Ukraine's cost of war: US aims to get IMF to remove surcharge on loans to war torn country

Washington: A provision in the recently signed defence spending bill mandates that the United States work to ease Ukraine’s debt burden at the International Monetary Fund, which could create tensions at the world’s lender-of-last-resort over one of its biggest borrowers.

The National Defence Authorisation Act requires American representatives to each global development bank, including the IMF, where the US is the largest stakeholder, to use " the voice, vote, and influence " of the US in seeking to assemble a voting bloc of countries that would change each institution’s debt service relief policy regarding Ukraine.

Among other things, the US is tasked with forcing the IMF to re-examine and potentially end its surcharge policy on Ukrainian loans. Surcharges are added fees on loans imposed on countries that are heavily indebted to the IMF.

The US interest in changing the policy comes as it has distributed tens of billions for the Ukrainian military and humanitarian aid since the Russian invasion began in February. Most recently, Ukraine will receive $44.9 billion in aid from the US as part of a $1.7 trillion government-wide spending bill.

Inevitably, some US grant money is spent servicing IMF loans.

“I can see why the Senate would want to relax the surcharge for Ukraine,” Peter Garber, an economist who most recently worked at the global markets research division of Deutsche Bank, wrote in an email. “As the principal bankroller of economic aid for Ukraine, the US would not want to deliver funds only to have them go right to the coffers of the IMF.”

Economists Joseph Stiglitz at Columbia University and Kevin P Gallagher at Boston University wrote in February about surcharges, saying that “forcing excessive repayments lowers the productive potential of the borrowing country, but also harms creditors” and requires borrowers “to pay more at exactly the moment when they are most squeezed from market access in any other form.”

Other economists say the fees provide an incentive for members with large outstanding balances to repay their loans promptly.

Even with the aid, the beleaguered Ukrainian economy is expected to shrink by 35 per cent, according to the World Bank, and the country will owe roughly $360 million in surcharge fees alone to the IMF by 2023.

Having surcharge waived off won’t be easy

The effort to wrangle the IMF’s 24 directors, who are elected by member countries or by groups of countries, to end the surcharges may not be so easy.

Just before Christmas, the directors decided to maintain the surcharge policy. They said in a 20 Decemebr statement that most directors “were open to exploring possible options for providing temporary surcharge relief,” but others “noted that the average cost of borrowing from the Fund remains significantly below market rates.”

Prominent economists studying the war’s impacts pointed out in a December report — “Rebuilding Ukraine: Principles and Policies,” by the Paris- and London-based Centre for Economic Policy Research — that “some significant voting members may have interests that are not aligned with having Ukraine succeed economically.”

No more ‘blank check’

Securing consistent financing for Ukraine could become harder as the war rages on. There are growing fears of a global recession and concerns that European allies are struggling to deliver on their financing promises. In addition, the GOP is set this coming week to take control of the House, with the top Republican, Representative Kevin McCarthy, saying his party will not write a “blank check” for Ukraine.

Mark Weisbrot, co-director of the liberal Centre for Economic and Policy Research in Washington, said the surcharge issue affects not just Ukraine, but also other countries facing debt crises. Among them: Pakistan, hit by flooding and humanitarian crises, as well as Argentina, Ecuador, and Egypt, who together are on the hook for billions in surcharges.

“There is no logic to the IMF imposing surcharges on countries already in crisis,” Weisbrot said, “which inevitably happens because the surcharges are structured to hit countries already facing financial problems.”

He said the issue will become more urgent as Ukraine’s debt grows and the war drags on.

Jeffrey Sachs, an economist, and director of the Centre for Sustainable Development at Columbia University said, “these surcharges should certainly be eliminated,” adding: “The IMF undercuts its core lender-of-last-resort role.”

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