## THE IMF MUST LEAD ON DEBT SUSTAINABILITY

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### Debt as a central development and climate-financing issue
- Public debt is diverting funds from health and education and threatening to push more countries into distress and more people back into poverty.
- Debt will remain a critical component of financing for sustainable development goals, particularly climate resilience; the imperative is to “lend and borrow ‘better’.”
- Key analytical insight: the rate of economic growth is the most important driver of debt dynamics. Rule of thumb stated: interest rates likely to exceed the rate of future nominal growth cannot be considered sustainable.

### Flawed IMF lending framework for middle-income countries
- Surcharges introduced at the start of the millennium on IMF GRA lending (SBAs, EFFs, RFIs):
  - Level-based surcharge: 2 percent on GRA borrowing that exceeds 187.5 percent of quota.
  - Time-based surcharge: additional 1 percent on the portion of GRA credit above this threshold outstanding for more than 36 months (or 51 months in the case of the EFFs).
- Original objective of surcharges: to dissuade large and prolonged borrowing from depleting the IMF’s resources among higher-rated emerging market sovereign borrowers.
- The global context has changed:
  - IMF precautionary balances: $6.2 billion as of April 1999 to approximately $33 billion as of April 2024.
  - As of April 2024, 21 middle-income countries had borrowed above 187.5 percent of quota.
  - Compared with a decade ago, the average per capita income of countries with active EFFs has fallen by a factor of 4.
- The unchanged surcharge regime has exposed fragile sovereign borrowers to the force of rising world interest rates despite the IMF being well capitalized and not reliant on market borrowing.

### Surcharge effects on borrowing costs (exact figures)
- As of June this year:
  - Minimum all-in interest rate payable on GRA disbursements: 5.1 percent a year.
  - Rate on portion of drawings that exceeds 187.5 percent of quota: 7.1 percent.
  - GRA liabilities outstanding for three years or more (or four in the case of the EFF): record interest rate of 8.1 percent.
- Conclusion drawn: IMF lending to some middle-income countries cannot be considered sustainable under the current cost structure.

### Tenor and suitability of IMF instruments
- Critique of the Extended Fund Facility (EFF):
  - EFF disburses over only three or four years and has to be repaid in seven (weighted average).
  - Structural reform is long-term; an instrument with these constraints is not fit to support structural reform amid a “polycrisis” and the climate crisis.
  - Result: many middle-income countries are locked into perpetual programs, borrowing from the IMF just to repay the IMF.
- Historical note: the EFF was last reformed in 1979 (45 years ago).

### Recent IMF innovations and contrasting features
- Rapid responses and instruments introduced in recent years:
  - Rapid rollout of the RFI and the Rapid Credit Facility during the pandemic.
  - Allocation of a record $650 billion-equivalent in SDRs.
  - Introduction of the Resilience and Sustainability Facility:
    - Funded by rechanneling a portion of the new SDRs.
    - Designed to help finance climate resilience and adaptation for countries that already have an IMF upper-credit-tranche arrangement.
    - Final maturity of 20 years and carries no surcharges.

### IMF portfolio concentration and scale
- Current IMF portfolio and borrower concentration:
  - Portfolio stands at $112 billion spread across 90 countries, translating to just over $1.2 billion per borrower.
  - Excluding Argentina ($32 billion), the figure falls to $900 million per borrower.
  - Excluding the top three borrowers (Argentina, Egypt, and Ukraine) brings the per-borrower figure to just under $700 million.
  - Top three borrowers account for 46 percent of the portfolio.

### Policy recommendations and priorities (explicitly stated or strongly implied)
- Reform the IMF’s surcharge regime urgently:
  - Options include a radical overhaul that includes caps that take into account the interest rate cycle or scrapping surcharges outright.
- Reform the tenor and structure of lending arrangements for middle-income countries to support long-term structural reforms and climate resilience.
- Reassess IMF instruments so that they are “fit for purpose” for middle-income countries confronting multiple, long-lasting crises.
- Leverage recent precedents (RFI, Rapid Credit Facility, SDR allocation, Resilience and Sustainability Facility) as a basis for further reform of lending arrangements.

*mia amor mottley, “THE IMF MUST LEAD ON DEBT SUSTAINABILITY,” F&D, JUNE 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/06/mottley.pdf_