IMF surcharges cripple the poorest nations and transfer wealth from the poorest to the richest nations

I am now working in Kyoto again and have a full day’s commitments ahead of me. But as part of my on-going research I have been investigating the conditions under which the IMF extends financial support to the poorest nations. And today I will tell you about the surcharge system which the IMF uses to make it even harder for those nations to repay the already onerous debt obligations that the IMF imposes on them. These surcharges are just another component of the IMF’s extraction system which transfers wealth from the poorest nations to the richest. I have long advocated the abolition of the IMF and a replacement, multilateral institution being created that actually works to help reduce poverty and the redistribute resources from endowed to less-endowed nations without any harsh austerity measures. The challenge is how would that work. I will write more about my ideas on that in due course. But the evidence keeps mounting to justify the abolition. The surcharge system is one part of that evidence suite.

The current IMF arrangements with a less endowed nation go like this.

A nation finds it cannot fund its imports through exports and goes to the IMF for financial support.

The IMF’s original role was to provide foreign currency loans to nations under the Bretton Woods Agreement to ensure they could maintain their agreed currency parity.

The central banks of nations that were running external deficits and faced downward pressure on their exchange rate had to sell from their stores of foreign currencies to maintain their own currency value as agreed.

These stores are of course finite for any nation and the IMF would provide extra forex resources when a nation faced depletion.

That was what the IMF was set up to do.

The idea of ‘conditionality’ didn’t enter the picture until the later part of the 1960s as neoliberalism was emerging.

Once the Bretton Woods system of fixed exchange rates collapsed in the early 1970s the rationale for the IMF ended.

But it reinvented itself as a provider of medium- and long-term finance to nations but only if the nations entered a so-called – Structural Adjustment Program (SAP) – which typically exhibits all the worst aspects of neoliberalism.

The typical characteristics are harsh fiscal austerity usually focused on cuts to social assistance, pension cuts, and cuts to education and health budgets; privatisation of key infrastructure assets, deregulation of labour markets (wage cuts and reduced job security), financial market deregulation to eliminate prudential oversight and local market protections, transformation of subsistence agriculture into cash crops for exports; opening borders to foreign2710 NW 23RD AVENUE, CAMAS, WA 98607 USA capital to exploit natural resource endowments, and more.

The IMF has become the neoliberal enforcer on the world stage, sometimes acting alone via the so-called Article IV processes, and sometimes in tandem with other agencies, such as when it combined with the European Commission and the European Central Bank (as the Troika) to dish out the nation-destroying bailout packages for Greece.2710 NW 23RD AVENUE, CAMAS, WA 98607 USA

The SAPs have largely been replaced by the so-called = Poverty Reduction and Growth Facility – but this shift in the late 1990s was just window dressing and the aim remains the same – hollow out the state, siphon of real resources to the wealthy countries and tie the nation in onerous financial obligations that advance the interests of the wealthy global speculators.

Ideally, such an institution should operate to redistribute resources to the poorest nations from the richest nations to allow the former to reach a point in the development cycle that they can achieve some resilience from the flux and uncertainty of the world economy.

The last thing a progressive would want from such an organisation would be for it to operate as a vehicle to allow the resources of the poorest nations to be transferred in one way or another (directly or through value adding) to the richest nations.

Equally, such an organisation should never operate to extract profit for its own ends from its aid role helping the poorest nations.

The problem is that the IMF operates exactly to expand the wealth of the top end interests while holding the poorest nations in limbo.

And it introduced terms and conditions on its loans that allow it to profit from its involvement, which makes it even harder for the poorest nations to escape their plight.

The reality is that the poorest nations are being forced by the IMF to pay over and above the already harsh terms for receiving fund from the institution.

I am referring here to the so-called IMF surcharges.

Here is some information from Eurodad on these pernicious charges – A guide to IMF surcharges (published December 2, 2021)

Not only does a nation face crippling repaying conditions that are made worse by the conditionality imposed by the IMF in the form of local ‘adjustments’, but they must also pay a “system of fees” on the loans over and above the interest and principal repayments.

In this document – FAQ Surcharges – the IMF claim the surcharges “are designed to discourage large and prolonged use of IMF resources.”

They are meant “to limit the size of IMF borrowing and diversify their sources of financing” and to “encourage timely repayment of IMF credit”.

The surcharges are levied on the nations in the most trouble – those with high debt obligations over an extended period.

For the poorest countries that are already struggling with chronic balance of payments situations, the surcharges dramatically increase the cost of dealing with the IMF – usually adding 2 to 3 per cent on top of the interest-rate of the initial loan.

The London-based Centre for Economic Policy and Research (CEPR) estimated that (Source):

For surcharge-paying countries, these fees constitute 28 percent of all non-principal payments … The five largest current borrowers from the IMF — Ukraine — which is in the midst of a war — will pay Argentina, Ecuador, Egypt, Pakistan, and Ukraine — are all experiencing serious economic and non-economic challenges. Collectively, they will pay nearly $1.9 billion to the IMF in surcharges in 2024. From 2024 to 2028, they will pay an estimated $8.5 billion.

Surcharge payments are forcing these countries to use large quantities of already scarce liquid resources for additional IMF payments rather than for critical domestic expenditures.

The situation worsened – more nations were forced to pay surcharges – as a result of the Covid-19 disaster.

So the IMF made more profits on the back of the pandemic.

The IMFs justification (above) does not accord with the evidence which is clear.

The nations paying surcharges fall further into debt and often are then forced to renegotiate with the IMF on even harsher terms than before.

Many nations are also forced to seek financing from wealthy global hedge funds under onerous terms – thereby worsening their overall security and advancement.

Further the IMF’s claim that the surcharges are intended to replenish (finance) its capital base – the so-called ‘Precautionary Balances’ also does not stack up.

This CEPR analysis – No More Excuse for Surcharges: the Target for Precautionary Balances Has Been Reached (published February 15, 2024) – makes it clear that the IMF can achieve its stated capital base without the surcharges.

They conclude that:

In fact, if surcharges are removed starting FY 2025, by April 2029, the precautionary balances will reach XDR 30.7 billion ($49.5 billion) — 23 percent above target.

There is also credible research that links the surcharge burdens to cost-of-living increases in the poorest nations which then precipitate social unrest.

A research paper in the journal – Global Food Security – Food insecurity and political instability during the Arab Spring (published September 2020) – which I read the other day, traced the social instability in the – Middle East and North Africa (MENA) – countries to rising prices.

A case in point is Egypt where the IMF forces it to pay surcharges on its loans.

As a result Egypt has increased the prices of basic staples such as bread and other essential products (medical supplies, etc), which impact disproportionately on the poorest citizens (Source).

As if the situation in the Middle East wasn’t already straining social stability throughout the region.

The IMF surcharges just make matters worse.

And the fallout of the brutal IDF campaigns in Gaza and Lebanon and the US attacks in Yemen will force the broader MENA nations to endure refugee issues and require even more international funding.

You can bet the IMF will be out with their calculators working out how much profit they can make through their surcharge system as a result of these human disasters.

Conclusion

The surcharge issue is just one reason the IMF should be abolished as not being fit for purpose.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.