Barbados Faces Increased IMF Surcharges unless Policy Changes: Analysis

Barbados is scheduled to pay millions of dollars more in surcharges to the International Monetary Fund (IMF) this year, 2025 and beyond unless the United States (US)-based financial institution reduces or abandons the controversial fees.

Ahead of its annual meetings next month, the IMF has started what its director of communications Julie Kozack recently called “a comprehensive review” of surcharges.

Barbados and other countries have been lobbying for an end to the surcharges, but it is unclear what the outcome of the review will be.

Based on a published schedule of Barbados’ projected payments to the IMF, as of December 31, 2023 the island was expected to repay the Fund US$72.7 million this year, including, US$5.02 million in surcharges.

An updated schedule at the end of July stated that Barbados will pay the IMF about US$43.5 million including US$2.83 million in surcharges. For 2025, Barbados’ projected payments to the IMF are approximately US$102.9 million, including, US$6.4 million in surcharges.

In April, published IMF data revealed that Barbados paid the IMF about US$25 million last year, including about US$4.23 million in surcharges.

Speaking at a press briefing on July 11, Kozack said: “A comprehensive review of IMF surcharges is currently underway. That is part of our Executive Board ‘s work programme for this fiscal year.

“The review aims to do a few things. It will take stock of experience with the implementation of the surcharge policy since the last review, which was in 2016. The review may present options for possible changes to the current policy, taking into account the implications for our borrowing members and also for the IMF’s credit risk management framework.”

She continued: “Engagement with our Executive Board has started. Engagement between staff and the Executive Board has started. As part of that review, the staff does engage informally with the board from time to time, and that’s because a broad consensus among the IMF’s membership is needed to make any changes to the surcharge policy.

Voting power

“That policy requires, according to the Articles of Agreement, a 70 per cent majority of voting power in the Executive Board for any changes to that policy. So, building consensus is crucial,” she noted.

As of September 7, the United States (US) has 16.5 per cent voting power at the IMF – the largest amount. The US has been reluctant to change the surcharge mechanism.

Speaking during a recent meeting of the US House Financial Services Committee, Treasury Secretary Janet Yellen said the US backed the IMF’s decision to review its surcharge policy.

She added, however, that “the surcharges framework is important to create appropriate incentives to repay the IMF in a timely way and to contain borrowings”.

It is estimated that in the last five years, Barbados and other IMF-indebted countries have paid the institution US$7 billion

in surcharges, with a further US$9.8 billion expected to be paid over the next five years.

The surcharges the IMF receives are in addition to regular interest rates and service fees charged on funds borrowed by Barbados and other member countries.

On Friday, former IMF deputy director Hung Tran, speaking as a non-resident senior fellow at the US think tank Atlantic Council’s Geoeconomics Center, said in an Atlantic Council commentary that 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,” argued the former executive managing director at the International Institute of Finance.

Tran expects the ongoing IMF surcharges review “to produce recommendations to be discussed at the Annual Meetings in October”. He said that the surcharge system “is causing more harm than good”.

He elaborated: “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 per cent of a member’s quota).”

Economic distress

“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 former IMF deputy director explained that “the basic IMF charge rate is one hundred basis points above the Special Drawing Rights (SDR) interest rate”.

He stated: “The IMF 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 per cent.

“As a consequence, such surcharges would bring the total lending rate of IMF loans subject to surcharges to 7.8 per cent at present – quite onerous for countries already in deep economic distress and short of hard currency.” (SC)