2024-09-26 13:22:07
The International Monetary Fund (IMF) is the lender of last resort to the global economy. Its role is to provide support to member states that are facing a financial and economic crisis. The Fund is able to provide medium and long-term financing at low interest rates to countries experiencing difficulties. However, credit operations that impose surcharges on the base interest rates on the Fund’s loans to a group of 22 countries, including Angola, are facing economic crises.
IMF surcharges are a system of fees on IMF loans that place an unfair burden on vulnerable countries in need of financial support.
The IMF charges two types of surcharges. A “band” surcharge of 200 basis points (2%) is levied on any loan outstanding from the IMF’s General Resources Account (GRA) that exceeds 187.5% of the country’s quota in the Fund. In addition, an additional “time” surcharge of 100 basis points (1%) is charged on the outstanding GRA loan that has exceeded this limit by more than 36 or 51 months, depending on the line of credit. Both surcharges can add up, meaning a country can pay up to 300 basis points (3%) in addition to interest rates and other debt service charges to the IMF. Surcharges are only charged on GRA credit.
To get a more accurate idea of what this means, we can simulate the interest rate on the IMF loan from the GRA account on 25 September.
The IMF base lending rate is 100 basis points (1%) above the Special Drawing Rights (SDR) interest rate. The Special Drawing Rights (SDR) rate, in turn, is determined by the weighted average of the interest rates of the five main currencies (US dollar, euro, British pound, Japanese yen and Chinese yuan) contained in the CST.
Based on the IMF’s calculation method, the official SDR interest rate, yesterday, September 25, was 3.6%. As a result, the base rate on an IMF loan would be 3.6%+1% = 4.6%. Adding the two surcharges of 2% and 1%, the total rate for a country currently subject to the surcharges would be 7.6%, more than 65% above the IMF’s base interest rate, which would be heavy enough for countries already subject to the surcharges. deep economic crisis and no strong currency.
IMF surcharges were first established in 1997. They were introduced in response to the systemic increase in the financing needs of developing countries from the IMF. As the size of individual programs increased, the Fund found it necessary to protect its borrowing capacity by imposing surcharges to penalize countries that borrowed significantly more than their quotas and/or were slow to repay surpluses over their quotas.
Which countries are affected by IMF surcharges?
The IMF has never been very transparent on this issue. For many years, surcharges were implemented opaquely. The IMF’s national reports referred only to “interest rates and other debt service charges”.
Until recently, the IMF began publishing data on surcharge payments through its financial data inquiry tool in 2023. This move was a step forward in terms of transparency. But while retrospective data is likely to be accurate, projections into the future are incomplete.
Our analysis is based on official data from the IMF and on the research we have carried out in publications from internationally renowned institutions such as Eurodad, the Center for Economic and Political Research (CEPR), the European Network for Debt and Development. Later, Nobel Prize winner for Economics Joseph Stiglitz wrote an article with other economists on the subject.
Based on various sources, as of 2021, fifteen countries have previously paid surcharges to the IMF and continue to do so: Angola, Argentina, Armenia, Barbados, Costa Rica, Ecuador, Egypt, Gabon, Georgia, Jordan, Mongolia, Pakistan, Seychelles, Tunisia and Ukraine.
IMF loans were granted to the 15 countries that triggered the surcharges before the Covid-19 pandemic in 2020. After Covid-19, seven more countries joined in 2023: Benin, Ivory Coast, Kenya, Moldova, North Macedonia, the Senegal and Sri Lanka.
What is the cost of IMF surcharges for these countries?
To put the issue in better context, according to official IMF data, Angola took a loan of 3.2 billion SDR (1 SDR = 1.45 USD in 2018) in December 2018. At the time, the loan was 432% of Angola’s share at the IMF. Therefore, this loan would be subject to a 2% surcharge on top of the IMF’s base interest rate.
The loan would expire in December 2021. However, as of August 31, 2024, the outstanding balance was still 2.9 billion SDR (1 SDR = 1.35 USD), which is 404% of Angola’s share in the IMF, which would result in an additional surcharge of 1%, due to the lack of timely repayment above the limit of 187.5% of the quota. Since the loan was granted in 2018, Angola is assumed to be paying a surcharge to the IMF of 3% on the loan, in addition to the base interest rate.
Starting next year, Angola’s debt service (interest, charges, surcharges and capital) is expected to increase, rising from 139 million SDR in 2024 to 572 million SDR in 2025, 703 million SDR in 2026, 662 million SDR in 2027 and 622 million SDR. in the year 2028.
We could not find detailed information on the value of surcharges in the IMF database. But the documents we consulted, namely from CEPR, show that the value could reach up to 30% of the above values annually.
These data are clearly inaccurate due to the lack of transparency in the communication of official data on Angola’s debt surcharges to the IMF. Just as Kenya is doing, auditing only Angola’s public debt would allow more clarity, not only on surcharges to the IMF, but also on other less transparent loan conditions.
Read more here: Kenya begins public debt audit to ensure better accountability and transparency, says Finance Minister
In a more general context, Stiglitz and the co-authors of the aforementioned article sharply criticized the IMF’s surcharge policy, claiming that the Fund’s policy had led to an unimaginable situation.
According to Stiglitz, a group of 22 countries in financial difficulties has become the largest source of net income for the International Monetary Fund in recent years, with payments higher than the Fund’s operating costs.
The institution charged with providing the global public good of a well-functioning international financial system is, in effect, asking countries that can barely pay their own bills to foot the bill for the rest of the world .
This difficult situation is the result of the IMF’s surcharge policy, which imposes additional fees on countries that exceed limits on the amount or duration of their loans from the Fund.
IMF position on surcharge policy
The IMF is a priority creditor, meaning that countries must pay the Fund before other creditors. Therefore, it does not make much sense to apply surcharges, because if countries cannot pay the IMF, they cannot pay any other creditor.
Surcharges on what countries already have require them to provide scarcer currency to pay the IMF, which would limit the ability of those countries to meet priority development expenditures, especially at a time when they should that developing countries would have increased investment to achieve the United Nations Sustainable Development. Goals for 2030 and the energy transition under the Paris climate agreement.
In recent years, several world leaders, the G77 group of developing countries, UN officials, UN human rights experts, leading economists, civil society organizations and others have called for the suspension or complete end to IMF surcharge policy.
It is true that the IMF recognizes that the system is unfair and has already committed to reforming it at the IMF/World Bank Spring Meetings in April 2024. It is expected that the IMF will present a proposal to that effect at the Annual Meetings of IMF/World Bank. at the end of October.
However, the IMF will not be able to reform the system without the agreement of its main shareholders, the United States and Europe.
At a time when global strategic partnerships are being redefined, and when the United States and Europe are looking for strategic alliances with Africa to counterbalance China’s hegemony on the African continent, it would be important that the United States and Europe both a concrete approach. to reform the international financial system.
Overall, many economists believe that returns on loans and equity investments in Africa systematically overestimate risk, resulting in much higher risk-adjusted interest rates in these countries than would otherwise be the case. “normal”.
Angola will receive US President Joe Biden on October 13, two weeks before the IMF/World Bank annual meeting. It would be a great opportunity for the President of Angola, João Lourenço, to reiterate to his counterpart in America the appeal he made at the General Assembly of the United Nations to promote a fairer international financial system. A joint initiative from the two Presidents would strengthen the movement towards reforming the international financial system.
Read more here: PR at the UN calls for a fairer international financial system
In fact, it is not worth pointing the finger at China for its opaque practices regarding loans to African countries, unless institutions like the IMF set an example in terms of transparency and fairness. Otherwise, it would be like pointing a finger in front of a mirror.
By: José Correia Nunes
Executive Director of Portal de Angola
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