Will Ukraine Benefit if IMF Ends its Punitive Fees on Debt Burdened Countries?

By Anna Kornyliuk
KYIV, Ukraine, Oct 4 2024 – Over the coming month, the United States has a window of opportunity to lift a multi-billion-dollar burden from Ukraine, and other countries in financial distress, without costing the US taxpayer a dime.

The International Monetary Fund (IMF) is currently considering ending its controversial “surcharges” — punitive fees that it imposes on countries whose debt exceeds a certain threshold. These surcharges come on top of regular interest and service costs, and can increase the cost of borrowing by as much as 40 percent.

By piling additional fees onto already onerous debt burdens, surcharges make it harder for struggling nations to reduce debt to sustainable levels, while siphoning off scarce resources that are needed for health, education, climate action, and development.

In theory, surcharges are meant to disincentivize reliance on IMF lending. But the countries that have been forced to turn to the IMF face bigger challenges than a lack of incentive.

Over the last five years, developing countries have been plagued by devastating global crises far beyond their control: COVID-19, debilitating food and energy price shocks, skyrocketing interest rates, and increasingly frequent and ferocious climate disasters. In this period, the number of countries paying surcharges has skyrocketed from eight to twenty-two.

Clearly, surcharges are failing to achieve their goal.

My country, Ukraine, is a case in point. Forced further and further into debt while defending itself from a catastrophic and illegal invasion, Ukraine is now the second largest payer of surcharges in the world. In the last five years, we’ve paid roughly $750 million in surcharges. Over the coming decade, surcharges will cost us an additional $3 billion.

This $3 billion may not be make-or-break for Ukraine’s future. But in times of war, every dollar counts. That’s $3 billion from Ukrainian hands to the world’s biggest multilateral financial institution — $3 billion that cannot be spent on defense, humanitarian needs, or reconstruction.

Other countries suffer unjustly as a result of surcharges too. In 2022, unprecedented flooding left a third of Pakistan’s entire territory underwater, and 8 million people displaced. Over the next five years, while attempting to recover from this catastrophe, Pakistan will be forced to pay $445 million in surcharges.

Egypt — which has experienced growing hunger since Russia’s war disrupted its wheat imports — Kenya — which has been wracked by deadly unrest due to its crushing debt burden — Barbados — which was recently slammed by a record-breaking hurricane — all are paying significant portions of their budgets, above the regular cost of lending, as punishment for needing the IMF’s help.

Experts and activists have long warned that surcharges are harmful and counterproductive. Members of the US Congress, UN human rights experts, leaders of developing countries, Nobel laureate economists, and hundreds of civil society groups, including Ukrainian organizations like my own, have all called to end the policy.

That effort got a sudden boost this year when the IMF announced that its precautionary balances, which are, in part, built up using surcharges, had reached their target level. In other words, the IMF already has what it needs to mitigate potential losses, without squeezing the very countries it is meant to help.

Forcing countries like Ukraine to make up for funding shortfalls from wealthy countries by using surcharge income to finance the Fund’s concessional lending programs, as some have proposed, is simply backward.

With the Biden administration’s support, the IMF recently initiated a review of the surcharge policy. A final decision is expected by the Fund’s October meetings, making this month the sole window of opportunity to ensure that the result of this long-awaited surcharge reassessment is not a checked box and a tweak at the margin, but their complete elimination.

There is plenty of precedent. The IMF has implemented surcharge-like policies multiple times in its 80-year existence. On each occasion, the Fund ultimately determined the policy to be a failure and reversed course. This time, it should do so for good.

But that can’t happen without US support. As the largest single voter at the IMF, any policy change effectively runs through the Biden administration.

That should be an easy win. While funding for Ukraine has become increasingly contentious in Congress, the IMF’s surcharge review presents President Biden with a chance to save Ukraine — and other heavily indebted developing countries — billions of dollars, without a political fight and at zero cost.

Opportunities like this don’t come along often, particularly in the last months of one’s presidency. For the sake of Ukraine, and citizens of indebted countries around the world, President Biden should seize it.

Anna Kornyliuk is a senior policy and data analyst at the Kyiv-based Institute of Analytics and Advocacy.

IPS UN Bureau

Follow @IPSNewsUNBureau
!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0],p=/^http:/.test(d.location)?’http’:’https’;if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src=p+’://platform.twitter.com/widgets.js’;fjs.parentNode.insertBefore(js,fjs);}}(document, ‘script’, ‘twitter-wjs’);