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This month, in addition to confronting a Russian military build-up on its borders, Ukraine was scheduled to deliver $197 million in debt payments to the International Monetary Fund. In March, the amount increases to $668 million. The monthly payments are in themselves no surprise, given Kyiv’s well-known dependency on IMF support.
What is more alarming is that of the first payment, some $35 million is made up of what the IMF calls “surcharges”, paid on top of regular interest payments for its loans. The IMF doesn’t disclose surcharges in the financial statements for countries, much like the hidden fees of some credit cards. In March Ukraine’s surcharge payments will run to around $29 million.
Calls to review surcharge policy have gained traction on the management board of the IMF–but are being adamantly resisted by the United States Treasury. Now that intransigence is adding to the pressures on a vital strategic ally in the midst of a deepening political and economic crisis.
Ukraine’s current economic troubles demand action. Since November, the hryvnia has dropped 8.4% against the dollar to its lowest level since the start of the pandemic. The IMF estimates that 70% of Ukraine’s foreign liabilities are denominated in dollars, so this drop in the exchange rate makes it more difficult to keep up with debt payments.
Ukraine’s international reserves fell from $30.9 billion at the end of December 2021 and the central bank has sold $1.5 billion of its reserves since the beginning of the year in the domestic foreign exchange market. On Jan. 20, the Ukrainian central bank had to raise interest rates to 10% from 9% to try to tackle persistently high inflation and to try to avoid capital flight in the context of the economic fallout resulting from the standoff with Russia.
On Nov. 24, 2021, Ukraine received a $700 million disbursement from an IMF standby program. This pales in comparison to the $2.34 billion Ukraine must pay the IMF in 2022, in the midst of geopolitical tension, economic destabilization, and rising interest rates.
The president of Ukraine has stated that the country needs $5 billion in external financing to stabilize the economy. The president of the European Commission, Ursula von der Leyen, has proposed the EU governments authorize a €1.1 billion loan and €120 million in grant assistance for Ukraine. Von der Leyen has also called on other international partners, including the IMF, to ”follow the same approach.”
So why would the U.S. Treasury argue for keeping surcharges, which add significantly to the stress on Ukraine and an increasing number of other states with high levels of debt to the IMF. So far the message seems to be “because we always have.”
Surcharges are supposedly used to sustain the Fund’s lending power. However, the IMF’s surcharge revenue is three orders of magnitude smaller relative to its available funds: it has repeatedly declared that it has $1 trillion in lending power.
The IMF has also argued that surcharges are a powerful incentive that motivates countries to pay back their loans early. This is a dubious claim, particularly in the case of a country that is dealing with an armed conflict and facing the threat of a foreign military attack. In addition, beyond its military crisis, Ukraine has been particularly hard hit by the pandemic — with 40,000 excess deaths in November 2021, and in great need of further financing to cover ongoing healthcare needs, pay for public-sector workers and other necessities.
Separately a group of U.S. members of Congress have already called for the end to the application of the IMF’s “unfair and counterproductive” surcharge policy, that “weakens efforts to address the immense challenges the world is facing at this time.”
President Biden recently said that the U.S. is “exploring additional macroeconomic support to help Ukraine’s economy.” A quick and easy way to help mitigate the economic destabilization caused by rising tensions is for the U.S. to call for an immediate decision by the IMF executive board to scrap surcharges.
Yurii Romashko is co-founder and executive director of Ukraine’s Institute for Analysis and Advocacy.
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