Reforming the IMF Surcharge Rate Policy to Avoid Procyclical Lending

The International Monetary Fund (IMF) levies ‘surcharges’ or extra fees beyond the normal borrowing costs on member countries that either draw “sufficiently large” amounts of IMF credit to mitigate balance of payments constraints, or that maintain their credit exposure with the institution for “sufficiently long” periods of time. Such surcharges have become increasingly important: 10 countries paid 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. Reportedly designed to discourage the overuse of Fund resources and to ensure the financial soundness of the IMF’s own balance sheet, in recent years surcharges have come under scrutiny for two reasons. First, such surcharges are inherently pro-cyclical as they increase the burden of debt payments at exactly the time when a member country needs counter-cyclical and low-cost financing, contravening the very rationale of the IMF. Secondly, 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. This paper reviews the rationale for IMF surcharges, evaluates their impacts on member country economies and on the IMF business model, and presents and evaluates various proposals for IMF surcharge reform.