Debt, Development, and the IMF: Flawed Frameworks and the Need for Reform
The Challenge of Debt
WASHINGTON, CMC—When considering the economic and development challenges of developing economies in the face of the climate crisis, most people view debt as a complicating factor and, at worst, a source of many of our problems.
There are good reasons for this. Rising public debt across the developing world and the surging interest bills accompanying it are diverting public funds from already underfunded health and education programs. It threatens to push more countries into outright distress and more people back into poverty.
The Need for Better Lending and Borrowing
Yet there is no escaping the fact that debt will continue to be a critical component of the funding developing economies need to meet their sustainable development goals—particularly climate resilience—and fulfill their economic development potential more generally. The challenge, therefore, is to both lend and borrow “better.” What does this mean?
It means ensuring that public borrowing is anchored in sustained fiscal discipline. However, it also means avoiding debt that is likely to prove unsustainable. While multiple factors determine overall debt sustainability, experience teaches us that the rate of economic growth is the most critical driver of debt dynamics.
Flawed IMF Lending Framework
Although much focus has been on the very high interest rates paid by some developing economies on their Eurobond issuances since the start of 2024, the problem of unsustainably high borrowing costs is also evident in lending by the official sector.
The recent rise in global interest rates has revealed a flawed IMF lending framework for middle-income countries that no longer support debt sustainability. It is in desperate need of reform.
Surcharge Regime and Tenor
Let’s start with the central issue of cost. At the start of the millennium, surcharges were introduced on all IMF lending to middle-income countries through the General Resources Account (GRA), which includes Stand-by Arrangements (SBAs), Extended Fund Facilities (EFFs), and Rapid Financing Instruments (RFIs).
The surcharge structure comprises a level-based surcharge of 2 percent on GRA borrowing that exceeds 187.5 percent of quota and an additional one percent “time-based” surcharge on the portion of GRA credit above this threshold that is outstanding for more than 36 months (or 51 months in the case of the EFFs).
As of June this year, the minimum all-in interest rate payable on GRA disbursements (this covers SBA, EFF, and RFI disbursements) had surged to 5.1 percent a year, with sovereigns paying 7.1 percent on the portion of their drawings that exceeds 187.5 percent of quota.
GRA liabilities outstanding for three years or more (or four in the case of the EFF- less than halfway to final maturity) now have a record interest rate of 8.1 percent.
Perpetual Programs and the Need for Reform
Therefore, it should come as no surprise that so many middle-income countries are locked into perpetual programs, borrowing from the IMF to repay the IMF. This is not good for sovereign borrowers, is unsuitable for the IMF, and could be better for the people the IMF serves.
Forty-five years have passed since the EFF was last reformed in 1979. Fresh thinking on IMF support for middle-income countries, based on what we know to be dedicated and capable management and shareholders, is long overdue.
Conclusion
As they confront the multiple crises of the early 21st century, middle-income countries need lending arrangements that are fit for purpose. It’s time for the IMF to switch its attention to fundamental reform of its existing lending arrangements for middle-income countries.
FAQs
Q: What is the IMF’s lending framework for middle-income countries?
A: The IMF’s lending framework for middle-income countries includes Stand-by Arrangements (SBAs), Extended Fund Facilities (EFFs), and Rapid Financing Instruments (RFIs), with a surcharge regime that has not been revised since the start of the millennium.
Q: Why is the IMF’s surcharge regime flawed?
A: The IMF’s surcharge regime is flawed because it is not sustainable for middle-income countries and exposes them to rising world interest rates, making it difficult for them to repay their debt.
Q: What is the impact of perpetual programs on middle-income countries?
A: Perpetual programs, where middle-income countries borrow from the IMF to repay the IMF, are not good for sovereign borrowers, are unsuitable for the IMF, and could be better for the people the IMF serves.
Q: Why is fresh thinking on IMF support for middle-income countries necessary?
A: Fresh thinking on IMF support for middle-income countries is necessary because the current lending framework is flawed and has not been revised since the start of the millennium, making it unsustainable for middle-income countries.
Q: What is the need for reform of the IMF’s existing lending arrangements for middle-income countries?
A: The need for reform of the IMF’s existing lending arrangements for middle-income countries is necessary to ensure that the lending arrangements are fit for purpose and can support the sustainable development goals of middle-income countries.