A growing number of economists and policymakers are urging the International Monetary Fund (IMF) to remove extra fees it charges for loans to countries in distress. These fees are a swindle away from scarce funds that could be used to fight Covid.
This fund has been supporting countries in financial distress for decades and charges these fees for loans that are unusually long-term or large. These fees were created to protect against large losses due to high-risk lending.
Critics claim that the surcharges arrive at the worst possible time, when countries are already desperate for funds to provide aid for poverty and public health. Some countries paying the fees, such as Armenia and Ukraine, have vaccinated only a third their population. Critics claim that the I.M.F. is causing a decline in vaccination rates. The I.M.F. ends up threatening the financial stability and financial well-being of the very people it is trying to help.
18 Democrats in Congress, including Representatives Alexandria Ocasio-Cortez from New York and Pramila Jayapal, wrote this week to Treasury Secretary Janet L. Yellen, asking for support to end the surcharge policy.
The surcharge “discourages public health investment by developing countries,” the letter said. “This perverse outcome will undermine global economic recovery.” The letter echoed several other appeals from more than two dozen emerging nations, including Argentina, South Africa and Brazil, as well as economists.
“Attempts to force excessive repayments are counterproductive because they lower the economy’s productive potential,” the Nobel Prize-winning economist Joseph E. Stiglitz and Kevin Gallagher, a professor of global development at Boston University, wrote in a recent analysis. “Both creditors and the country itself are worse off.”
They added: “The I.M.F. should not be in the business of making a profit off of countries in dire straits.”
Although it is primarily a lender last resort, the fund has expanded its mission to include combating extreme inequality as well as combating climate change.
Surcharges are used to build up a reserve and encourage borrowers to pay their loans on time. The surcharges are exempt for the poorest countries.
The I.M.F. is financed mainly by its 190 members, with the United States accounting for the largest part. However, the fees have become a significant source of revenue. The fund estimates that by the end of this year, borrowers will have shelled out $4 billion in extra fees — on top of their regular interest payments — since the pandemic began in 2020.
The debate over the surcharge is emblematic of larger contradictions at the heart of the I.M.F.’s structure and mission. The fund was created to provide a lifeline to troubled economies so that they recover “without resorting to measures destructive of national or international prosperity.”
However, the terms and conditions associated with its loans can sometimes increase economic pain. “They penalize countries at a time when they are in an adverse situation, forcing them to make greater cuts in order to repay debts,” according to an analysis from the liberal Center for Economic and Policy Research in Washington.
“Demanding these surcharges during an ongoing recession caused by a pandemic goes even more against” the I.M.F.’s founding principles, the center argues.
Voting power in the fund’s governance is based on the size of each country’s monetary contribution, with only the United States having veto power. The I.M.F. is run in a way that allows the most vulnerable countries to have the least say. Its role.
In a statement, the Treasury Department reiterated support for the surcharges: “As the I.M.F.’s major shareholder we have an obligation to protect the financial integrity of the I.M.F.” And it pointed out that the interest rates charged by the fund were often far below market rates.
A review of the surcharges last month by the fund’s executive directors ended without any agreement to halt the charges. An I.M.F. statement explained that while “some directors were open to exploring temporary surcharge relief” to free up resources to deal with the pandemic, most others preferred a comprehensive review later on in the context of the fund’s “overall financial outlook.”
Argentina is one of the most vulnerable countries. Although they balked earlier at the surcharges, their campaign has gained momentum thanks to Covid-19.
“I think the pandemic makes a big difference,” said Martín Guzmán, Argentina’s minister of economy.
He argues that what was once considered unusual circumstances have become commonplace because of the massive debt many countries have taken out to pay it. The highest level of government debt in emerging nations has been seen in over 50 years.
According to the I.M.F., 21 nations are now subject to surcharges, up from 15 in 2020. Paying countries include Egypt, Pakistan, Ukraine, Georgia and Tunisia.
Argentina has long been a vocal opponent of the surcharges. This is due to its bitter relationship with the Fund over a series of bailouts, defaults, and other events that have dated back decades.
The country is working out a new repayment plan for $45 billion borrowed by the previous government as part of a 2018 loan package. The government estimates that by 2024, it will have accrued more than $5B in surcharges. This year, 70 percent of Argentina’s nearly $1.6 billion bill from the I.M.F. Surcharges
“The charges will be undermining the mission of the I.M.F., which is to ensure global stability and balance of payments,” Mr. Guzmán said.
According to World Bank estimates, 124,000,000 people were pushed into poverty by 2020. Eight out of ten of these people are in middle-income nations.
Political strains are also being caused by rising costs for basic necessities like heating and food. This week, I.M.F. warned in its blog that continuing Covid outbreaks, combined with rising inflation, debt and interest rates, mean emerging economies should “prepare for potential bouts of economic turbulence.”
Source: NY Times