRs) allocation by International Monetary Fund (IMF) for highly climate change challenged countries in particular, have all not allowed once again countries with enough expenditure capacity for preparing better for the climate change crisis, and related likely ‘Pandemicene’ phenomenon.

If these were not big enough hurdles in the way of developing countries, especially the debt distressed and highly climate vulnerable countries, the IMF has continued with its ‘junk fee’ in the shape of surcharges. In this regard, in the same September 16, PS published article ‘The IMF must end its destructive surcharges’ economics Nobel laureate, Joseph E. Stiglitz, among other authors of that article argued that ‘A group of 22 financially distressed countries, including Pakistan and Ukraine, has become the largest source of net revenue to the International Monetary Fund in recent years, with payments exceeding the Fund’s operating costs.

The institution entrusted with providing the global public good of a well-functioning international financial system is, in effect, asking countries that are hardly able to pay their own bills to pick up the tab for the rest of the world. This unseemly state of affairs is the result of the IMF’s surcharge policy, which levies additional fees on countries that exceed thresholds for the amount or length of their borrowing from the Fund. Imposing fines on countries like war-torn Ukraine or Pakistan, a lower-middle-income country where flooding two years ago submerged one-third of its territory, seems antithetical to the IMF’s mission: maintaining stability in the global financial system.’

Here, it needs to be indicated that while it is important that Pakistan secures IMF lending in its effort to remain sustainable with regard to maintaining its debt sustainability, it is strange that the current and previous finance ministers, at least in the recent past, as per the writer’s information, have never reportedly raised the issue with the IMF of discontinuing with its surcharge policy.

Given the over-board monetary austerity policy being pursued in general internationally, has led to rise in SDR interest rate from around one percent to around four percent in a matter of few years, should all the more push the IMF to remove this surcharge, so that the burden of debt servicing with regard to external loans is reduced.

Surcharges are no small amounts, as a September 6 Atlantic Council published article pointed out: ’Surcharges have substantially increased the payment burdens on countries in economic distress, especially depleting their dwindling foreign exchange reserves.

Total surcharges will amount to $13 billion between 2024 and 2033. Surcharges will be a significant financing burden for low- and middle-income countries, which have been spending more to service their debts to external official and private creditors than they receive in new funds.

Five countries have borrowed the most from the IMF – Argentina, Ecuador, Egypt, Pakistan, and Ukraine. They paid $5.1 billion combined in surcharges between 2018 and 2023 and will pay an additional $7.2 billion between 2024 and 2028.

Ukraine alone paid $621 million between 2018 and 2023 and will have to pay $1.6 billion between 2024 and 2028. Such surcharges sharply increase the cost of interest payments to the IMF, bringing IMF financing close to market rates—well above the concessional rates typically offered to countries in need by international financial institutions.’

Copyright Business Recorder, 2024