The US Can Make Billions Available to Ukraine at No Cost to Itself

The United States has a chance to save Ukraine billions of dollars, and at no cost to U.S. taxpayers, by pushing for an end to the unfair and harmful surcharge policy of the International Monetary Fund (IMF).

The IMF is currently reviewing this surcharge policy, which hits Ukraine—and other highly indebted borrowers like Kenya, Ecuador, Argentina, Barbados, and Egypt—with additional charges on top of standard interest and service fees. Human rights and development experts consider surcharges to be counterproductive and contrary to international human rights law. The IMF should take this opportunity to permanently end its surcharge policy for highly indebted borrowers.

Surcharges are penalty fees levied on middle-income countries with high levels of IMF debt. There are two types of surcharges exacted by the IMF: level-based surcharges and time-based surcharges. Level-based surcharges add 2 percentage points in fees to a country’s outstanding IMF credit when it surpasses 187.5% of a country’s quota to the Fund. Time-based surcharges add another percentage point of fees when a country’s IMF debt exceeds this threshold for over 36 or 51 months, depending on the lending facility. Some countries, including Ukraine, are paying both surcharges, amounting to an additional 3% points of fees.

In Ukraine’s case, surcharges will add nearly $3 billion to the war-ravaged country’s debt burden over the next decade even as it needs an estimated $9.5 billion in emergency financing for recovery and reconstruction just this year.

The IMF and Treasury Secretary Yellen have previously claimed that surcharges incentivize timely repayment to the IMF. However, countries are struggling to repay the IMF due to exogenous shocks, not a lack of appropriate incentives. Surcharges are counterproductive as they push countries facing crises—including war, the COVID-19 pandemic, and climate disaster —further into debt. It is no coincidence that, prior to the pandemic, only eight countries were paying IMF surcharges; today 23 countries are paying these fees.

In Ukraine’s case, surcharges will add nearly $3 billion to the war-ravaged country’s debt burden over the next decade even as it needs an estimated $9.5 billion in emergency financing for recovery and reconstruction just this year. Experts say efforts to relieve Ukraine’s debts could change the course of the war. Ukraine recently reached a much-needed deal to restructure its debts. Keeping surcharges in place would diminish the benefits of this restructuring, as it sends $3 billion that could be spent on recovery, reconstruction, and defense back to the IMF. Surcharges have already cost Ukraine $621 million between 2018 and 2023. Discontinuing surcharges would save Ukraine billions of dollars in its hour of need.

Following intense criticism of surcharges by leading economists, developing countries, and U.S. members of Congress, the IMF announced earlier this year that it would carry out a review of the controversial policy. Following consultations with IMF stakeholders— in particular, the US Treasury Department—the Fund is expected to announce the results of its review, and any recommendations of changes to the policy, before the IMF’s Annual Meetings in October. It’s worth noting that the IMF has previously recognized the profoundly harmful and counterproductive consequences of similar past policies, moving to discontinue them in 1974, 1981, and 1992.

Yet, among wealthy countries, there appears to be resistance to terminating, or even significantly reforming, the current surcharge policy. It is particularly troubling that much of this resistance appears to be rooted in the hope that the income from surcharges can supplement projected funding shortfalls for the IMF’s Poverty Reduction and Growth Trust (PRGT) facility, which offers low-income countries interest-free and concessional loans. The IMF, the US Treasury, and other observers have previously discussed surcharges as a source of income for IMF lending via the PRGT.

Among wealthy countries, there appears to be resistance to terminating, or even significantly reforming, the current surcharge policy.

Post-pandemic funding needs have depleted PRGT resources and the program is in need of replenishment. It may be necessary for the IMF to increase its lending through the PRGT in response to the growing needs of developing countries. However, squeezing highly indebted countries such as Ukraine to do so would be a perverse solution. These same middle-income countries have also largely been left out of pandemic-related debt relief initiatives and are struggling to recover under the weight of a failing international financial architecture. Funding for the PRGT shouldn’t come at the expense of these countries.

There are better and more effective alternatives to relying on surcharges to fund the PRGT. These include: donations from the U.S. and other advanced economies, gold sales, and changes to the IMF’s internal accounting practices. Surcharges are infinitesimal compared to the IMF’s much-vaunted $1 trillion lending firepower. The IMF has vast reserves of gold that remain largely undervalued. These gold reserves are currently valued at the 1960s rate of approximately $47 per ounce. Valued at current market rates of approximately $2,556 per ounce, the IMF’s gold reserves would be worth $228 billion. The IMF could sell a portion of these reserves or adopt mark-to-market accounting practices to fund the PRGT.

Indebted middle-income countries like Ukraine should not be expected to subsidize PRGT lending when better alternatives exist. A permanent end to surcharges would eliminate an increasingly significant barrier to sustainable recovery in many developing countries. Given that the U.S. holds a de facto veto over IMF policy changes, the stance of the U.S. Treasury Department will be instrumental. Refusing to change the surcharge policy today would be a major missed opportunity for Secretary Yellen and the world.