Reforming the IMF Surcharge Rate Policy to Avoid Procyclical Lending

The International Monetary Fund (IMF) levies surcharges, or extra fees, on member countries that either draw “substantial” amounts of IMF credit to mitigate the balance of payments constraints or maintain their credit exposure with the institution for sufficiently long periods. Reportedly designed to discourage the overuse of Fund resources and ensure the IMF’s financial soundness, surcharges have been scrutinized in recent years for two reasons. 

First, such surcharges are inherently procyclical, as they increase the burden of debt payments at exactly the time when a member country is in need of counter-cyclical and low-cost financing, contravening the very rationale of the IMF. Ten countries were paying surcharges in 2020. Now, 22 countries are subject to IMF surcharges, and revenues from surcharges between 2020 to 2023 have reached about $6.4 billion. The five countries paying the highest surcharges are Ukraine, Egypt, Argentina, Ecuador and Pakistan. 

Second, IMF surcharges have become among the largest sources of revenue for the IMF, creating a situation whereby the most economically disadvantaged member countries are a major source of income for Fund operations. 

In a new Think20 (T20) policy brief, Kevin P. Gallagher, Martin Guzman, Joseph Stiglitz and Marilou Uy review the rationale for IMF surcharges and evaluate their impact on member country economies and the IMF business model. The authors evaluate various proposals for IMF surcharge reform and advance a set of concrete steps for both the Group of 20 (G20) and the IMF. 

Policy Recommendations:

• Eliminate surcharges, as they undermine the IMF’s role as a steward of global financial stability.
• Cap total interest charges to reduce the problem of procyclical lending rates.
• Align the current thresholds for exceptional access and level-based surcharges.
• Count what a country would pay for surcharges under the current formula as principal payments of IMF loans. 

The authors note that the elimination of surcharges is the appropriate solution, but without consensus among IMF members, additional options, which are not mutually exclusive, should be considered to dampen the procyclical impact of surcharges.