Reforming the IMF Surcharge Rate Policy to Avoid Procyclical Lending

Reportedly designed to discourage the overuse of Fund resources and to ensure the financial soundness of the IMF, in recent years, surcharges have come under scrutiny for two reasons. First, such surcharges are inherently procyclical as they increase the burden of debt payments at exactly the time when a member country is in need of counter-cyclical and low-cost financing, contravening the very rationale of the IMF.

Ten countries were paying surcharges in 2020. Now, 22 countries are subject to IMF surcharges, and revenues from surcharges between 2020 and 2023 have reached about $6.4 billion, just as countries are struggling to recover from their balance of payments issues amidst multiple shocks, such as COVID-19, climate change, war, and advanced economy interest rate changes.

The five countries paying the highest surcharges are Ukraine, Egypt, Argentina, Ecuador, and Pakistan. Second, IMF surcharges have now become among the largest sources of revenue for the IMF, creating a perverse situation whereby the most economically disadvantaged member countries are a major source of income for Fund operations.