New Report Recommends End to IMF Surcharge Policy after Examining Its History, Precedents for Full Removal

July 30, 2024

Contact:Dan Beeton, 202-293-5380 x104Mail_Outline

Washington, DC - A new report from the Center for Economic and Policy Research (CEPR) explores the legal history of the IMF's surcharge policy, a harmful and ineffective measure whose existence is unjustified from both an economic and legal perspective, and argues for the surcharges' removal. The report, which will be published in a forthcoming issue of the Development Journal of the Society for International Development, notes that there are precedents for the complete removal of IMF surcharges, in 1974, 1981, and 1992.

"The IMF's surcharge policy, introduced in 1997, is outdated and has failed to fulfill its declared purpose. It exacerbates the already fragile economic and balance of payments circumstances in heavily indebted countries," said Ivana Vasic-Lalovic, a coauthor of the report.

The report, "The Case for the Complete Removal of IMF Surcharges: Historical Precedents and a Growing Burden," by Ivana Vasic-Lalovic, Andrés Arauz, and Francisco Amsler, traces back to the beginning of the surcharge policy's implementation, initially used to encourage temporary use of IMF resources, and finds that surcharges instead created perverse incentives and complications. "The graduated system of surcharges was altogether eliminated in 1981, after it failed to prevent larger and longer borrowing." It was later reintroduced during the debt crisis of the 1980s, but "proved counterproductive and unnecessarily burdensome. When highly indebted countries in arrears failed to service these surcharges, the IMF suspended them in 1992 for all outstanding cases. It can do so again, permanently."

Later reintroduced, the IMF expanded the surcharge policy in the 2000s, but avoided publishing comprehensive and accurate data on surcharges until 2023, keeping the policy out of academia and public discourse.

In the wake of the widespread and enduring economic and social impacts of the COVID-19 pandemic, IMF surcharges have come under scrutiny. Recent research has demonstrated an "incentive incompatibility" between the policy's stated objectives and implementation, and has raised serious legal and human rights concerns. Various researchers and economists have criticized the surcharge policy as detrimental to health, education, gender equality, and childcare goals. The surcharges also go against the Fund's own Articles of Agreement, as the report notes.

Recently, members of the US Congress have urged Treasury Secretary Janet Yellen to back eliminating surcharges, noting that they are a growing problem affecting more countries, and for longer periods. Many international and civil society organizations; leading economists; the UN Global Crisis Response Group on Food, Energy, and Finance; UN Secretary-General Antonio Guterres; UN human rights experts; and governments in the Global South have also recently urged the IMF to discontinue the surcharge policy.

"Instead of alleviating financial strain, IMF surcharges are intensifying debt challenges for middle-income nations struggling with significant balance of payment issues," said report coauthor Andrés Arauz. "Thirteen countries, more than half of those that are subject to surcharges, are either now facing, or are at imminent risk of, debt distress."

"Engulfed in simultaneous debt, development, and climate crises, sustainable recovery for these countries requires an overhaul of the international financial architecture, not punitive rates," the report concludes. "The IMF's surcharge policy substantially increases already unsustainable debt burdens, and lessens the prospects for recovery."

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