Washington DC — On Friday the 11th, the IMF announced policy changes that will save developing countries $1.2 billion per year. Despite the self-congratulations and fanfare, these reforms are only a tiny fraction of what campaigners had been asking for -- and an even smaller share of what the Global South needs.
This month, the International Monetary Fund (IMF) had an opportunity to end one of its most reviled policies and lift billions of dollars of debt off the backs of crisis-stricken developing countries. It chose not to.
The IMF's ostensible mission is to promote financial stability by providing loans to countries facing economic challenges or crises. These loans must be repaid, with interest, and typically come with harmful conditions of austerity, privatization, and deregulation.
Since 1997, the IMF has also levied fees called surcharges, on top of the regular costs of a loan, on countries whose debt to the Fund exceeds a certain threshold. By the IMF's logic, these highly indebted countries -- like Pakistan, which is still recovering from unprecedented natural disasters, and Ukraine, which is in the midst of a war -- surcharges provide an incentive to deter prolonged reliance on the Fund.
In reality, surcharges exacerbate already onerous debt burdens, siphoning scarce resources from countries in need of relief rather than punishment. As a result of the pandemic, the global economic shocks sparked by the war in Ukraine, climate change, and rising interest rates -- circumstances well beyond any individual country's control -- the number of countries forced to pay surcharges to the IMF has nearly tripled in the past five years. Clearly, surcharges do not work as claimed.
As the burden of surcharges has grown, so has their opposition. In recent years, researchers have uncovered the profound harms caused by the policy, members of Congress have passed legislation demanding their reassessment, and civil society groups have organized discussions and letters pushing for their elimination.
Ultimately, a clear global majority -- including every developing country, leading economists, UN human rights experts, and hundreds of organizations like Oxfam and the International Trade Union Confederation -- stood on the side of discontinuing the policy.
Given this near-consensus, the policy's clear harms, the fact that the IMF has no need for surcharge income, and the historical precedence for their elimination, many assumed that ending surcharges was a low-hanging fruit. Following years of pressure, the IMF initiated a formal review of surcharges this summer.
The outcome of that review, announced last week, provided a welcome measure of relief, but ultimately fell short. Rather than ending the counterproductive policy, the Fund raised the threshold at which surcharges must be paid, and slightly reduced their charge. The Fund also decreased its current non-surcharge lending rate from 4.51 percent to 4.11.
Because of the increased threshold, fewer countries will pay surcharges, though the number could still grow significantly in the coming years, as climate disasters and other external shocks force more countries to take on higher levels of IMF debt.
By the Fund's measurements, these changes will reduce the costs paid by all borrowers, combined, by $1.2 billion annually. While this is better than what would have occurred without concerted external efforts, the Fund has ultimately doubled down on its procyclical logic while conceding only enough to alleviate pressure.
Inside reports indicate that the United States, which has the largest vote under the Fund's undemocratic governance structure, was the primary blocker of more substantive reform, proposing instead to use the income from surcharges to cover for wealthy countries' own funding shortfalls.
For many highly indebted countries, including Ecuador, Argentina, Ukraine, Egypt, and Pakistan, the failure to discontinue surcharges means a multi-billion dollar bill will soon come due, making it harder to reduce debts to sustainable levels or to finance development, climate action, and other critical needs.
This, in turn, adds fuel to the fire of an already vicious cycle of debt, underdevelopment, and climate change; nearly 80 developing countries are already in or at risk of debt distress, three quarters of which are highly climate vulnerable.
This is hardly the first time the IMF has imperiled the Global South. The IMF is perhaps best known for its role during the debt crises of the 1980s and 1990s, in which emergency loans were used to force developing countries to adopt neoliberalizing reforms that resulted in lost decades of economic growth.
In response to these evident harms, mounting global protests, and decreasing reliance on Fund lending, the IMF in the 2000s began to adopt better rhetoric, established new fora for civil society participation, and eventually even owned up to many of its failures. But while these cosmetic changes defused opposition, the Fund did not fundamentally alter its approach.
Since the 2008 financial crisis, and accelerating during the pandemic, developing countries have once again been forced to accumulate a powder keg of debt. The IMF's response has not only been insufficient, but, in the case of surcharges and the continued insistence on austerity, actively harmful. Meanwhile, attempts to democratize the IMF's governance structure and give greater voice to countries of the Global South have repeatedly faltered.
But while the IMF long ago revealed its true face, developing countries have had nowhere else to turn. In today's increasingly multipolar world, that may soon change. China's emergence as the world's largest bilateral creditor, the establishment of the BRICS+'s New Development Bank and Contingent Reserve Agreement, efforts to build alternatives to the US dollar and its attendant monetary constraints -- countries across the Global South are seeking to reduce dependence on the IMF.
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While these alternatives remain nascent, the fact that the Fund has proven unresponsive to even the simplest of reforms should only hasten this process.
Civil society groups, meanwhile, who hoped that directly engaging with the IMF would lead to substantive change, may yet become disillusioned. If all this time, resources, and energy could not even end surcharges, perhaps the prospects of "change from within" should be abandoned -- and the era of mass protest from outside the security perimeter, revitalized.
Discontinuing surcharges alone would not have solved the many crises facing the Global South. But the failure to do so has made clear that the solutions do not lie within the IMF. When even the low-hanging fruit is out of reach, perhaps all that is left is to strike at the root.
Michael Galant is a Senior Research and Outreach Associate at the Center for Economic and Policy Research (CEPR) in Washington, DC. He is also a member of the Secretariat of Progressive International. Views are his own. He can be found on X at @michael_galant.
IPS UN Bureau
