As the coronavirus pandemic fuels a rapid rise in inequality and debt, a growing number of policymakers and economists are pressing the International Monetary Fund to scrap additional fees it charges on loans to distressed countries as it draws back scarce funds that could instead. used to fight covid.
The fund, which for decades has supported cash-strapped countries, charges these fees on loans that are unusually large or long-term. They are designed to help protect against heavy losses from high-risk lending.
But critics argue that the surcharges come at the worst possible moment, when countries really need the money to provide poverty aid and public health services. Some fee-paying countries, including Egypt, Ukraine and Armenia, have only vaccinated about a third of their population. The result, critics argue, is that the IMF ends up undermining financial well-being and stability in the same places it is trying to help.
In the latest criticism, a letter this week to Treasury Secretary Janet L. Yellen from 18 Democrats in Congress, including Representatives Alexandria Ocasio-Cortez of New York and Pramila Jayapal of Washington, called on the United States to support an end to the additional tariff policy.
The letter said the additional cost “discourages investment in public health by developing countries”. “This adverse outcome will undermine the global economic recovery.” The letter echoed numerous other calls from more than two dozen emerging countries, including Argentina, South Africa and Brazil, as well as economists.
“Attempts to impose excessive repayment are counterproductive because they reduce the productive potential of the economy,” economist Joseph E. Stiglitz and Kevin Gallagher, professor of global development at Boston University, wrote in a recent analysis. “Both the creditors and the country itself are in a worse position.”
“The IMF should not be in the business of taking profits from countries in dire straits,” they added.
The fund acts primarily as a lender of last resort, although it has recently expanded its mission to include reducing severe inequality and combating climate change.
In addition to creating a reserve, the surcharge is designed to encourage borrowers to repay on time. The poorest countries are exempt.
The fee has become a major source of revenue for the International Monetary Fund, which is financed mainly by its 190 member states, with the United States paying the largest share. The fund estimates that by the end of this year, borrowers will have paid $4 billion in additional fees — on top of regular interest payments — since the pandemic began in 2020.
The debate over the surcharges is emblematic of the larger contradictions at the heart of the IMF’s structure and mission. The fund was created to provide a lifeline for troubled economies to recover “without resorting to measures destructive to national or international prosperity.”
But the terms and conditions that accompany its loans have sometimes added to the economic pain. According to an analysis from the Liberal Center for Economics and Policy Research in Washington, “They are punishing countries at a time when they are in the opposite position, forcing them to make deeper cuts in order to pay off debt.”
The center argues that “demanding these additional fees during the ongoing pandemic-induced recession further contravenes” the IMF’s founding principles.
The voting power of the fund’s governance depends on the size of each country’s monetary contribution, with only the United States having a veto. This means that the countries most in need have the least say in how the IMF should play its role.
In a statement, the Treasury reiterated its support for the surcharges: “As a major contributor to the IMF, we have an obligation to protect the IMF’s financial soundness,” and noted that interest rates charged by the Fund were often well below market rates. .
A review of the additional fees ended last month by fund executives without any agreement to halt the fees. An IMF statement made it clear that while “some managers were open to exploring temporary additional fee relief” to free up resources to deal with the pandemic, most preferred a comprehensive review later in the context of the Fund’s “general financial outlook.”
Distressed countries that are subject to additional fees such as Argentina earlier rejected the additional payments, but their campaign has gained momentum with the spread of Covid-19.
“I think the pandemic is making a big difference,” said Martin Guzman, Argentina’s economy minister.
He argues that the pandemic has transformed what were once considered extraordinary circumstances into the familiar, given the massive debt many countries have to cover their mounting costs. Government debt in emerging countries has reached its highest level in half a century.
The number of countries subject to additional duties rose to 21 last year from 15 in 2020, according to the International Monetary Fund, with Pakistan, Egypt, Ukraine, Georgia, Albania, Tunisia and Ecuador among the countries paying.
Argentina, which has long had a bitter and contentious relationship with the fund over a series of bailouts and defaults dating back decades, has been a vocal opponent of the additional fees.
The state is trying to establish a new repayment schedule for the $45 billion the previous government borrowed as part of a 2018 loan package. By the end of 2024, the government estimates it will have raised a tab of more than $5 billion in additional fees alone. This year, 70 percent of Argentina’s nearly $1.6 billion bill from the International Monetary Fund is for surcharges.
“The accusations will undermine the IMF’s mission, which is to ensure global stability and the balance of payments,” Mr. Guzmán said.
According to World Bank estimates, 124 million people were pushed into poverty in 2020, eight out of 10 of them in middle-income countries.
Meanwhile, the costs of basic necessities such as food, heating and electricity are rising, adding to political tensions. This week, the International Monetary Fund warned in its blog that the continuing outbreak of the Covid virus, combined with rising inflation, debt and interest rates, means that emerging economies must “prepare for potential waves of economic disruption.”