The IMF’s most important function is to provide emergency financing to countries in dire economic straits that are unable to pay their creditors. In response to the COVID-19 pandemic, the IMF has already approved 119 programs to 85 countries at a cost of over $100bn.
But, as it turns out, the countries that need the most from the IMF will have to pay over $4bn in extra surcharges on top of interest payments and fees from the beginning of the crisis through the end of 2022. What’s more, the IMF estimates the surcharges have become the Fund’s largest source of revenue, accounting for almost half of revenues during this period. At exactly the same time, developing countries need every penny they can muster to fight the virus, protect the vulnerable, and mount an inclusive and green recovery. Something has gone horribly wrong with the policy.
The COVID-19 pandemic triggered the worst economic downturn since the Great Depression. The World Bank estimates that upwards of 124m people were pushed into extreme poverty in 2020, with 8 out of 10 of those newly poor living in middle-income countries. Federal debt is a particularly acute problem here. For instance in Nigeria, more than 50 percent of government revenue is being used to service international debts rather than combat the virus.
The region of Latin America and the Caribbean has been one of the hardest hit, with more than 500,000 deaths and an economic downturn of 7.7 percent in 2020. In per capita terms, the region has been pushed back to 2010 levels, effectively causing yet another lost decade. The United Nations estimates that many countries in the region are deploying 30 to 70 percent of shrunken government revenue to pay creditors.
Even though middle-income countries are among the hardest hit, the G20’s new architecture to help countries alleviate debt distress — the Debt Service Suspension Initiative and the Common Framework — only provide debt suspension and relief to the low-income countries. In addition, the G20 schemes only apply to bilateral official creditors such as members of the Paris Club and China, even though two-thirds of middle-income-country debt is held in international financial institutions such as the IMF.
To read more, visit the Financial Times.