The IMF Must Lead on Debt Sustainability

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Reform of the IMF’s lending arrangements for middle-income countries is overdue.
Debt will continue to be a critical component of funding for sustainable development and climate resilience; the challenge is to both lend and borrow “better.”

The rate of economic growth is the most important driver of debt dynamics.
Rule of thumb: rates of interest that are likely to exceed the rate of future nominal growth cannot be considered sustainable.
The more such rates feature across a public debt portfolio, the greater the likelihood of sovereign debt distress in the future.

Surcharges introduced at the start of the millennium on all IMF lending through the General Resources Account (GRA) include:
- a level-based surcharge of 2 percent on GRA borrowing that exceeds 187.5 percent of quota, and
- an additional 1 percent “time-based” surcharge on the portion of GRA credit above this threshold that is outstanding for more than 36 months (or 51 months in the case of the EFFs).
Objective of surcharges: dissuade large and prolonged borrowing from depleting the IMF’s resources.
Context changes since introduction:
- Precautionary balances: $6.2 billion as of April 1999 to approximately $33 billion as of April 2024.
- As of April this year, 21 middle-income countries had borrowed above 187.5 percent of quota.
- Compared with a decade ago, the average per capita income of countries with active EFFs has fallen by a factor of 4.
Consequence: the surcharge regime has exposed fragile sovereign borrowers to the full force of rising world interest rates, even though the IMF is now well capitalized and does not rely on market borrowing to fund its lending arrangements.

Minimum all-in interest rate payable on GRA disbursements: 5.1 percent a year.
Sovereigns paying 7.1 percent on the portion of their drawings that exceeds 187.5 percent of quota.
GRA liabilities outstanding for three years or more (or four in the case of the EFF) now have a record interest rate of 8.1 percent.
Conclusion drawn: the IMF cannot argue that its lending programs have debt sustainability at heart when its own lending to middle-income countries cannot be considered sustainable.

The EFF disburses over only three or four years and has to be repaid in seven (on a weighted average basis).
Structural reform is complex and takes time to implement and years to bear fruit; the EFF’s tenor is too constrained to support structural reform amid “polycrisis” and the climate crisis.
Result: many middle-income countries are locked into perpetual programs, borrowing from the IMF just to repay the IMF.

Forty-five years have passed since the EFF was last reformed, in 1979.
Fresh thinking on IMF support for middle-income countries is long overdue.
The IMF has demonstrated capacity for innovation in recent years:
- Quick rollout of the RFI and the Rapid Credit Facility soon after the pandemic.
- Allocation of a record $650 billion-equivalent in SDRs.
- Introduction of the Resilience and Sustainability Facility, funded by rechanneling a portion of the new SDRs, designed to help finance climate resilience and adaptation for countries that already have an IMF upper-credit-tranche arrangement; this facility has a final maturity of 20 years and carries no surcharges.

Reform the IMF’s surcharge regime urgently:
- Options include a radical overhaul that includes caps that take into account the interest rate cycle, or preferably scrapping the surcharge regime outright.
Reform tenors and instruments:
- Align lending tenors with the time horizon required for structural reform and climate resilience investments.
- Design IMF lending arrangements for middle-income countries that are fit for purpose in the face of multiple 21st-century crises.

The IMF Must Lead on Debt Sustainability, Mia Amor Mottley, F&D Magazine.

The IMF Must Lead on Debt Sustainability
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