The International Monetary Fund (IMF) surcharge system—in place since 1997—is causing more harm than good. Just ask Ukraine, or other low-income countries in debt distress. Despite struggling to keep its economy going while fighting off Russia’s invasion, Ukraine is paying surcharges of three hundred basis points on top of the basic charge that comes along with borrowing from the IMF. Meanwhile, the IMF’s justifications for surcharges, based on incentives and building the IMF’s own precautionary balances, face new questions.

The IMF imposes surcharges if its loan to a member exceeds a certain level or persists longer than the agreed duration. Level-based surcharges of two-hundred basis points are added on top of the basic charge associated with IMF borrowing for member countries with high debt levels owed to the IMF General Resources Account (exceeding 187.5 percent of a member’s quota). Time-based surcharges of one hundred basis points are applied to loans lasting longer than thirty-six months (under a regular standby loan) or fifty-one months (under an extended funding facility loan). The basic IMF charge rate is one hundred basis points above the Special Drawing Rights (SDR) interest rate. The IMF Special Drawing Right (SDR) rate is determined by the weighted average of the interest rates of the five major currencies (the US dollar, euro, pound sterling, yen, and renminbi) making up the SDR—currently at 3.8 percent. As a consequence, such surcharges would bring the total lending rate of IMF loans subject to surcharges to 7.8 percent at present—quite onerous for countries already in deep economic distress and short of hard currency.

The IMF says its surcharge policy intends to incentivize borrowing countries to repay the IMF in a timely manner and to contain their borrowing. The IMF also needs surcharges to build up its precautionary balances to safeguard its capital base against potential credit losses. In reality, surcharges have been found an insignificant factor in deterring countries from borrowing more from the IMF. The conditions that come along with borrowing from the IMF already deter many countries from relying on the institution until their situation deteriorates to the point that they have no alternatives. Concerns about conditionality also disincentivize members from asking for too big a loan unless driven by the magnitude of the crisis. The bigger the loan, the more stringent the conditionality. By and large, countries would try to repay the IMF to regain sovereignty away from the Fund’s scrutiny of their compliance with loan conditions.

The fact that some countries let their IMF loans remain outstanding longer than originally agreed usually results from a protracted crisis making timely repayments difficult. For example, multiple crises in recent years have led the number of countries paying surcharges to rise from eight—before the Covid pandemic—to twenty-two. The surcharges did not deter this increase. Finally, the IMF will achieve its target of SDR 25 billion ($33.2 billion) for its precautionary balances by the end of FY2024. Its balances will likely continue to grow, even without the surcharges.

Surcharges have substantially increased the payment burdens on countries in economic distress, especially depleting their dwindling foreign exchange reserves. Total surcharges will amount to $13 billion between 2024 and 2033. Surcharges will be a significant financing burden for low- and middle-income countries, which have been spending more to service their debts to external official and private creditors than they receive in new funds.

Five countries have borrowed the most from the IMF—Argentina, Ecuador, Egypt, Pakistan, and Ukraine. They paid $5.1 billion combined in surcharges between 2018 and 2023 and will pay an additional $7.2 billion between 2024 and 2028. Ukraine alone paid $621 million between 2018 and 2023 and will have to pay $1.6 billion between 2024 and 2028. Such surcharges sharply increase the cost of interest payments to the IMF, bringing IMF financing close to market rates—well above the concessional rates typically offered to countries in need by international financial institutions.

Ukraine, in particular, has a four-year IMF program under the Extended Funding Facility worth $15.6 billion (445 percent of its quota), signed in March 2023. Ukraine also has an outstanding loan of $10.5 billion from the IMF. In the next four years, Ukraine will probably repay to the IMF as much as it will receive in new loans. Its debt service payment (principal and interest) to the IMF will reach between $1.1 and $1.2 billion in 2025, as estimated by the Wilson Center. This is a financial burden the country can ill afford. It is important to note that from 2018 to 2022, Ukraine was a net payer to the IMF, paying back $7.2 billion while receiving $4.2 billion in new loans.

Many observers have criticized the surcharges as unfair and unreasonable. They can be procyclical, increasing financing costs precisely when countries are in economic distress and short of hard currencies. In 2022, several members of the US House of Representatives proposed legislation asking the IMF to review its surcharge policy with a view to abolish it. At a recent House Financial Services Committee hearing, Treasury Secretary Janet Yellen said the United States supports a review of the IMF surcharge policy, but qualified that by repeating IMF rational for surcharges.

In response, at the IMF/World Bank Spring Meetings in April 2024, the IMF decided to review the surcharge policy. The review started in early July this year and is expected to produce recommendations to be discussed at the Annual Meetings in October. The Group of Twenty-Four—representing developing countries at the IMF—issued a statement at the Spring Meetings asking the IMF to suspend its surcharge policy as soon as possible, pending changes (including the elimination of surcharges, reducing the surcharge spreads, and relaxing the thresholds that trigger surcharges) to be discussed and approved by the IMF Board. Such a decision requires 70 percent of the votes.

The IMF should seriously consider these requests and move expeditiously to significantly reform its surcharge policy, ideally abolishing it. This policy has not served its purposes, is no longer needed to build the Fund’s precautionary reserves. Instead, it imposes unnecessary financing burdens on low-income countries in debt distress—the very countries that need all the help they can get. Dropping the surcharge would help relieve some of the financial burdens on Ukraine, especially, which has experienced extraordinary hardship and sacrifice fighting against Russia’s war of aggression.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center, a former executive managing director at the International Institute of Finance, and a former deputy director at the International Monetary Fund.

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