IMF fees on loans to war-torn countries closer to elimination

Financial crisis: Dejected woman on a queue in Sri Lanka. [AP]

The International Monetary Fund (IMF) is facing pressure to re-evaluate how it imposes fees on loans it disperses to needy countries like war-torn Ukraine - which is one of the fund's biggest borrowers.

The move comes as more countries will need to turn to the IMF, as food prices and inflation internationally continues to rise.

Surcharges are added fees on loans imposed on countries that are heavily indebted to the IMF.

Treasury Deputy Secretary Wally Adeyemo said in Aspen last month that finance ministers of several countries realise they have to pay a price for Russia's war in Ukraine, especially with food prices going up.

"They're going to have to go to the IMF, they're going to need to find assistance," Adeyemo said. However, the IMF fee system could change through US legislation. An amendment to the National Defence Authorisation Act, otherwise known as the defence spending bill, would suspend IMF surcharges, while their effectiveness and burden on indebted countries is studied.

That was passed by the US House in July. The Senate is expected to vote on its Defence Bill in September. A representative of the Senate Armed Services Committee said an amendment may be offered in the next few weeks or even on the Senate floor.

As the largest IMF shareholder and member of the Fund's executive board, the US can push for policy decisions and unilaterally veto some board decisions.

Citing worsening financial crises in Sri Lanka and Pakistan as examples, some accuse China of engaging in debt trap diplomacy - or having countries fall so deeply into debt that they are beholden to it on international issues.

Advocates and civil rights organisations lodge the same complaint against the Fund, who claim the organisation undercuts its core lender-of-last-resort role with countries in vulnerable positions to pay back debt.

With an ever-worsening risk of a global debt crisis and rising interest rates, the issue has become more pressing for countries looking to reduce their deficits.

However, some economists and representatives of the fund say the surcharges amount to responsible lending behaviour, as they provide an incentive for members with large outstanding balances to repay their loans promptly. This applies especially to countries that may otherwise not be able to obtain financing from private lenders.

Maurice Obstfeld, a Berkeley economics professor and former IMF research department director said as a lender of last resort, the Fund's ability to lend is important as low and middle-income countries face rising interest rates. "The Fund's staff is small and in a crisis, its efforts are better deployed serving member countries' needs," he said in an email to The Associated Press. "Surcharges could be relaxed temporarily in the face of intense pressures on borrowing countries, but at the expense of the Fund's ability to serve its membership in the longer term."

Illinois Congressman Jesus "Chuy" Garcia, who offered the defence spending amendment, told The Associated Press "it is unfair for the IMF to require countries like Ukraine that are already deep in debt to pay surcharge fees. These surcharges increase poverty and hold back our global economic recovery."

Ukraine's projected real GDP is expected to decline by 35 per cent, due in large part to Russia's invasion of Ukraine, according to IMF data.

The country, engaged in a war with no projected end, has an outstanding balance of 7.5 billion SDRs - an IMF accounting unit valued at around $9.8 billion (Sh1.176 trillion) according to Ukrainian central bankers.

The latest figures estimate that Ukraine will owe the IMF $360 million (Sh42.2 billion) in surcharges between 2021 and 2023. Economists Joseph Stiglitz at Columbia University and Kevin P. Gallagher at Boston University wrote earlier this year that "forcing excessive repayments lowers the productive potential of the borrowing country, but also harms creditors.

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