Pakistan is one of 14 countries adversely affected by the International Monetary Fund (IMF) loans which trigger surcharges that as per Stiglitz, a Nobel laureate, and Gallagher, Professor at Boston University, “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% (Munevar 2021), and effectively double borrowing costs for some.
While wealthy countries have been able to spend trillions of dollars in pandemic stimulus to resuscitate their economies, surcharges deter a corresponding response in the countries’ most in need, fueling severe divergence in the global recovery.”
As per Fortune magazine issue dated 22 April 2022, “this year alone the IMF’s five largest borrowers (Argentina, Ecuador, Egypt, Pakistan, and Ukraine) are on course to pay $2.7 billion worth of these extra fees that are tacked on to loan payments to the Fund.”
And surcharges payable by these five largest borrowers from 2021 to 2028 are as follows: Argentina 51.6 percent (4.1 billion dollars), Egypt 1.5 billion dollars, Ecuador 939 million dollars, Ukraine 483 million dollars and Pakistan 393 million dollars.
Surcharges were first established by the Fund in 1997, so states Daniel Munevar writing for European Network on Debt and Development (Eurodad) “in response to a systematic 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…higher borrowing costs linked to use of surcharges were framed as an incentive for early repayment of large loans outstanding for long periods of time…Quota-based surcharges apply to outstanding credit based on the size of the loan.
Credits above 187.5 percent 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.”
Projected interest payments linked to regular General Resources Account (GRA), non-concessional funds, and service fees and charges (including sustaining the lifestyle of IMF staff) and surcharges paid by all borrowing countries is projected at a mind-boggling 12.9 billion dollars between 2021 and 2028 – 39 percent for regular GRA service fees and charges and 69 percent surcharges.
The following extremely disturbing data for Pakistan was released by Eurodad: September 2013 date of approval of Pakistan’s Extended Fund Facility programme accounted for 247 percent of the country’s quota which would have triggered the quota-based surcharges of an additional 200 basis points.
In 2021 outstanding GRA was 7020 million dollars out of which surcharges accounted for 37.9 percent of borrowing costs which increased Pakistan’s borrowing costs by 61 percent. In actual money terms surcharges payable by Pakistan were 49 million dollars in 2021, 130 million dollars in 2022, projected at 122 million dollars in 2023 and 69 million dollars in 2024.
Unlike Argentina, Egypt, Ecuador, and Ukraine, Pakistan was eligible for G20 Debt service suspension initiative during the pandemic as well as the common framework that enabled access to multilateral safety net that apart from Pakistan’s dwindling international reserves include bilateral swap arrangements (with countries including China), regional financial arrangements (Arab countries and Turkey) and the IMF.
Centre for Economic Policy and Research organized an event titled “IMF Surcharges: A Necessary Tool or Counter-productive obstacle to a just and green recovery” during which Stiglitz argued that “the rule of the IMF (is) as a provider of public good and stability…the surcharges are going exactly against what it’s supposed to be doing.
It’s supposed to be helping countries over a temporary liquidity problem not extracting extra rents from them because of their dire need and increasing the probability of another debt restructuring down the line, weakening the sustainability of the levels of debt that they have.”
He added that “countries typically turn to the IMF only in extreme exigencies such as foreign exchange debt crisis….it entails loss of economic sovereignty. It’s an admission of failure of governments to manage crises on their own and it has obviously, as a result, severe political consequences for those governments who turn to the IMF.”
Stiglitz further maintained that “if more money goes to the creditors there’s going to be less available for the country itself. But something that is not fully appreciated is that this is not a zero sum game. It’s not as if there’s a fixed size of the economic pie. The creditors get more and the country in crisis gets less because of the adverse effects on growth of transfers to foreign creditors.”
Jayati Ghosh, Professor of Economics at the University of Massachusetts, Amherst and Executive Secretary of International Development Economics Associates concurred arguing that “surcharges policy is not only unjust, but due to the procyclicality of the surcharges its undermining the IMF’s own principles…its own Articles of Agreement which state that IMF cannot be destructive of national or international prosperity….surcharges actually force even greater fiscal adjustment on countries at a time when they really cannot afford it.”
Ghosh pointed out further that some countries in Asia - the Philippines and Pakistan being the most obvious examples - have been on almost continuous IMF programs for the last half century, “and it’s not because they like to be on IMF programs; it’s because they think it’s an easy source of money and it’s because they have no other choice.”
This is certainly true as Pakistani governments — military and civilian — have taken the country again and again on a Fund programme, currently the country is on its twenty-third programme, and the public has learnt the high cost it is made to pay to dole out our administrations profligacy, mismanagement and corruption thereby eroding the quality of life.
Ironically while Miftah Ismail was in Washington DC pledging to reverse the unfunded subsidies to the Fund staff, a pledge that he was in no position to meet as subsequent events indicate, the civil society organizations were calling for the Fund to end unfair and counterproductive surcharges. And noteworthy is the fact that 18 Democrats sent a letter to US Treasury Secretary Janet Yellen asking the US to support ending surcharge policy.
To conclude, one would hope that Pakistani economic team leaders begin to engage with the IMF on ending surcharges and coordinate with the other four largest borrowers to highlight this matter that is at odds with the charter of the Fund instead of engaging in a never ending politically motivated repartee with the previous administration that Miftah Ismail as the finance minister is neither appointed nor competent to deal with.
Copyright Business Recorder, 2022
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