## ppea2024044

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### EXECUTIVE SUMMARY — Purpose and scope
- Provides background for an informal discussion to engage the Executive Board on the review of charges and the surcharge policy.
- Reviews charges and surcharges for the first time since 2016 and postpones the decision on setting the margin for the basic rate of charge to allow a comprehensive assessment covering:
  - effectiveness of the incentive function of surcharges;
  - total cost for borrowing members;
  - income and reserves accumulation potential;
  - possible changes to commitment fees arising from the need to adjust nominal thresholds for erosion.
- Considers adjustment of thresholds set in terms of quotas in the context of the effectiveness of the 16th general review of quotas.
- Prepared by the Finance Department and Strategy, Policy, and Review Department; approved by Bernard Lauwers (FIN) and Ceyla Pazarbasioglu (SPR).

### Role and structure of charges, surcharges, and commitment fees
- Charges and surcharges purpose:
  - mitigate financial risks, generate income to cover intermediation expenses, and accumulate precautionary balances (PBs).
- Basic rate of charge:
  - Determined as the SDR interest rate plus a fixed margin set by the Executive Board every two years under Rule I-6(4).
  - Margin unchanged at 100 basis points since May 1, 2012 (historically set at 100 basis points).
- Surcharges:
  - Level-based surcharge: 200 basis points applied on portion of GRA credit outstanding greater than 187.5 percent of quota.
  - Time-based surcharge: 100 basis points applied on portion of GRA credit exceeding the level-based threshold for more than 36 months (or 51 months for EFF borrowings).
  - PRGT concessional lending and RST not subject to surcharges.
- Commitment fees:
  - Charged on undrawn amounts and refunded proportionally on drawings.
  - Upward-sloping fee structure: 15 basis points up to 115 percent of quota; 30 basis points for amounts above 115 percent and up to 575 percent of quota; 60 basis points for amounts exceeding 575 percent of quota.
  - Tier thresholds adjusted in 2016 from 200 percent and 1,000 percent of quota to 115 and 575 percent of quota, respectively.
- Service charge:
  - Fixed service charge of 50 basis points levied on each GRA disbursement.

### Recent changes in the operating environment and Fund financial position
- Fund credit outstanding:
  - Returned to record levels reached during the Global Financial Crisis; remained moderate as a share of Fund resources.
  - By 2022, GRA credit outstanding surpassed previous GFC peak, hovering just below SDR 100 billion.
  - Total Fund credit outstanding series include e.g., 2013: 90,182; 2024: 90,801 (SDR millions) as presented in source tables.
- Duration and structure of arrangements:
  - Duration of Fund arrangements increased; more Extended Arrangements relative to SBAs (currently four Extended Arrangements for every SBA).
  - Successor arrangements and repeated use increased: nearly one in three GRA arrangements approved since the pandemic was a successor within last three years; 13 member countries had repeated GRA programs during 2013–22.
  - The five largest cases account for about 70 percent of Fund credit outstanding.
- Interest environment and income:
  - Basic rate of charge rose sharply by about 400 basis points since 2022 due to higher SDRi; margin remained at 100 basis points.
  - Investment (non-lending) income increased substantially in FY2024, exceeding non-intermediation expenses.
  - Precautionary Balances (PBs) reached SDR 25 billion medium-term target in FY2024 and Executive Board maintained SDR 25 billion PB target.

### Assessment of the current surcharge policy — incidence, burden, incentives, erosion
- Incidence and concentration:
  - Number of surcharge-paying members peaked at 15 in 2012–13, declined to single digits in 2016–19, and reached a maximum of 22 (out of 53 with GRA credit outstanding) in March 2024 (about 40 percent).
  - Top five surcharge payers consistently contributed more than 90 percent of total surcharge income over past ten years; post-pandemic top payers include Argentina, Egypt, Pakistan, Ecuador, and Ukraine.
  - Prolonged surcharge payers (paid surcharges three or more consecutive years) rose to 15 out of 22 surcharge payers in 2024.
- Burden and cost dynamics:
  - Total cost of Fund borrowing increased substantially after 2021; dispersion widened during global distress episodes.
  - October 2021–March 2024: basic rate of charge increased from 105 basis points to 511 basis points; the entire 406 basis points increase was due to higher SDRi (margin unchanged at 100 basis points).
  - Effective surcharge rates (end-March 2024): average for all 22 members paying surcharges = 0.89 percent; for 14 surcharge payers effective rate < 1 percent; for largest two borrowers effective surcharge rate exceeded 2 percent: 2.4 percent for Argentina and 2.1 percent for Egypt.
  - Example: for largest surcharge payer, effective surcharge rate 2.4 percent accounted for less than a third of total effective cost of borrowing from Fund of 7.5 percent.
- Incentive function:
  - Mixed evidence: surcharges effective for some members (Groups 1 and 2) but not for large, protracted borrowers (Group 3).
  - Three borrower groups identified:
    - Group 1: credit outstanding hovers near threshold, suggesting avoidance behavior (e.g., Cyprus; examples include Colombia, Kosovo, North Macedonia, Serbia).
    - Group 2: borrow above threshold during distress, reduce outstanding once pressures ease and market access returns (e.g., Greece, Ireland, Portugal, St. Kitts and Nevis).
    - Group 3: large, persistent financing pressures where threshold not binding and surcharges less effective (e.g., Angola, Argentina, Costa Rica, Ecuador, Egypt, Jordan, Pakistan, Ukraine).
- Threshold erosion:
  - Level-based surcharge threshold of 187.5 percent of quota has eroded in real terms since 2016, bringing more countries into surcharge scope.
  - Staff estimate: a value of about 280 percent of quota would fully offset erosion.
  - Since 2016 the nominal SDR value of level-based threshold eroded by:
    - 32-34 percent in terms of world GDP;
    - 31-32 percent in terms of world’s external financing needs.
  - For EMDEs, erosion deeper: GDP: 34-37 percent; Current payments: 39-40 percent; Capital inflows: 32-35 percent; External financing needs: 29-30 percent.
- Surcharge income and role in PBs:
  - Surcharge income (SDR millions): FY 2015 peak SDR 1,463; FY 2018 SDR 371; FY 2023 SDR 1,407.
  - Share of surcharge income in operational income: 52.4 percent in FY 2016; 27 percent in FY 2019; 51.1 percent in FY 2022.
  - Share of surcharge income in net operational income fluctuated between 53 percent and 110 percent over the period.

### Illustrative reform approaches and evaluation criteria
- Reform spectrum considered:
  - Parametric adjustments (thresholds, rates, time triggers, tiered rates).
  - Broader architectural innovations (state-varying surcharge rates, capping total interest rate, refunding surcharges upon principal repayment, suspension/abolition).
- Evaluation criteria:
  - burden relief;
  - incentive-compatibility;
  - income generation potential and stability;
  - preservation of simplicity of the surcharge framework.
- Trade-offs emphasized: abolishing/suspending surcharges reduces burden and regressivity concerns but removes price incentives and substantially reduces income/reserve accumulation capacity; refunding surcharges upon repayment reduces net burden but not upfront burden during crisis.

### Parametric adjustments — illustrative options, fiscal impacts, and distributional implications
- Increase level-based surcharge threshold to 280 percent of quota:
  - Restores erosion broadly; implies annual lending income loss of about SDR 360 million in FY2026.
  - Largest three surcharge payers account for 45 percent of total relief.
  - Reduces number of surcharge-paying members from 20 to 16 in FY2026 (illustration).
- Reduce level-based surcharge rate by 50 percent (from 200 to 100 basis points):
  - Implied annual lending income loss of about SDR 520 million in FY2026; largest three payers account for 75 percent of total.
  - Number of surcharge payers unchanged versus status quo.
- Reduce time-based surcharge rate by 50 percent (from 100 to 50 basis points):
  - Implied annual lending income loss of about SDR 240 million in FY2026; largest three payers account for 79 percent of total.
- Extend time-based trigger by 12 months:
  - Implied modest annual lending income losses (about SDR 30 million in FY2026).
  - Reduces number of members paying time-based surcharges from 12 to 9 in FY2026.
- Two-step surcharge rate example (100 bps for 187.5–600 percent of quota; 200 bps above 600 percent):
  - Estimated annual lending income loss about SDR 370 million in FY2026; largest three payers account for 63 percent of total; number of surcharge payers unchanged.

### Illustrative FY25–FY29 surcharge and margin scenarios (selected figures reproduced exactly)
- Scenario A. No policy changes:
  - Margin income (SDR million): 906 859 861 813 715 4,154
  - Surcharge income (SDR million): 1,514 1,540 1,544 1,420 1,172 7,190
  - Number of surcharge payers: 23 20 22 22 20
- Scenario B. Threshold increased to 280 percent of quota:
  - Surcharge income (SDR million): 1,427 1,176 1,175 1,051 797 5,626
  - Lending income loss compared with A. (SDR million): 87 363 369 369 751 1,564
  - Number of surcharge payers: 23 16 16 17 15
  - Share of relief of top three surcharge payers (percent): 56.5 45.1 44.3 44.4 43.5
- Scenario C. Level-based surcharge rate cut to 100 bps:
  - Surcharge income (SDR million): 1,384 1,015 1,017 933 774 5,123
  - Lending income loss compared with A. (SDR million): 129 525 527 487 398 2,067
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 73.6 73.7 72.7 72.4 73.0
- Scenario D. Time-based surcharge rate cut to 50 bps:
  - Surcharge income (SDR million): 1,453 1,295 1,299 1,197 984 6,229
  - Lending income loss compared with A. (SDR million): 60 245 245 223 189 961
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 78.8 79.0 78.4 79.1 77.2
- Scenario E. Extension of time-based trigger by 12 months:
  - Surcharge income (SDR million): 1,495 1,507 1,539 1,416 1,150 7,108
  - Lending income loss compared with A. (SDR million): 19 25 28 2
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 0.0 44.0 0.0 0.0 0.0
- Scenario F. Tiered level-based surcharge rates (100bp for 187.5–600 percent of quota, 200bp for above 600 percent):
  - Surcharge income (SDR million): 1,422 1,169 1,164 1,047 834 5,635
  - Lending income loss compared with A. (SDR million): 92 371 380 373 381 1,555
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 69.5 62.8 62.2 63.9 68.2
- Scenario G. Tiered level-based surcharge rates (200bp for 187.5–600 percent of quota, 100bp for above 600 percent):
  - Surcharge income (SDR million): 1,477 1,386 1,397 1,306 1,113 6,678
  - Lending income loss compared with A. (SDR million): 37 154 147 114 50 512
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 83.6 99.4 100.0 100.0 100.0

### Broader architectural options (stabilization-focused and state-dependent mechanisms)
- State-varying surcharge rates (inversely related to SDRi):
  - Design: maintain current 200 basis points in “normal” SDRi range; reduce surcharge when SDRi exceeds “normal” level, potentially to zero at an upper bound.
  - Illustrative calibration used: lower bound of 200 basis points and upper bound of the “normal” SDRi range of 500 basis points.
  - Estimated expected annual lending income loss based on WEO projections for SDRi: about SDR 520 million for FY2026; largest three surcharge payers account for 74 percent of the total.
  - Number of borrowers subject to surcharges would not change.
  - Trade-offs: increased income uncertainty; greater relief concentrated on larger borrowers; considerable complexity in calibration and governance.
- Capping total marginal rate of Fund credit (example cap at 7 percent):
  - Provides certainty on maximum debt service; risks: could eliminate surcharge revenue and push lending rate below funding cost, producing operational lending losses; complex calibration and potential large income risks.

### Margin for the basic rate of charge — criteria, illustrative range, and scenario analysis
- Rule I-6(4) criteria:
  - Margin should cover intermediation expense, generate net income for reserves given PBs and expected surcharge/commitment fee contributions, and align with long-term credit market conditions (market test).
  - Margin set every two financial years with a comprehensive review before end of first year.
- Illustrative margins and staff view:
  - Intermediation-cost-only implied margin: about 20 basis points (intermediation income would reach SDR 260 million in FY2025 and cover intermediation cost of SDR 132 million under desk survey).
  - Staff judgment: prudent to aim for some net income because 20 basis points would likely fail the market test.
  - Staff recommended illustrative range: 40 to 100 basis points.
  - Expected margin contribution to net income/reserve accumulation: about SDR 350 to SDR 900 million.
- Benchmarks:
  - Five-year rolling median for lowest quartile EMBI spread: 166 basis points.
  - Five-year rolling median for sample of countries with GRA arrangements since 2000: 317 basis points.
  - Interpretation: margin between 40 and 100 basis points aligns basic rate with average cost of financing for countries with sovereign ratings averaging between BBB+ and A-; remains moderately below cost for relatively creditworthy borrowers and substantially below cost for most past GRA borrowers.
- Scenario analysis (Annex IV selected results, Fund Income and Expenses Scenarios; values in SDR unless noted):
  - Scenario 1: FY2025 Desk Survey
    - Income: 100 bps = 984; 40 bps = 441; 20 bps = 260; Non-intermediation = 1170; Coverage = 132%
    - Expenses: Intermediation expenses = 132; Non-intermediation expenses = 888
  - Scenario 2: FY2028 Desk Survey
    - Income: 100 bps = 824; 40 bps = 336; 20 bps = 174; Non-intermediation = 1385; Coverage = 146%
    - Expenses: Intermediation expenses = 141; Non-intermediation expenses = 946
  - Scenario 3: FY2028 Current arrangements, 2.2% SDRi and Floor-level PB (stress scenario)
    - Income (A): 100 bps = 707; 40 bps = 283; 20 bps = 141; Non-intermediation = 844; Coverage = 89%
    - Expenses (B): Intermediation expenses = 141; Non-intermediation expenses = 946
    - Difference (A)–(B): 100 bps = 566; 40 bps = 142; 20 bps = 0; Non-intermediation difference = -102
- Policy-relevant conclusions from scenarios:
  - Margins of 40 basis points or higher would comfortably cover intermediation expenses under baseline and provide a buffer to cover possible shortfalls in non-lending balance under stress.
  - A margin of 20 basis points covers intermediation costs but likely fails the market test and offers limited net income/reserve-building capacity.

### Commitment fees and threshold erosion
- Commitment fee observations:
  - Thresholds under upward-sloping fee structure have eroded since 2016.
  - Increasing thresholds of all steps by 45-50 percent (to fully offset erosion since 2016) would reduce income by about SDR 10‒30 million annually.
- Commitment fee role:
  - Compensate for cost of establishing and monitoring arrangements and setting aside resources; discourage unnecessarily high precautionary access.

### Combined effects, implementation issues, sequencing, and operational considerations
- Combined effects:
  - Illustrative combination of a 40 bps margin reduction with various surcharge reforms: loss due to lower margin about SDR 340 million in FY 2026; combined annual lending income losses in FY 2026 across scenarios about SDR 380 to SDR 870 million.
  - Combined cumulative 5-year impact (FY2025-29) on net income: SDR 1.6 billion to SDR 3.7 billion, representing a 13 to 30 percent reduction from current policy scenario.
  - Incidence: three largest borrowers generally capture higher benefit shares under options that reduce surcharge rates.
- Implementation timelines and operational risks:
  - Margin: new margin implementation could be completed within one month.
  - Parametric surcharge changes (thresholds/rates): about one to three months, depending on scope and treatment of existing arrangements.
  - Architectural changes (state-dependent rates, caps, multiple thresholds): require more analysis, longer implementation, and IT modifications.
  - Commitment fee threshold adjustments: could leverage 2016 approach and be relatively straightforward.
  - Interaction with 16th General Review of Quotas (16th GRQ):
    - Changes based on current quotas; when 16th GRQ becomes effective, surcharge and commitment fee thresholds in percent of current quotas would be mechanically divided by 1.5 to keep nominal value unchanged.
    - If 16th GRQ delayed, Board could consider additional adjustments for erosion.
  - Recommended sequencing: initiate system/module changes at start of financial quarter to align with billing and reporting; intra-quarter changes possible but increase operational risks.

### Next steps, Board engagement, and questions for Directors
- Purpose of paper: inform Executive Board’s first engagement, build common understanding of objectives and guiding principles; staff to narrow reform options based on feedback for further Board consideration.
- Proposed timetable and ambition:
  - Board amended Rule I-6(4) to maintain margin at 100 basis points over SDRi until completion of surcharge review, but no later than April 30, 2025; Board will set margin for remainder of FY2025 and FY2026 by that date.
  - Staff aim for a successful conclusion by the Annual Meetings if Directors agree.
- Issues for Director comment (selected):
  - Is there scope to lower GRA borrowing costs for all borrowers, given PBs target reached and robust net income outlook?
  - Should reform combine broad-based relief on the basic rate (under Rule I-6(4)) and surcharge policy reform that provides additional relief while preserving incentives and buffers?
  - Open to exploring wide-ranging reforms that stabilize cost of Fund borrowing versus focus on parametric reforms?
  - Agree that design of level-based surcharge thresholds and commitment fee thresholds should be revisited in light of erosion?
  - Given shock-prone environment and structural problems facing members, is there scope to revisit time-based surcharge design (36 months for credit tranches; 51 months for EFFs)?
  - Budget implications and system configuration costs to be provided in follow-up Board paper.

*pp ea2024044 — Review of Charges and Surcharges (IMF staff analysis; excerpts).*

### EXECUTIVE SUMMARY

### ppea2024044 - EXECUTIVE SUMMARY

### Purpose and scope
- Provides background for an informal discussion to engage the Executive Board on the review of charges and the surcharge policy.
- Reviews charges and surcharges for the first time since 2016 and postpones the decision on setting the margin for the basic rate of charge to allow a comprehensive assessment covering:
  - effectiveness of the incentive function of surcharges;
  - total cost for borrowing members;
  - income and reserves accumulation potential;
  - possible changes to commitment fees arising from the need to adjust nominal thresholds for erosion.
- Considers adjustment of thresholds set in terms of quotas in the context of the effectiveness of the 16th general review of quotas.

### Role and structure of charges, surcharges, and commitment fees
- Charges and surcharges are key elements of the Fund’s multilayered framework to mitigate financial risks, generate income to cover intermediation expenses, and accumulate precautionary balances (PBs).
- Basic rate of charge:
  - Determined as the SDR interest rate plus a fixed margin set by the Executive Board every two years under Rule I-6(4).
  - Margin has been unchanged at 100 basis points since May 1, 2012.
- Surcharges:
  - Level-based surcharge: 200 basis points applied on the portion of GRA credit outstanding greater than 187.5 percent of quota.
  - Time-based surcharge: 100 basis points applied on the portion of GRA credit exceeding the level-based threshold for more than 36 months (or 51 months for EFF borrowings).
  - Concessional lending under PRGT and lending under RST are not subject to surcharges.
- Commitment fees:
  - Charged on undrawn amounts and refunded proportionally on drawings.
  - Upward-sloping fee structure: 15 basis points up to 115 percent of quota; 30 basis points for amounts above 115 percent and up to 575 percent of quota; 60 basis points for amounts exceeding 575 percent of quota.
  - Tier thresholds were adjusted in 2016 from 200 percent and 1,000 percent of quota to 115 and 575 percent of quota, respectively.
- A fixed service charge of 50 basis points is levied on each GRA disbursement.

### Recent changes in the operating environment and financial position
- Since 2016, significant changes include:
  - Fund credit outstanding returned to record levels reached during the Global Financial Crisis, reflecting persistent economic uncertainty following the COVID-19 pandemic and geopolitical shocks, though it has remained moderate as a share of Fund resources.
  - Duration of Fund arrangements has increased, with some countries maintaining high access through successive arrangements, incurring surcharges due to both size and length of exposures.
  - Borrowing costs for members have increased substantially as global interest rates rose, pushing up the basic rate of charge through the floating SDR interest rate while surcharge rates and margin have remained stable.
  - The Fund made substantial progress in building reserves and diversifying income sources in line with the 2008 income model, reaching its SDR 25 billion medium-term target for precautionary balances in FY2024.

### Assessment of the current surcharge policy
- Mixed evidence on effectiveness:
  - Surcharges have played an important role in accumulating PBs.
  - The incentive mechanism to prevent excessive Fund borrowing and encourage timely repayment has been effective for some members but with notable exceptions, especially among the largest surcharge payers facing large and protracted balance of payments needs and limited alternative financing.
- Erosion of thresholds:
  - Level-based surcharge thresholds have eroded in real terms since 2016, bringing more countries into the scope of surcharges at relatively modest levels of access.
- Public concerns:
  - Members and stakeholders raised concerns about high interest burden for surcharge payers, the size of the margin for the rate of charge, and the effectiveness of price incentives provided by surcharges, particularly given improved reserves (SDR 25 billion PBs) that lessen the need to generate income to bolster reserves.

### Illustrative approaches for surcharge policy reforms (framework and criteria)
- Paper considers a range of reforms from parametric adjustments to substantive architectural changes.
- Evaluation criteria used: burden relief, incentive-compatibility, income generation potential and stability, preservation of simplicity of the surcharge framework.
- Examples discussed:
  - Parametric adjustments including raising the level-based surcharge threshold to offset erosion.
  - Broader changes to surcharge architecture (various innovative options evaluated).

### Margin for the basic rate of charge: application and illustrative range
- Executive Board agreed in April 2024 to amend Rule I-6(4) and extend the current margin of 100 basis points to allow setting the margin in the context of this review.
- Illustrative findings:
  - A margin of 20 basis points would cover lending-related intermediation costs but would be notably below the cost of financing even for relatively creditworthy borrowers.
  - An illustrative application of the rule suggests a margin between 40 and 100 basis points would:
    - remain aligned competitively with respect to long-term credit market conditions;
    - remain somewhat below the cost of financing for relatively creditworthy borrowers;
    - be substantially below the cost faced by most countries with GRA arrangements;
    - preserve significant net income generation capacity after covering intermediation costs.
- The paper discusses margin-setting for the remainder of FY2025 and FY2026.

### Commitment fees and threshold erosion
- Commitment fees were reviewed in 2023 as part of FCL, SLL, and PLL review, with current policies maintained.
- Since the 2016 review, thresholds have eroded versus macroeconomic aggregates.
- Adjusting commitment fee thresholds to offset erosion would imply increasing their nominal value by 45‒50 percent.

### Combined effects, implementation issues, and operational considerations
- Paper analyzes combined effects of illustrative surcharge reforms and margin adjustments on income and PBs, including distributional and concentration implications.
- Considers implementation issues such as adjusting surcharge and commitment fee thresholds in terms of new quotas in the context of the 16th general review of quotas.
- Presents illustrative scenarios and related impacts on surcharge income and net operating income across FY25‒29.

### Next steps and Board engagement
- This paper informs the Executive Board’s first engagement on the review and aims to build a common understanding of objectives and guiding principles for possible policy reforms.
- Based on feedback from the informal engagement, staff intends to narrow down reform options that could garner a broad consensus for further consideration by the Executive Board.

*Prepared by the Finance Department and Strategy, Policy, and Review Department; approved by Bernard Lauwers (FIN) and Ceyla Pazarbasioglu (SPR).*

### 3.      Global economic conditions, the level and type of Fund lending, and the Fund’s

### 3.      Global economic conditions, the level and type of Fund lending, and the Fund’s

### Major changes since the 2016 review
- Global shocks since 2016: the pandemic crisis, a post-pandemic bout of global inflation, and a sustained rise in interest rates.
- Fund lending trajectory:
  - Expanded sharply during the pandemic, first with a record number of emergency assistance disbursements and then a shift to upper credit tranche (UCT) arrangements.
  - On average, arrangements today have higher access and longer duration than pre-pandemic.
- Fund financial position:
  - Stronger financial situation reflecting large lending income from charges and surcharges and increased non-lending income from investments.
  - Medium-term target for Precautionary Balances (PBs) of SDR 25 billion was reached in Fiscal Year (FY) 2024.
  - Executive Board maintained the SDR 25 billion PB target in the recent Review of Adequacy of Precautionary Balances.
- Interest burden:
  - Margin has remained fixed at 100 basis points since 2011.
  - The basic rate of charge has risen sharply by about 400 basis points, owing to global tightening of monetary policies since 2022, increasing interest payment burden for GRA borrowers.

### Concerns and scope of the review
- Stakeholder concerns raised about surcharges:
  - Questions on effectiveness in meeting objectives, incentive properties.
  - Criticisms that surcharges are procyclical, regressive, lack transparency.
  - Arguments that continued accumulation of surcharges to bolster reserves is not warranted given high PBs and other credit risk protections.
- Some concerns also raised about the level of the rate of charge.
- Purpose of the paper:
  - Inform Executive Board’s first engagement on the review, build common understanding of broad objectives and guiding principles for possible reforms.
  - Offer initial considerations on surcharge policy effectiveness and possible reforms, and on setting the margin on the rate of charge.
  - Present illustrative reform approaches and assess them using criteria of burden relief, incentive-compatibility, income generation potential and stability, and preservation of simplicity.
  - Illustrate application of Rule I-6(4) for setting the margin for remainder of FY2025 and FY2026.
  - Explore possible modifications of commitment fee framework to offset erosion.
  - A formal proposal could be presented to the Board in due course, informed by feedback and mindful of income projection impacts.

### A. Surcharge policy framework and objectives
- Primary goals:
  - Discourage large and prolonged use of GRA resources.
  - Help accumulate PBs to protect the Fund’s balance sheet by absorbing possible credit and other financial losses.
  - Provide price-based incentives to limit borrowing size, diversify financing sources, and encourage timely repayment as market access is restored.
- Underlying presumption: members using Fund financing for large balance of payments problems should be able to gradually find alternative, cheaper financing sources.
- Framework history:
  - Current level- and time-based surcharges introduced in 2009, simplifying previous Time Based Repurchases Expectation Policy.
  - 2016 Review adjusted level threshold and extended time-based trigger; threshold adjusted from 300 percent of (13th General Review) quota to 187.5 percent of (14th General Review) quota (nominal SDR value increased by 25 percent). Time-based trigger for EFF credit increased from 36 months to 51 months.
  - 2023: Fund expanded publication of surcharges data for transparency.

### How surcharges operate and their income role
- Surcharge mechanics:
  - Marginal rate of surcharge provides incentive to limit additional access; effective surcharge rate determines average cost.
  - Effective interest rate for total GRA borrowing = basic rate of charge + average effective surcharge rate.
  - Average effective surcharge rate (in terms of total credit outstanding) is substantially lower than the marginal surcharge rate, converging to the marginal rate only for very large exposures.
- Time-based surcharges:
  - Designed to encourage early repurchases by raising cost of Fund financing closer to market levels.
  - When market spread over basic rate ≤ sum of marginal level- and time-based surcharges (300 bps), countries are more likely to make early repurchases.
- Contribution to operational income and PB accumulation:
  - Surcharge income peaked in FY 2015 at SDR 1,463 million and fell to SDR 371 million in FY 2018, before rising to SDR 1,407 million in FY 2023.
  - Share of surcharge income in operational income: topped at 52.4 percent in FY 2016, declined to 27 percent in FY 2019, and increased to 51.1 percent in FY 2022.
  - Share of surcharge income in net operational income fluctuated between 53 percent and 110 percent over the period.

### B. Framework for setting the margin for the basic rate of charge
- Role of the margin:
  - Margin (applied on top of SDR interest rate, SDRi) plus surcharges determine total cost of Fund borrowing.
- Rule I-6(4) requirements:
  - Margin set every two financial years for the next two-year period, with comprehensive review before the end of the first year.
  - Margin should cover intermediation expense of the Fund (considering income from service charges) and generate net income for placement to reserves, taking into account current PBs, any floor/target for PBs, and expected contributions from surcharges and commitment fees.
  - Margin should ensure cost of Fund credit is neither too high nor too low relative to long-term credit market conditions (the “market test”).
  - Rule permits setting the margin at a different level in exceptional circumstances.
- Recent practice and rationale:
  - Since adoption of the current rule in 2011, the Board has set the margin at 100 basis points using the exceptional circumstances clause, reflecting that non-lending income remained consistently below expenses for non-lending activities.
  - Income model intent (2008): move away from reliance on lending income for financing non-lending activities, expecting non-lending income would finance those activities; non-lending income remained constrained through FY2023.
  - Lending income, including from the margin, has covered intermediation expenses and contributed to reserves, and until now has also covered some non-lending expenses.
- Recent Board action:
  - Executive Board extended the margin period set to expire at end-April 2024.
  - Most Directors favored considering the margin within the surcharge review for a holistic perspective.
  - Board amended Rule I-6(4) to maintain margin at 100 basis points over SDRi until completion of the surcharge review, but no later than April 30, 2025; Board will set margin for the rest of FY 2025 and FY 2026 by that date.

### C. Commitment fee framework and objectives
- Purpose of commitment fees:
  - Compensate the Fund for cost of establishing and monitoring arrangements and for setting aside resources.
  - Discourage unnecessarily high precautionary access and help contain liquidity risks.
- Design history:
  - Current fee structure introduced in 2009.
  - Thresholds under the upward-sloping fee structure (in percent of quotas) were agreed in 2016 and increased by 15 percent in nominal SDR terms at that time.
  - Executive Board discussed commitment fees in the 2023 review of precautionary facilities but made no structural changes.

### Recent changes in the Fund’s lending and operating environment and implications
- Global economic context post-2016:
  - 2017–18: cyclical recovery from GFC with rising global growth.
  - Recovery cut short by COVID-19 and subsequent shocks; medium-term outlook weak amid high debt levels and elevated global interest rates.
  - Many EMDEs emerged from the pandemic with limited policy buffers, increasing vulnerability as financing conditions tightened.
- Demand for Fund lending:
  - Increased greatly since 2016 review and expected to remain high.
  - 2016–17: demand relatively low, 31 new arrangements approved; GRA credit outstanding fell below SDR 40 billion by end-2017 (<6 percent of total lending capacity).
  - COVID-19 boosted demand to record levels, mainly emergency financing.
  - By 2022, GRA credit outstanding surpassed previous GFC peak, hovering just below SDR 100 billion.
  - As a share of Fund lending resources or quota resources, credit outstanding remained below peaks seen in the 1990s EM crises or the GFC.
  - More recently, GRA credit receded somewhat but remains historically elevated; credit outstanding projected to remain relatively high in coming years (as discussed in 2024 Review of Adequacy of the Fund’s Precautionary Balances).
- Changes in structure and concentration of lending:
  - Fund arrangements have become longer and larger:
    - Post-COVID, the number of GRA lending arrangements rivals the GFC, but structure shifted: greater share of Extended Arrangements with longer maturities.
    - Currently four Extended Arrangements for every SBA.
    - Regional concentration shifted from European crisis programs to EMDEs in other regions, notably the Western Hemisphere and the Middle East and Central Asia.
  - Access and successor arrangements:
    - Since 2020, access under GRA increased for both normal and exceptional access cases.
    - The five largest cases now account for about 70 percent of Fund credit outstanding.
    - Repeated use of Fund resources increased: nearly one in three GRA arrangements approved since the pandemic was a successor to a previous GRA arrangement within the last three years.
    - In total, 13 member countries had repeated GRA programs during 2013-22.
  - Some members request RSFs to prepare for longer-term structural challenges (e.g., climate change), lengthening overall Fund exposure.
  - Similar developments noted for concessional lending under the Poverty Reduction and Growth Trust (PRGT).

### Key statistics and figures (as presented)
- Surcharge income by year (SDR millions): FY 2015 peak SDR 1,463; FY 2018 SDR 371; FY 2023 SDR 1,407.
- Share of surcharge income in operational income: 52.4 percent in FY 2016; 27 percent in FY 2019; 51.1 percent in FY 2022.
- Share of surcharge income in net operational income: fluctuated between 53 percent and 110 percent over the period referenced.
- Total Fund credit outstanding at year-end (SDR millions) series included but specific year-by-year values presented in the source table (e.g., 2013: 90,182; 2024: 90,801).
- Amount of surcharge income collected (SDR millions) series presented in the source table (e.g., 2013: 1,241; 2024: 1,429).
- Precautionary Balances at year-end (SDR billions) series presented in the source table (e.g., 2013: 11.5; 2024: 25.1).
- Margin for the rate of charge historically set at 100 basis points; basic rate of charge has risen by about 400 basis points since 2022.

### Policy issues and analytical focus for reform options
- The review will assess:
  - Effectiveness of surcharge policy as a risk management tool and income source for PBs, jointly with income from the margin.
  - Possible reforms to surcharge policy to address concerns (procyclicality, regressivity, transparency, accumulation rationale).
  - Options for setting the margin under Rule I-6(4), including a range of possible margins for the remainder of FY2025 and FY2026 consistent with the rule.
  - Potential modifications to the commitment fee framework to offset erosion.
  - Tradeoffs across reforms evaluated on burden relief, incentive-compatibility, income generation potential and stability, and preservation of surcharge framework simplicity.
- Process:
  - Informal discussion to gather feedback; a formal proposal for changes in overall policy framework could follow, mindful of impacts on income projections.

*International Monetary Fund — Review of Charges and Surcharges, Section 3 (excerpts).*

### 20.      The sharp turn of global interest rates following the recent monetary tightening

### 20.      The sharp turn of global interest rates following the recent monetary tightening

### Impact on the GRA operating environment
- Interest burdens of all GRA borrowers have increased considerably since 2021, driven by a sharp jump in the SDRi of about 400 basis points since October 2021, which pushed up the basic rate of charge.
- The margin for the basic rate of charge has remained unchanged at 100 basis points.
- Higher interest rates led to a significant improvement in investment (non-lending) income:
  - Reflecting the upward shift in the interest rate outlook, investment income increased substantially in FY2024, exceeding non-intermediation expenses.
  - Investment income is expected to remain robust in coming years along with lending income.

### Experience with the surcharge policy — A. Surcharge incidence
- Number of surcharge-paying members:
  - Reached a peak of 15 during the European sovereign debt crisis in 2012–13.
  - Declined to single digits during 2016–19.
  - Rose again with the COVID-19 pandemic and subsequent shocks, reaching in March 2024 a maximum of 22 out of 53 countries with GRA credit outstanding (about 40 percent).
- Composition of surcharge payers:
  - The proportion paying both level- and time-based surcharges declined from one half during 2014‒15 to about one third during 2016‒19, then rose again to one half in early 2024.
  - As of end-January 2024, 16 out of 25 countries with an active program paid surcharges (64 percent), of which six members paid both level-based and time-based surcharges.
- Prolonged surcharge payers:
  - Defined as countries that paid surcharges for three or more consecutive years.
  - Increased to a record number of 15 out of 22 surcharge payers in 2024, compared to 13 out of 16 in 2013.
- Concentration of surcharge income:
  - A small number of users consistently account for the bulk of total surcharge income: the top five surcharge payers have consistently contributed more than 90 percent of total surcharge income over the past ten years.
  - After the pandemic, the top surcharge payers became large emerging market borrowers (Argentina, Egypt, Pakistan, Ecuador, and Ukraine).

### Experience with the surcharge policy — B. Cost of Fund borrowing and surcharge burden
- Total cost of Fund borrowing:
  - Increased substantially after 2021.
  - Dispersion of total borrowing cost widened during global distress episodes.
  - Increase in total cost for the largest borrowers has been more pronounced than for other GRA borrowers.
- Drivers of the increase:
  - Increase in the cost of borrowing from the Fund has been driven by the basic rate of charge.
  - During October 2021–March 2024, the basic rate of charge increased from 105 basis points to 511 basis points, with the entire 406 basis points increase accounted for by a higher SDRi since the margin has remained unchanged at 100 basis points.
  - Note: increases in the SDRi do not affect the Fund’s net lending income, as members’ reserve tranche positions are remunerated at the SDRi and funding costs therefore rise in tandem with the income received from the basic rate of charge.
- Effective surcharge rates (end-March 2024):
  - For all 22 members paying surcharges, the average effective surcharge rate was 0.89 percent.
  - For 14 surcharge payers, the effective rate was less than 1 percent.
  - For the largest two borrowers the effective surcharge rate exceeded 2 percent: 2.4 percent for Argentina and 2.1 percent for Egypt.
  - Even for the largest surcharge payer, the effective surcharge rate of 2.4 percent accounted for less than a third of the total effective cost of borrowing from the Fund of 7.5 percent.
- Fund borrowing versus market financing:
  - For borrowers subject to surcharges, the cost of market financing remains above the effective cost of borrowing from the Fund.
  - The market cost also exceeds the maximum marginal cost (assuming application of both level and time-based surcharges) for most non-PRGT eligible surcharge payers.
  - The cost of borrowing from the Fund has been less volatile than market costs; the difference between market financing cost (proxied by EMBI yields) and the effective cost of Fund borrowing generally widens during global downturns.
  - While Fund borrowing costs rose significantly after 2021, they increased much less than market costs.
- Comparisons for largest surcharge payers:
  - The average effective cost of Fund borrowing for the top five surcharge payers ranges from 6.2 to 7.5 percent (noted in an illustrative comparison).
  - The marginal rate for the five largest borrowers was noted as 8.1 percent in the illustrative comparison.
  - Example comparisons:
    - Pakistan (CCC rating) — its effective cost of Fund borrowing is at a similar level to the market cost of countries like Chile or Peru.
    - Argentina — the effective Fund borrowing cost is slightly lower than the market cost of Mexico.
- Official financing caveat:
  - Comparisons do not include official financing; bilateral and multilateral lenders can provide longer maturities and lower costs, and may include grants or loan/grant combinations.
  - Illustrative comparison: World Bank IBRD Flexible Loans with a maturity of ten to twelve years had interest rates between 6.5 and 6.65 percent as of April 1, 2024 — compared to average effective rates of Fund borrowing ranging from 6.2 to 7.5 percent and marginal rates of 8.1 percent for the five largest borrowers.
- Surcharge burden dynamics:
  - The surcharge burden rose during global distress times (GFC, pandemic, post-pandemic).
  - While surcharges represented a substantial burden for the largest borrowers in distress periods, the burden for the median surcharge payer remained generally modest.
  - Dispersion of the burden is relatively large and widened during distress periods, with the burden for top payers growing disproportionately due to large and prolonged recourse to Fund financing.
- Overall characterization:
  - Fund lending is counter-cyclical in volume and in prices relative to market borrowing costs, but not in terms of its absolute cost.
  - Volume: credit outstanding rises sharply in global downturns and declines when conditions improve.
  - Prices: borrowing costs from the Fund are considerably lower and more stable than market costs, but Fund rates do increase when global interest rates rise (via the variable SDR interest rate) and they also rise with the volume and duration of borrowing due to level-based and time-based surcharges.

### Experience with the surcharge policy — C. Incentive function of surcharges
- Assessment approach:
  - Establishing conclusively whether surcharges discouraged excessive Fund borrowing and promoted early repayment is methodologically challenging because counterfactuals cannot be observed.
  - Repayment decisions also reflect reputational and confidence considerations.
  - Staff used quantitative evidence of repayment patterns and case studies, and employed a measure of financing pressures to relate credit outstanding dynamics relative to the surcharge threshold with degrees of distress (Annex II).
- Evidence and country groups:
  - Overall evidence suggests countries with moderate or short-lived financing needs are more responsive to level-based surcharges.
  - Three distinct groups based on credit outstanding behavior relative to the level-based surcharge threshold:
    - Group 1 — Level-based threshold linked to amounts borrowed:
      - Credit outstanding hovered just below or very close to the threshold, possibly reflecting a desire to avoid surcharges.
      - These are relatively small borrowers with generally manageable financing pressures and not large BOP needs.
      - Example: Cyprus — credit outstanding crossed the surcharge threshold but was swiftly brought back.
    - Group 2 — Borrowed above threshold during high financing pressures but reduced outstanding amounts once pressures eased:
      - These countries had high BOP needs and limited market access during high borrowing episodes.
      - Once BOP issues were resolved and market access regained, these countries made early repayments to reduce and eventually avoid surcharges.
    - Group 3 — High and protracted financing pressures; credit outstanding remained significantly above the threshold:
      - Little evidence that the level-based threshold influenced access decisions.
      - Fund credit remained high for considerable time; members have very high BOP needs and limited or no alternative financing.
      - Example: Argentina — the Fund’s largest debtor.
- Conclusion on incentive effectiveness:
  - The effectiveness of the incentive role of surcharges appears negatively correlated with the level of financing pressures and disappears for large borrowers with prolonged Fund financing needs and entrenched imbalances.

*Source: IMF staff calculations and text from the chapter "20.      The sharp turn of global interest rates following the recent monetary tightening" of the provided document.*

### 33.      The incentive mechanism of time-based surcharges appears to have worked for pre-

### 33.      The incentive mechanism of time-based surcharges appears to have worked for pre-

### Effectiveness of time-based surcharges
- Evidence of effectiveness:
  - Worked for pre-2016 review cases related to the GFC and for some post-review cases; less clear for more recent cases (mostly COVID-19 associated).
  - Before the 2016 review, many borrowers with credit outstanding above the surcharge threshold made early repayments after regaining market access (see Box 4 of the 2016 Review of Access Limits and Surcharge Policies).
  - Large surcharge payers affected by the European crisis (Greece, Ireland, and Portugal) made early repurchases when the spread between the market rate and the basic rate of charges fell well below the marginal rate of surcharges (Annex II).
  - Morocco made early repurchases in early 2021 to bring credit outstanding below the threshold; authorities attributed the decision to avoid paying a surcharge and noted Fund resources were more expensive than market financing at the time of repayment.
- Cases with limited response to price incentives:
  - Relatively small surcharge payers in 2023: Albania, Armenia, Jordan, and Mongolia — the spread between market rate and basic rate of charges fell below the marginal rate of surcharges by the time they were subject to time-based surcharges (Figure 13), yet they did not make early repurchases, possibly due to limited arbitrage gain.
  - Current top surcharge payers: Argentina, Ecuador, Egypt, and Pakistan — sovereign spreads remain far above the level- and time-based surcharge rates; based on prices, there is no incentive to make early repurchases even when time-based surcharges have kicked in.
- Underlying drivers for limited effectiveness in recent cases:
  - Prevalence of large and persistent balance of payments problems.
  - All current top surcharge payers have had successor drawing arrangements (i.e., within two years of the end of the previous arrangement), indicating persistent or repeated balance of payment needs.
  - These needs reflect external shocks, deep-seated structural problems that take time to resolve, and in some cases difficulties in executing necessary policy adjustments (Figure 14).
  - Majority of countries that made early repurchases did not have successor drawing arrangements.

### Erosion of the thresholds
- General point:
  - Erosion occurs as nominal GDP, external financing needs, and other macro/financial variables increase over time while thresholds are set in relation to quotas.
  - Erosion tightens the relative levels at which the Fund assesses exposures as sufficiently high to justify surcharges.
- Specifics since 2016:
  - The level-based surcharge threshold of 187.5 percent of quota has eroded against a range of standard metrics.
  - A value of about 280 percent of quota would fully offset the erosion.
  - The threshold was moderately increased in SDR terms in the 2016 Review; since 2016 the nominal SDR value of the level-based surcharge threshold has eroded by:
    - 32-34 percent in terms of world GDP;
    - 31-32 percent in terms of world’s external financing needs.
  - For EMDEs, erosion has been deeper in terms of:
    - GDP: 34-37 percent;
    - Current payments: 39-40 percent;
    - Capital inflows: 32-35 percent;
    - External financing needs: 29-30 percent.
  - Excluding China and India marginally increases erosion across metrics for EMDEs.
  - Because of erosion, access under Fund-supported arrangements tends to increase in percent of quota, subjecting a higher share of credit to surcharges.
- Table 2 summary (level-based threshold erosion metrics 2016–2024; selected entries reproduced exactly as in source):
  - World — Median across metrics: 33 2793 2277
  - EMDEs — Median across metrics: 33 2793 6291
  - EMDEs excl. India and China — Median across metrics: 34 2833 7297
  - (Table rows reflect "2016-2024 Erosion, percent" and "Level-based surcharge offsetting erosion" using Median erosion and Aggregate erosion; source: WEO and IMF staff calculations.)

### Assessment of the operating environment and surcharge experience (2016–2024)
- Key findings:
  - The interest burden for borrowing members has increased substantially owing to the sharp increase in global interest rates and—especially for the largest surcharge payers—more persistent financing needs, even though the cost of borrowing from the Fund remains significantly below market costs, including for the largest surcharge payers.
  - Precautionary Balances (PBs) have reached the Board-established target and the income outlook remains robust. Surcharges have played an important role in facilitating the accumulation of PBs. With PBs at target, the reserve-building motivation for setting surcharge levels will be less strong going forward, absent a substantial deterioration in the Fund’s risk outlook.
  - The number of members subject to surcharges has increased and reached historical highs, reflecting:
    - A shift toward longer, somewhat larger, and repeated Fund arrangements in a shock-prone global environment; and
    - Erosion of the surcharge threshold against relevant metrics, bringing more countries into the scope of surcharges and exposing them to the maximum marginal rate at relatively modest levels of access.
  - Surcharges have been partially effective in limiting Fund borrowing and encouraging timely repayment, but less effective for current top surcharge payers owing to persistent BOP needs that limit access to alternative financing.

### Reform approaches: overarching considerations
- Reform objectives used to evaluate options:
  - Ease the surcharge burden and make it more manageable;
  - Ensure an effective incentive function of surcharges;
  - Preserve the income-generation capacity of charges and surcharges;
  - Maintain the simplicity of the surcharge policy framework.
- Fundamental question:
  - Whether the Fund should continue using price-based incentives to moderate demand and encourage timely repayment.
  - Abolishing or suspending surcharges would reduce burden and regressivity concerns but remove price incentives and eliminate contributions to income and reserve accumulation, substantially reducing financial buffers.
  - Variant: preserve surcharges but refund them once related principal repaid (akin to a “security deposit”); would not address upfront burden during crisis.

### Parametric adjustments (illustrative scenarios and trade-offs)
- Overview:
  - Parametric adjustments preserve the current framework while addressing concerns via threshold and/or rate changes; retain significant income generation capacity and simplicity.
  - Projections use Fund’s desk survey of likely program requests in next 24 months as of May 2024; policy changes assumed to take effect on February 1, 2025; all projections preliminary.
- Increasing the surcharge threshold level:
  - Restores erosion, reduces effective surcharge rate and increases borrowing space for countries at or just below threshold; preserves marginal rate above new threshold.
  - Provides greater proportionate relief to smaller debtors who could fall out of surcharge scope; reduces number of members subject to surcharges.
  - Illustration: increasing threshold to 280 percent of quota would:
    - Broadly restore erosion since 2016;
    - Imply an annual lending income loss of about SDR 360 million in FY2026;
    - The largest three surcharge payers would account for 45 percent of total relief;
    - Reduce the number of surcharge-paying members from 20 to 16 in FY2026.
  - More extreme alignment proposal: align thresholds for exceptional access and level-based surcharges (normal cumulative access limit currently temporarily set at 600 percent of quota) would:
    - Reduce number of surcharge-paying members to only two in FY2026;
    - Imply an annual lending income loss of SDR 1.1 billion;
    - Substantially weaken incentive mechanism and income-generating capacity.
- Reducing surcharge rates:
  - Lowers burden from program inception (level-based) or later (time-based) but reduces price-based incentives.
  - Illustration:
    - 50 percent reduction of level-based surcharge rate (from 200 to 100 basis points) would imply an annual lending income loss of about SDR 520 million in FY2026, with the largest three surcharge payers accounting for 75 percent of the total.
    - 50 percent reduction in the time-based surcharge rate (i.e., a 50 basis point reduction) would imply an annual lending income loss of about SDR 240 million in FY2026, with the largest three surcharge payers accounting for 79 percent of the total.
  - Lowering surcharge rates would not change the number of surcharge payers compared to status quo.
- Extending the trigger for time-based surcharges:
  - Motivated by difficulties of borrowers under credit tranches and Extended Arrangements to quickly regain market access in tight financing conditions and elevated debt burdens.
  - Provides extra time for surcharge-paying members to accomplish external adjustment before time-based surcharges kick in; mainly benefits future borrowers unless extension is considerable.
  - Illustration: extending the time-based trigger by 12 months for both outstanding credit under the credit tranches and EFFs would:
    - Imply modest annual lending income losses (about SDR 30 million in FY2026);
    - Largely benefit members with relatively smaller surcharge burdens;
    - Reduce number of members paying time-based surcharges from 12 to 9 in FY2026.
  - If pursued, staff would assess legal and policy implications, including differentiation of the trigger between credit tranches and EFFs.

*Italic source attribution: ppea2024044 - 33. The incentive mechanism of time-based surcharges appears to have worked for pre- (excerpt).*

### 42.      Some variants of the three basic parametric adjustments discussed above could be

### ppea2024044 - 42.      Some variants of the three basic parametric adjustments discussed above could be

### Parametric adjustments — variants and implications
- Introducing multiple surcharge rate steps:
  - Rationale: Provide a more gradual increase in the marginal rate with the volume of credit outstanding, relieving borrowers that exceed the zero-rate threshold only moderately.
  - Illustrative design: two-step structure with a level-based surcharge rate set at 100 basis points (current surcharge rate minus 100 bps) between 187.5 percent and 600 percent of quota, and 200 basis points (current surcharge rate) over 600 percent of quota.
  - Effects:
    - Reduces relative burden more for surcharge payers with lower credit while maintaining price incentives at current levels for very large borrowing.
    - Adds complexity and effectively reverts to a graduated rate structure prior to the 2009 reforms.
  - Estimated fiscal impact:
    - Estimated annual lending income losses for the illustrative two-step structure would be about SDR 370 million in FY2026, with the largest three payers accounting for 63 percent of the total.
    - The number of surcharge payers would remain unchanged.

- Reducing the level-based surcharge rate for credit outstanding above a certain level:
  - Rationale: Provide relief to large surcharge payers whose borrowing costs have increased notably; keep current rate structure up to the normal cumulative access limit and lower the rate beyond that point.
  - Trade-offs:
    - Rate structure becomes regressive, potentially sending conflicting signals and weakening large borrowers’ efforts to mobilize financing from other sources.
    - Income loss fully accounted for by reduction for the largest surcharge payers; number of members subject to surcharges would not change.
  - Illustrative fiscal impact:
    - Example: reduction in the level-based surcharge from 200 to 100 basis points for credit outstanding above 600 percent of quota would reduce lending income by about SDR 150 million in FY2026, with the largest three payers accounting for almost 100 percent of the total.
    - Number of surcharge payers would remain unchanged.

### Comparative assessment of parametric options (summary points from Table 3)
- Increase the surcharge threshold:
  - Impact on surcharge burden: Reduces burden for all surcharge payers, with higher relative benefit for smaller debtors.
  - Impact on price incentives: Preserves current price-based incentives for credit above the new threshold.
  - Impact on income generation: Magnitude of income reduction depending on the size of threshold adjustment.
  - Simplicity: Maintains simplicity of status quo.
- Reduce surcharge rates:
  - Impact on surcharge burden: Lessens burden, with higher benefit for relatively large borrowers.
  - Impact on price incentives: Reduces price-based incentives for all levels of credit.
  - Impact on income generation: Magnitude of income reduction depending on size of rate adjustment.
  - Simplicity: Maintains simplicity of status quo.
- Extend the trigger for time-based surcharges:
  - Impact on surcharge burden: Little change in surcharge burden for current large surcharge payers.
  - Impact on price incentives: Preserves current price incentives for credit outstanding beyond the new trigger.
  - Impact on income generation: Small near-term impact; larger impact in the medium-term.
  - Simplicity: Maintains simplicity of status quo.
- Introduce multiple surcharge rate steps:
  - Impact on surcharge burden: Reduces burden for all surcharge payers (benefits more uniformly distributed).
  - Impact on price incentives: Reduces price-based incentives somewhat for lower levels of credit but preserves them for very high levels.
  - Impact on income generation: Magnitude depends on thresholds and rates; smaller impact than zero threshold increase and rate reduction of same magnitude (over equal intervals of access).
  - Simplicity: Somewhat more complex than status quo.
- Reduce level-based surcharge above a certain level:
  - Impact on surcharge burden: Reduces burden only for large surcharge payers.
  - Impact on price incentives: Maintains incentives for low credit but reduces them for high credit.
  - Impact on income generation: Magnitude depends on threshold and rate adjustment.
  - Simplicity: Somewhat more complex than status quo.

### Illustrative surcharge income scenarios (Table 4: FY25–FY29 projections)
- Scenario A. No policy changes:
  - Margin income (SDR million): 906 859 861 813 715 4,154 (FY25 FY26 FY27 FY28 FY29 Total during FY25-29)
  - Surcharge income (SDR million): 1,514 1,540 1,544 1,420 1,172 7,190
  - Number of surcharge payers: 23 20 22 22 20
- Scenario B. Threshold increased to 280 percent of quota:
  - Surcharge income (SDR million): 1,427 1,176 1,175 1,051 797 5,626
  - Lending income loss compared with A. (SDR million): 87 363 369 369 751 1,564
  - Number of surcharge payers: 23 16 16 17 15
  - Share of relief of top three surcharge payers (percent): 56.5 45.1 44.3 44.4 43.5
- Scenario C. Level-based surcharge rate cut to 100 bps:
  - Surcharge income (SDR million): 1,384 1,015 1,017 933 774 5,123
  - Lending income loss compared with A. (SDR million): 129 525 527 487 398 2,067
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 73.6 73.7 72.7 72.4 73.0
- Scenario D. Time-based surcharge rate cut to 50 bps:
  - Surcharge income (SDR million): 1,453 1,295 1,299 1,197 984 6,229
  - Lending income loss compared with A. (SDR million): 60 245 245 223 189 961
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 78.8 79.0 78.4 79.1 77.2
- Scenario E. Extension of time-based trigger by 12 months:
  - Surcharge income (SDR million): 1,495 1,507 1,539 1,416 1,150 7,108
  - Lending income loss compared with A. (SDR million): 19 25 28 2
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 0.0 44.0 0.0 0.0 0.0
- Scenario F. Tiered level-based surcharge rates (100bp for 187.5–600 percent of quota, 200bp for above 600 percent of quota):
  - Surcharge income (SDR million): 1,422 1,169 1,164 1,047 834 5,635
  - Lending income loss compared with A. (SDR million): 92 371 380 373 381 1,555
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 69.5 62.8 62.2 63.9 68.2
- Scenario G. Tiered level-based surcharge rates (200bp for 187.5–600 percent of quota, 100bp for above 600 percent of quota):
  - Surcharge income (SDR million): 1,477 1,386 1,397 1,306 1,113 6,678
  - Lending income loss compared with A. (SDR million): 37 154 147 114 50 512
  - Number of surcharge payers: 23 20 22 22 20
  - Share of relief of top three surcharge payers (percent): 83.6 99.4 100.0 100.0 100.0

### Broader changes to surcharge architecture — stabilization-focused options
- Motivation:
  - Recent sharp increase in global interest rates and pass-through to the basic rate of charge raise concerns about borrowing burden when global conditions are challenging.
  - Introducing a stabilizing element could subordinate price-based incentives/timely repayment objectives in certain global states to stabilizing borrowing costs, appropriate if price-elasticity of demand for Fund credit declines in a high-interest environment.
- Two illustrative state-dependent mechanisms:

  1) State-varying surcharge rates, inversely related to the basic rate of charge:
    - Design: Asymmetric level-based surcharge rate schedule; maintain current rate (200 basis points) if the SDRi is within a “normal” range but reduce the surcharge when SDRi exceeds its “normal” rate, decreasing in inverse proportion until falling to zero when SDRi reaches an upper bound.
    - Illustrative calibration used: lower bound of 200 basis points and upper bound of the “normal” SDRi range of 500 basis points (around the 75th percentile of SDRi since 1980).
    - Implications:
      - Greater income uncertainty for the Fund; income losses depend on SDRi trajectory and could at the limit offset the entire surcharge income.
      - Incidence: relatively higher share of burden relief accrues to larger borrowers, similar to a parametric reduction in level-based surcharge.
      - Calibration complexities: setting the “normal” SDRi range depends on SDR rate and market rates, inflation, amount of borrowing, exogenous shocks, global growth, precautionary balances; choice between stabilizing nominal or real borrowing rates; judgment required and likely time-consuming Board deliberations.
    - Estimated fiscal impact:
      - Based on WEO projections for the SDRi, the expected annual lending income loss of the illustrative mechanism would be about SDR 520 million for FY2026, with the largest three surcharge payers accounting for 74 percent of the total.
      - Number of borrowers subject to surcharges would not change.

  2) Fully capping the interest rate for Fund borrowing:
    - Design example: cap the total marginal rate of Fund credit at 7 percent.
    - Implications:
      - Provides members with certainty about maximum debt service costs.
      - Generates high financial risks to the Fund: could lead to loss of all surcharge revenue and push lending rate below the funding cost (remuneration of reserve tranche positions), producing operational lending losses.
      - Calibration challenges: determining cap level is complex; at times of high inflation the capped rate could be highly accommodative.
    - Conceptual note: both state-varying and cap approaches would likely need adjustments when global conditions change; limited automaticity and Board review triggers may be needed.

- Summary assessment of “innovative” approaches (Table 5):
  - State-varying surcharge rate inversely related to basic rate:
    - Impact on surcharge burden: Reduces burden, especially for large borrowers; provides limited debt service stability.
    - Impact on price incentives: Reduces price-based incentives for all credit levels, varying with global interest levels.
    - Impact on income generation: Increases income uncertainty; could lead to significant reduction.
    - Simplicity: Considerably more complex than status quo.
  - Capping the total interest rate of Fund borrowing:
    - Impact on surcharge burden: Reduces burden, especially for large borrowers; provides more far-reaching debt service stability.
    - Impact on price incentives: Reduces price-based incentives for all credit levels.
    - Impact on income generation: Increases income uncertainty; could expose the Fund to very large income risks.
    - Simplicity: Considerably more complex than status quo.

### Margin for the rate of charge and operational income outlook
- Context:
  - Reliance on the exceptional circumstances clause in Rule I-6(4) for margin-setting (basis since 2011) is no longer needed given non-lending income is currently expected to exceed non-lending expenses going forward.
  - Projections based on a desk survey in May 2024 and SDR interest rates from market projections; expenses projected assuming a flat real budget consistent with assumptions in the Review of the Fund’s Income Position for FY 2024 and FY 2025-2026.
  - Payouts from the Fixed-Income and Endowment Subaccounts are expected to cover the Fund’s non-lending expenses going forward, a marked contrast to the prior decade.
- Projected operational income and key figures (Table 6: FY2024–FY2026, in SDR millions unless otherwise noted):
  - A. Operational Income (FY24 FY25 FY26): 3,659 3,825 3,781
  - Lending income (FY24 FY25 FY26): 2,682 2,642 2,603
    - Margin for the rate of charge (FY24 FY25 FY26): 943 906 859
    - Service charge and other income (FY24 FY25 FY26): 857 945 1,040
    - Commitment fees (FY24 FY25 FY26): 225 143 159
    - Surcharges (FY24 FY25 FY26): 1,429 1,514 1,540
  - Investment income (FY24 FY25 FY26): 783 1,055 1,089
    - Fixed-Income Subaccount (FY24 FY25 FY26): 783 950 982
    - Endowment Subaccount pay-out (FY24 FY25 FY26): 0 105 107
  - Interest-free resources (FY24 FY25 FY26): 183 116 77
  - Reimbursements (FY24 FY25 FY26): 11 21 12
    - SDR Department (FY24 FY25 FY26): 5 5 5
    - PRG Trust (FY24 FY25 FY26): 0 0 0
    - RST (FY24 FY25 FY26): 6 7 7
  - B. Expenses (FY24 FY25 FY26): 1,185 1,229 1,250
    - Net administrative budget (FY24 FY25 FY26): 1,060 1,128 1,151
    - Capital budget items expensed (FY24 FY25 FY26): 24 31 30
    - Depreciation (FY24 FY25 FY26): 6 5 7
    - Net periodic pension cost (FY24 FY25 FY26): 3 6 0
  - C. Net Operational Income Before Provisioning (A-B) (FY24 FY25 FY26): 2,474 2,596 2,531
  - Provision for loan impairment losses (FY24 FY25 FY26): 0 0 0
  - D. Net Operational Income (FY24 FY25 FY26): 2,474 2,596 2,531
  - E. Pension-related remeasurement gain (FY24 FY25 FY26): 1,640 0 0
  - Net Operational Income After Remeasurement (D+E) (FY24 FY25 FY26): 4,114 2,596 2,531
  - Endowment Subaccount - Retained Income (FY24 FY25 FY26): 570 291 289
  - Net Income (FY24 FY25 FY26): 4,684 2,887 2,820
  - Memorandum items:
    - Fund credit (average stock, SDR billions) (FY24 FY25 FY26): 94.3 90.6 85.9
    - SDR interest rate (in percent) (FY24 FY25 FY26): 4.0 3.6 3.2
    - US$/SDR exchange rate (FY24 FY25 FY26): 1.34 1.33 1.34
    - Precautionary balances (end of period, SDR billions) (FY24 FY25 FY26): 25.1 27.7 30.2
- Implication for margin-setting:
  - Establishment of the margin should be guided by criteria in Rule I-6(4): (i) adequate to cover estimated intermediation costs; and (ii) deliver an amount of net income for placement to reserves, assessed taking into account current precautionary balances, any floor or target, and expected contribution from surcharges and commitment fees.
  - Margin should also align with market conditions as measured by appropriate benchmarks (the “market test”).
  - Application of these criteria leaves considerable room for Executive Board judgment, including desirable levels of net income, reserve accumulation, and the application of the market test.

*International Monetary Fund — Review of Charges and Surcharges (excerpt).*

### 47.      Staff has conducted an analysis to illustrate possible margins for the remainder of

### ppea2024044 - 47.      Staff has conducted an analysis to illustrate possible margins for the remainder of

### Margins for the Basic Rate of Charge
- Intermediation-cost-only view:
  - Implied margin: about 20 basis points.
  - Under the desk survey scenario, intermediation income would reach SDR 260 million in FY2025 and cover intermediation cost of SDR 132 million.
  - Stress scenario: intermediation income SDR 141 million would cover intermediation costs SDR 141 million.
  - Staff judgment: prudent to aim for some net income because 20 basis points would likely fail the market test and leave borrowing costs well below historical levels.
- Current margin and income:
  - Current margin: 100 basis points.
  - Expected income with current margin: SDR 906 million in FY2025 and SDR 859 million in FY2026.
  - Contribution to net income from current margin: about SDR 774 million (FY2025) and SDR 724 million (FY2026).
- Staff view on an appropriate margin:
  - Recommended range: 40 - 100 basis points (consistent with Rule I-6(4) and allowing judgment).
  - Expected margin contribution to net income/reserve accumulation: about SDR 350 to SDR 900 million.
  - Rationale: preserves capacity to build reserves if credit risks rise, provides protection against income volatility from investment returns or declines in credit outstanding, and maintains stability of the margin applied to all credit outstanding.

### Benchmarks and Market Alignment
- Use of EMBI spreads as benchmark:
  - Benchmark approach: compare margin level to lowest quartile of EMBI spreads (proxy for more creditworthy borrowers; reflects Fund’s cooperative public policy role).
  - Five-year rolling median for the lowest quartile EMBI spread: 166 basis points.
  - Five-year rolling median for sample of countries with GRA arrangements since 2000: 317 basis points.
  - Interpretation: a margin between 40 and 100 basis points would align the basic rate of charge with the average cost of financing over the last five years for countries with sovereign ratings averaging between BBB+ and A-; it would remain moderately below cost of financing for relatively creditworthy borrowers and substantially below cost for most past GRA borrowers.

### Commitment Fees
- Observations:
  - Commitment fee thresholds have eroded relative to macro metrics since the 2016 Review.
  - Case made for offsetting accumulated erosion to support attractiveness and signaling value of precautionary instruments.
- Quantitative impact of raising thresholds:
  - Increasing thresholds of all steps in the upward-sloping fee structure by 45-50 percent (to fully offset erosion since 2016) would reduce income by about SDR 10‒30 million annually.

### Holistic Considerations on Margin and Surcharge Adjustments
- Combined effects to consider:
  - Net income and reserve accumulation.
  - Incidence of relief on members (benefit distribution).
  - Overall borrowing cost from the Fund (marginal and effective).
- Illustration combining a 40 bps margin reduction with various surcharge reform options:
  - Loss due to lower margin: about SDR 340 million in FY 2026.
  - Combined annual lending income losses in FY 2026 across illustrative scenarios: about SDR 380 to SDR 870 million.
  - Combined cumulative 5-year impact (FY2025-29) on net income: SDR 1.6 billion to SDR 3.7 billion, representing a 13 to 30 percent reduction from the current policy scenario.
  - Incidence: three largest borrowers generally capture higher benefit shares under options that reduce surcharge rates.
  - Sensitivity: impacts on effective and marginal borrowing costs, incidence, and net income generation are highly sensitive to calibration and potentially nonlinear.
- Scenarios and illustrative calibrations referenced:
  - Scenario labels include examples where margin reduced to 60 bps combined with various surcharge changes (e.g., threshold increased to 280 percent of quota; level-based surcharge rate cut to 100 bps; time-based surcharge rate cut to 50 bps; extension of time-based trigger by 12 months; tiered level-based surcharge rates alternatives).

### Implementation, Operational, and Other Considerations
- Interaction with forthcoming 16th General Review of Quotas (16th GRQ):
  - Changes to thresholds in current review would be made based on current quotas.
  - When 16th GRQ becomes effective, surcharge and commitment fee thresholds in percent of current quotas would be mechanically divided by 1.5 to keep nominal value unchanged.
  - If effectiveness of 16th GRQ is notably delayed, the Executive Board could consider additional adjustments for erosion.
- Implementation timelines and operational risks:
  - Margin: new margin implementation could be completed within one month.
  - Surcharges:
    - Parametric changes (thresholds and/or rate changes): about one to three months, depending on scope and treatment of existing arrangements.
    - More fundamental architecture changes (e.g., state-dependent surcharge rates, multiple rate thresholds, linking surcharge to basic rate of charge, caps on borrowing costs): require more analysis and longer implementation, and more complex IT systems modifications.
  - Commitment fees: adjustment of fee thresholds could leverage the 2016 approach and be relatively straightforward.
  - Recommended sequencing: initiate system/module changes at the start of a financial quarter to align with billing and financial reporting; changes within a quarter are possible but increase operational risks and resource needs.

*Source: ppea2024044 - Review of Charges and Surcharges (IMF staff analysis).*

### 57.      Directors may wish to comment on the following issues:

### 57.      Directors may wish to comment on the following issues:

### Scope for lowering GRA borrowing costs and overall reform objectives
- Considering that the Fund has reached its precautionary balances target and the robust net income outlook, and given the higher SDRi facing our membership, do Directors agree that there is scope to lower the cost of GRA borrowing for all borrowers?
- Do Directors agree that any reform should involve both broad-based relief on the basic rate of charge—based on the framework set out under Rule I-6(4)—and a reform of the surcharge policy that provides additional relief while preserving appropriate incentives and maintaining adequate financial buffers?
- Are Directors open to further explore more wide-ranging reforms to the surcharge policy that would introduce an objective to stabilize the cost of Fund borrowing, considering that this would likely take more time, or do Directors favor a focus on parametric reforms to the current framework?
- Do Directors agree that a successful conclusion of the review and agreement on reforms should aim to be delivered by the Annual Meetings?

### Design issues with level-based and commitment fee thresholds
- Do Directors agree that the design of level-based surcharges should be revisited in light of the erosion of the threshold against a range of metrics, and the fact that a large number of moderate borrowers are paying a relatively high marginal surcharge rate?
- Do Directors agree that commitment fee thresholds should also be revisited in light of erosion?

### Time-based surcharges and shock-prone environment
- Given the current shock-prone global environment and the structural nature of the problems facing our membership, do Directors agree that there is scope to revisit the design of time-based surcharges?
- Specific timing mechanics noted: time-based surcharges kick in 36 months after level-based surcharge threshold was exceeded in case of Stand-by arrangements and 51 months in case of Extended Fund Facilities.

### Budget and implementation note
- Budget implications of proposed policy changes, especially those related to system configurations, will be provided in the follow up Board paper once reform options have been narrowed down.
- Changes are expected to be included in regular systems enhancement plans and prioritized accordingly.

### Annex I — Concerns raised regarding surcharges (summary of public policy debate)
- Incidence and impact on GRA borrowers:
  - “Procyclical” nature: surcharges increase costs when borrowing members face economic strain and limited access to other financing.
  - Regressive impacts: surcharge payers are mostly middle-income countries without access to dollar swap lines and (in some cases) with quotas that are smaller than their share of world GDP, meaning surcharges apply at levels of Fund credit not commensurate with financial needs.
  - Lack of transparency: surcharge data are not easily available and countries may not be fully aware they are paying these charges.
- Design-related concerns:
  - Price-inelastic demand and lender of last resort role: skepticism that level-based surcharges can disincentivize borrowing when alternatives are unavailable.
  - Non-financial incentives (stigma, loss of sovereignty, conditionality) may be more relevant than price-based incentives.
  - Liquidity versus solvency: surcharges originated in a liquidity-crisis context (Asian crisis) and may be out of context for borrowers facing protracted balance of payments problems.
- Questions about Fund justifications:
  - Lack of evidence of effectiveness of surcharges in promoting prudent borrowing and preventing moral hazard.
  - Adequacy of Precautionary Balances: surcharges have become the largest source of the Fund’s revenue; non-surcharge income is considered sufficient to build precautionary balances, suggesting surcharges could be reduced or removed without threatening sustainability.
  - Risk management and senior creditor status: preferred creditor status is argued to provide sufficient protection, reducing the need for surcharge-derived income.

### Annex I — Proposed reform options (range presented)
- Immediate suspension of surcharges until a comprehensive review is completed, with subsequent reduction or possible elimination.
- Alignment of the threshold for level-based surcharges with the threshold access limits.
- Setting surcharge rates in inverse relation to the basic rate of charge (moving to state-dependent surcharge rates): Fund would determine a “normal/equilibrium” level of the SDRi, with surcharge rates declining when the actual level exceeds the “normal” level.
- Capping the total interest rate of GRA borrowing at some (moderate) level.
- Reimbursement of surcharge payments to a country once principal has been repaid.

### Annex II — Event study methodology and findings on incentive mechanisms
- Methodology overview:
  - Hypothesis: surcharge incentives work provided countries are not in significant macroeconomic distress; credit outstanding should hover around or remain below the threshold if incentives operate as intended.
  - Financing pressure classification: a country is in “high financing pressures (high debt vulnerability)” if it fulfills two or more of:
    - Its gross government debt (in percent of GDP) is above the 75th percentile of the distribution.
    - Its gross EMBIG credit spread is above the 75th percentile of the distribution.
    - The country has a rating below B, considering the S&P rating classification.
  - Visualizations compare credit outstanding to the level-based surcharge threshold, with marks for financing pressures, gray vertical lines for early repurchases, and vertical red lines for when time-based surcharges kicked in.
- Empirical findings — three country groups:
  - Group 1: Level-based threshold appears closely linked to amounts borrowed; credit outstanding hovered just below or near the threshold, suggesting intention to avoid surcharges. Countries are relatively small borrowers with manageable financing pressures. Examples: Colombia, Kosovo, North Macedonia, Serbia. Subset temporarily exceeded threshold but quickly repaid (examples: Cyprus, Morocco).
  - Group 2: Countries borrowed considerably above the threshold during highly distressed times but reduced credit outstanding once external pressures eased and market access returned, often making early repurchases. Examples: Greece, Ireland, Portugal, St. Kitts and Nevis. Time-based surcharge triggers (red lines) sometimes coincide with early repurchases.
  - Group 3: Countries with significant financing pressures where credit outstanding is well above the threshold and threshold is not binding. These countries have little alternative to IMF borrowing. Examples: Angola, Argentina, Costa Rica, Ecuador, Egypt, Jordan, Pakistan, Ukraine. Some migrated from Group 2 to Group 3 over time.
- Time-based surcharges assessment:
  - Time-based surcharges of 100 basis points are designed to encourage early repurchases by increasing Fund financing cost closer to market levels; the sum of the marginal rate of level- and time-based surcharges can reach 300 bps.
  - For borrowers that regained market access, the incentive kicks in when market cost (proxied by EMBIG yields) is at or below the total cost of Fund financing (basic rate plus surcharges).
  - Evidence that incentive mechanisms worked for many pre-2016 cases (GFC-related) and some post-review cases: Iceland, Latvia, Hungary, Ireland, Portugal made large early repurchases; Ireland and Portugal made large repurchases once the spread between market and Fund financing cost (adjusted EMBIG yields net of the basic rate of charges) fell below the marginal surcharge rate of 300 bps.
  - Post-2016 examples of early repurchases to avoid surcharges include Greece (October 2019 through March 2021) and Morocco (January 2021); Cyprus and St. Kitts and Nevis also made early repurchases when market access was regained.

*Source: ppea2024044 - 57.      Directors may wish to comment on the following issues:*

### Annex III. Measuring Erosion of Quota-Denominated Thresholds

### Annex III. Measuring Erosion of Quota-Denominated Thresholds

### Role of erosion in calibrating quota-denominated thresholds
- Erosion captures the decrease in the ratio of nominal thresholds (in SDR terms) to relevant nominal macroeconomic variables (also in SDR).
- Erosion is driven by inflation of currencies in the SDR basket, real growth in member countries, and the Balassa-Samuelson effect.
- Erosion affects calibration of access limits, surcharges and commitment fees.

### Multidimensional estimation approach
- Four analytical dimensions used to estimate erosion:
  - Macroeconomic variables in the denominator: GDP and measures of cross-border flows (proxies for potential BoP needs).
  - Country groups: world, EMDEs, or past users of Fund lending (program countries).
  - Aggregation: median across countries or aggregate for the country sample.
  - Time horizon: starting point for erosion calculations (most recent review vs. past recalibration points).

### Past reviews and methodological choices
- 2008–09 Review: focused on GDP and trade.
- 2016 Review: covered erosion vis-à-vis GDP, trade, external liabilities, and external gross financing needs.
- March 2023 Temporary Modifications and March 2024 Extension (2023/24 Reviews): similar set of indicators to 2016 Review, with differing definitions and country coverages.
- For the 2024 Reviews of Access Limits and of Charges and Surcharges, staff proposes building on methodologies used in the 2023/24 interim review and the 2016 Review, with median erosion as the preferred central tendency measure.

### Advantages of median erosion (preferred measure)
- Aggregate erosion: sum of numerators and denominators across countries and then compute erosion on the aggregate ratio; implicitly weights countries by their share in the aggregate, biasing estimates toward large economies.
- Median erosion: compute country-level erosions between start and end years, then take median across the sample; reflects erosion experienced by the representative member and is more relevant for calibrating quota-based thresholds.
- The Review presents both median erosion (preferred) and aggregate erosion (for comparability).

### Key quantitative conclusion on surcharge calibration
- Annex III Table 2 suggests that a level-based surcharge of about 280 percent of quota would offset erosion across most metrics, regardless of sample and methodology.
- This represents a nearly 50 percent increase from the current 187.5 percent of quota.
- The same percent increase would apply to other quota-based thresholds as well.
- Median erosion delivers a narrower range of erosion estimates across country groups and metrics, increasing confidence in results.
- Annex III Table 3 provides additional details on longer-horizon erosion (less relevant for surcharges than for access limits).

### Erosion estimation design features (Annex III Table 1 highlights)
- Time periods compared:
  - 2016 Review: 2009–2015
  - 2023/24 Reviews: 2015–2023
  - 2024 Reviews: 2016–2024
- Economic concepts / metrics:
  - Capacity to repay: GDP in all reviews.
  - Current account / BoP needs definitions shown; 2024 Reviews adopt Current payments = Imports of goods and services + Primary income debit + Secondary income debit.
  - Capital account / BoP needs: Capital flows = FDI + Portfolio liabilities + Other investment liabilities in 2023/24 and 2024 Reviews.
  - Aggregate BoP needs / EFN definition in 2016, 2023/24, and 2024 Reviews: External financing needs = – Current account balance + Amortization – Change in reserves (change in reserves subtracted only for low-reserves countries).
- Country coverage and proxies for likely borrowers:
  - World: All IMF members with restrictions for capital flows and EFN (only countries with positive values); program countries included for EFN metrics in 2024 Reviews.
  - EMDEs: All EMDEs with restrictions for capital flows and EFN (only positive values). Program EMDEs analyzed; EMDEs excluding India & China included for comparability with 2016 Review.
- Central tendency:
  - 2024 Reviews: Median erosion within country sample (preferred) and erosion of aggregate for comparability.

### Longer-term median erosion (Annex III Table 3 — Selected figures)
- Presented median erosion between base years and 2024 for multiple samples and metrics. Selected values:
  - World, Access Limit to GDP: 46.5 (2009-2024) and 33.7 (2016-2024)
  - World, Access Limit to Current Payments: 46.9 (2009-2024) and 38.0 (2016-2024)
  - World, Access Limit to Capital Inflows: 32.9 (2009-2024) and 31.8 (2016-2024)
  - World, Access Limit to External Financing Needs: 39.3 (2009-2024) and 30.9 (2016-2024)
  - EMDEs, Access Limit to GDP: 50.0 (2009-2024) and 34.0 (2016-2024)
  - EMDEs, Access Limit to Current Payments: 52.2 (2009-2024) and 38.9 (2016-2024)
  - Program Countries, Access Limit to GDP: 47.6 (2009-2024) and 35.1 (2016-2024)
  - Program EMDEs, Access Limit to GDP: 50.5 (2009-2024) and 34.7 (2016-2024)
  - EMDEs excl. China and India, Access Limit to GDP: 50.2 (2009-2024) and 33.8 (2016-2024)
- Note: All numeric values preserved exactly as presented.

### Implementation and reporting choices
- This Review no longer constrains the EFN metric to the subset of countries with at least one drawing IMF arrangement since 1990; results across all metrics for program-only countries are nonetheless presented for completeness.
- Both median- and aggregate-based erosion estimates are reported to support continuity and comparability.

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### Annex IV. Scenario Analysis for the Margin of Charge

### Objective and horizon
- Aim: illustrate a range for the margin that could preserve the capacity to contribute to reserves by FY 2028 (end of the two-year margin period following the two-year period for which the margin would be set).
- Target precautionary balances: close to the current target of SDR 25 billion by end-FY24 and FY28 in scenario parameters.

### Margins tested
- 100 basis points (current margin)
- 40 basis points (intermediate)
- 20 basis points (margin necessary to cover solely intermediation costs)

### Key drivers and scenarios
- Largest income components:
  - Lending income driven by amount of Fund credit outstanding.
  - Non-lending income driven by returns in the FI, highly sensitive to interest rates.
- Two main scenarios used:
  - Desk Survey Scenario (baseline/projection based on desk survey):
    - SDR interest rate: projected using market instruments (3.6 percent in FY25; 3.1 percent in FY28).
    - Net Administrative Budget expenditures: flat real budget (SDR 1,128m in FY25; SDR 1,202m in FY28).
    - Credit outstanding (average): SDR 90.6 bn in FY25; SDR 81.3 bn in FY28.
    - Precautionary balances: Reaches SDR 25 billion target by end-FY24.
  - Stress Scenario:
    - SDR interest rate: 2.2 percent, near the 10-year historical average, in FY28.
    - Net Administrative Budget expenditures: flat real budget (rising to SDR 1,202m in FY28).
    - Credit outstanding declines to SDR 70.7 bn (Current Arrangements) in FY28.
    - Precautionary balances: Reaches SDR 25 billion target by end-FY24.

### Scenario analysis results (Annex IV. Table 1 — Fund Income and Expenses Scenarios)
- Definitions:
  - Intermediation income comprises income from the margin and service charges.
  - Non-intermediation income comprises payouts from the fixed-income and endowment subaccounts and implicit income from interest free resources.
  - Expenses comprise Net Administrative Budget expenditure adjusted for reimbursements.
- Scenario 1: FY2025 Desk Survey
  - Income: 100 bps = 984; 40 bps = 441; 20 bps = 260; Non-intermediation = 1170; Coverage = 132%
  - Expenses: Intermediation expenses = 132; Non-intermediation expenses = 888
- Scenario 2: FY2028 Desk Survey
  - Income: 100 bps = 824; 40 bps = 336; 20 bps = 174; Non-intermediation = 1385; Coverage = 146%
  - Expenses: Intermediation expenses = 141; Non-intermediation expenses = 946
- Scenario 3: FY2028 Current arrangements, 2.2% SDRi and Floor-level PB (stress scenario)
  - Income (A): 100 bps = 707; 40 bps = 283; 20 bps = 141; Non-intermediation = 844; Coverage = 89%
  - Expenses (B): Intermediation expenses = 141; Non-intermediation expenses = 946
  - Difference (A)–(B): 100 bps = 566; 40 bps = 142; 20 bps = 0; Non-intermediation difference = -102

### Interpretation and policy-relevant conclusions
- Margins of 40 basis points or higher:
  - Would comfortably cover intermediation expenses under the baseline.
  - Provide a buffer to cover a possible shortfall in the non-lending balance or other sources under a stress scenario.
- In the stress scenario:
  - Intermediation income declines with credit outstanding but remains above intermediation expenses even with a margin of 40 basis points.
  - Non-intermediation income falls below non-intermediation expenses; a margin of 40 basis points would allow the deficit in the non-intermediation balance to be covered by intermediation income.
- Broad conclusion: a margin of 40 basis points or higher would continue to deliver a robust level of net income that minimizes the risk of a reversal in the margin or frequent changes, while retaining a capacity to contribute to reserves that would be robust to a possible decline of income from surcharges or other sources.

*Source: Annex III and Annex IV, ppea2024044 - Annex III. Measuring Erosion of Quota-Denominated Thresholds*

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_Source: https://www.imf.org/-/media/files/publications/pp/2024/english/ppea2024044.pdf_