This month, in addition to facing a Russian military buildup on its borders, Ukraine was due to pay $197 million in debt payments to the International Monetary Fund. In March, the amount increases to $668 million. The monthly payments are not in themselves a surprise, given Kyiv’s well-known dependence on IMF support.
What is more alarming is that of the first installment, some $35 million is made up of what the IMF calls “surcharges,” paid on top of regular interest payments for its loans. The IMF does not disclose surcharges in countries’ financial statements, nor do hidden charges for some credit cards. In March, additional payments from Ukraine will reach approximately $29 million.
Calls to review the surcharge policy have gained ground within the IMF board, but are met with adamant resistance from the US Treasury. Now that intransigence is adding pressure on a vital strategic ally amid a deepening political and economic crisis.
Ukraine’s current economic difficulties demand action. Since November, the hryvnia has fallen 8.4% against the dollar to its lowest level since the start of the pandemic. The IMF estimates that 70% of Ukraine’s external liabilities are denominated in dollars, so this fall in the exchange rate makes it more difficult to pay the debt.
Ukraine’s international reserves rose from $30.9 billion at the end of December 2021, and the central bank has sold $1.5 billion of its reserves year-to-date on the domestic foreign exchange market. On January 20, the Ukrainian central bank had to raise interest rates from 9% to 10% in an attempt to combat still high inflation and to try to avoid capital flight in the context of the economic fallout resulting from the standoff with Russia.
On November 24, 2021, Ukraine received a disbursement of $700 million from an IMF reserve program. It has nothing to do with the $2.34 billion Ukraine will have to pay to the IMF in 2022, amid geopolitical tensions, economic destabilization and rising interest rates.
Ukraine’s president said the country needed $5 billion in external financing to stabilize the economy. European Commission President Ursula von der Leyen has offered EU governments to authorize a €1.1 billion loan and €120 million in grants for Ukraine. Von der Leyen also called on other international partners, including the IMF, to “follow the same approach”.
So why would the US Treasury argue for keeping the surcharges, which are significantly adding stress on Ukraine and a growing 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 meant to be used to maintain the Fund’s lending power. However, the IMF’s surtax revenue is three orders of magnitude less than its available funds: it has repeatedly stated that it has $1 trillion in lending power.
The IMF has also argued that surcharges are a powerful incentive for countries to repay their loans early. This is a questionable assertion, especially in the case of a country in the throes of armed conflict and facing the threat of foreign military attack. Moreover, beyond its military crisis, Ukraine has been particularly hard hit by the pandemic – with 40,000 additional deaths in November 2021, and is in great need of additional funding to cover current health needs, pay workers public sector and other necessities.
Separately, a group of US congressmen have already called for an end to the IMF’s “unfair and counterproductive” surcharge policy, which “undermines efforts to address the immense challenges facing the world. right now”..”
President Biden recently said that the United States is “looking into additional macroeconomic support to help Ukraine’s economy.” A quick and easy way to help ease the economic destabilization caused by rising tensions is for the United States to seek an immediate decision from the IMF’s board to remove the surcharges.
Yurii Romashko is co-founder and executive director of the Ukrainian Institute of Analysis and Advocacy.
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