(Headline USA) A provision in the recently signed defense spending bill mandates that the United States work to ease Ukraine’s debt burden at the International Monetary Fund, which could create tensions at the world’s lender-of-last-resort over one of its biggest borrowers.
The National Defense Authorization Act requires American representatives to each global development bank, including the IMF, where the U.S. is the largest stakeholder, to use “the voice, vote, and influence ” of the U.S. in seeking to assemble a voting bloc of countries that would change each institution’s debt service relief policy regarding Ukraine.
Among other things, the U.S. is tasked with forcing the IMF to reexamine and potentially end its surcharge policy on Ukrainian loans. Surcharges are added fees on loans imposed on countries that are heavily indebted to the IMF.
The U.S. interest in changing the policy comes as it has distributed tens of billions for Ukrainian military and humanitarian aid since the Russian invasion began in February. Most recently, Ukraine will receive $44.9 billion in aid from the U.S. as part of a $1.7 trillion government-wide spending bill.
Economists Joseph Stiglitz at Columbia University and Kevin P. Gallagher at Boston University wrote in February about surcharges, saying that “forcing excessive repayments lowers the productive potential of the borrowing country, but also harms creditors” and requires borrowers “to pay more at exactly the moment when they are most squeezed from market access in any other form.”
Just before Christmas, the directors decided to maintain the surcharge policy. They said in a Dec. 20 statement that most directors “were open to exploring possible options for providing temporary surcharge relief,” but others “noted that the average cost of borrowing from the Fund remains significantly below market rates.”
Securing consistent financing to Ukraine could become harder as the war rages on. There are growing fears of a global recession and concerns that European allies are struggling to deliver on their financing promises.
Mark Weisbrot, co-director of the liberal Center for Economic and Policy Research in Washington, said the surcharge issue affects not just Ukraine, but also other countries facing debt crises. Among them: Pakistan, hit by flooding and humanitarian crises, as well as Argentina, Ecuador, and Egypt, who together are on the hook for billions in surcharges.
“There is no logic to the IMF imposing surcharges on countries already in crisis,” Weisbrot said, “which inevitably happens because the surcharges are structured to hit countries already facing financial problems.”
He said the issue will become more urgent as Ukraine’s debt grows and the war drags on.
Adapted from reporting by the Associated Press