WASHINGTON (AP) — A provision in the recently signed Defense Expenditure Act requires the United States to work to reduce Ukraine’s debt burden with the International Monetary Fund, which could create tension at the world’s lender of last resort over one of its largest borrowers.
The National Defense Authorization Act requires American officials at every global development bank, including the IMF, where the US is the largest stakeholder, to use “the voice, voice and influence” of the US to put together a voting bloc of countries that do so doing would change each institution’s debt service relief policy in relation to Ukraine.
Among other things, the US has the task of forcing the IMF to review and possibly end its policy of adding credit to Ukrainian loans. Surcharges are additional fees for loans imposed on countries that are heavily indebted to the IMF.
The US interest in changing policy comes as it has allocated tens of billions to Ukraine’s military and humanitarian aid since the Russian invasion began in February. Most recently, Ukraine will receive $44.9 billion in aid from the US as part of a $1.7 trillion federal spending law.
READ MORE: Biden signs $1.7 trillion bill to fund government operations
Inevitably, some US grant money is spent servicing IMF loans.
“I can understand why the Senate would want to ease the surcharge for Ukraine,” wrote Peter Garber, an economist who most recently worked in Deutsche Bank’s global market research department, in an email. “As the main banker of economic aid to Ukraine, the US would not want to ship funds just to go straight to the IMF coffers.”
Economists Joseph Stiglitz of Columbia University and Kevin P. Gallagher of Boston University wrote about surcharges in February, saying that “forcing excessive repayments lowers the borrowing country’s potential output, but it also harms creditors” and borrowers “do the same.” have to pay more when they are most pushed for market access in some other form.”
Other economists say the fees provide an incentive for members with large outstanding balances to repay their loans promptly.
Even with the aid, Ukraine’s struggling economy is expected to shrink by 35 percent, according to the World Bank, and the country will owe around $360 million in surcharge fees to the IMF alone by 2023.
Trying to get the IMF’s 24 directors, elected by member countries or groups of countries, to end the surcharge may not be so easy.
Just before Christmas, the board decided to keep the surcharge policy. They said in a Dec. 20 statement that most directors “were open to exploring possible options for a temporary exemption from surcharges,” but others “note that the average cost of borrowing from the fund is well below market rates.” remain”.
Prominent economists studying the effects of war pointed out in a December report, “Rebuilding Ukraine: Principles and Policies,” by the Paris and London-based Center for Economic Policy Research, that “some significant voting members may have interests who disagree with them that Ukraine is economically prosperous.”
Ensuring consistent funding for Ukraine could become more difficult as the war rages on. There are growing fears of a global recession and concerns that European allies are struggling to deliver on their funding promises. Additionally, the GOP is set to take control of the House of Representatives next week, with top Republican Rep. Kevin McCarthy saying his party will not issue a “blank check” for Ukraine.
Mark Weisbrot, co-director of the Liberal Center for Economic and Policy Research in Washington, said the PAYG issue affects not just Ukraine but other countries facing debt crises. Among them: Pakistan, which is being hit by floods and humanitarian crises, as well as Argentina, Ecuador and Egypt, which together are threatened with billions in surcharges.
“It is not logical for the IMF to impose surcharges on countries that are already in crisis,” Weisbrot said, “which is bound to happen because the surcharges are structured to hit countries that are already facing financial problems.” .”
He said the problem is becoming more pressing as Ukraine’s debt mounts and the war drags on.
Jeffrey Sachs, economist and director of the Center for Sustainable Development at Columbia University, said “these surcharges should definitely be eliminated,” adding, “The IMF is undermining its core role as lender of last resort.”
B… Argentina is the largest debtor to the IMF with a total outstanding debt of $42.2 billion. The country has a long and troubled relationship with the IMF, with a history of equally spectacular clashes and bailouts. At the turn of the century, the IMF provided $88.3 billion to bail out the country’s ailing economy.
What happens if a country cant pay back IMF?
The defaulting country is also reaching out to its unilateral and bilateral allies to ease the economic crisis. In addition, the defaulting country can also participate in a debt restructuring plan. See the article : Zimbabwean political figures who are fighting for the future of their country. This can be done either by extending the date on which their debts are repaid or by devaluing their currency.
What happens when a country cannot pay back its debt? A national bankruptcy is the failure of a country’s government to pay its debts. A sovereign default can slow economic growth and is likely to prevent further government borrowing from foreign investors for years. Wars and revolutions, mismanagement and political corruption are among the main causes of national bankruptcies.
What happens if a country fails to pay back to IMF?
The most immediate effect of a sovereign default is that the cost of government borrowing in the domestic and international bond markets increases. The higher interest rates are affecting the entire economy of the country, including the value of the currency, the banking system, the stock market, corporate borrowing, etc.
What happens if a country defaults on IMF loan?
Today, an insolvent government can be largely barred from further lending; some of its foreign assets may be confiscated; and it could face political pressure from its own domestic bondholders to repay its debt. On the same subject : What Covid-19 precautions should people take for international travel?. As a result, governments rarely default on the full value of their debt.
What is the negative effect of IMF?
Some studies find that IMF lending arrangements contribute to an increase in poverty. On the same subject : ‘Science is everything’. For example, Pastor (1987) and Vreeland (2002) show that participation in IMF programs worsens income distribution, particularly for the poor and the working class, which can increase poverty rates.
What are the disadvantages of the IMF? Disadvantages of the IMF
- Unsound exchange rate fixing policy by the IMF. …
- IMF failure to lift foreign exchange restrictions. …
- Insufficient resources. …
- High interest rates from the IMF. …
- One of the disadvantages is the strict requirements of the IMF.
How does IMF affect the economy?
The IMF promotes global macroeconomic and financial stability and provides policy advice and capacity-building support to help countries build and maintain strong economies.
How does the IMF hurt poor countries?
“They punish countries at times when they are in an unfavorable situation, forcing them to make bigger cuts to pay down debt,” according to an analysis by the liberal Center for Economic and Policy Research in Washington.
What are the impacts of IMF?
The International Monetary Fund (IMF) works to achieve sustainable growth and prosperity for all of its 190 member countries. It does this by supporting economic policies that promote the financial stability and monetary cooperation essential to increasing productivity, job creation and economic well-being.
Does IMF loan make money?
IMF Loan is a difficult skill to master as it is a skill specifically about making large amounts of money, it effectively negates the gain with the penalty of a loan taking everyone’s gains Revenue streams (including other IMF lending capabilities) halved) by paying off and resulting in a capability that a…
How much money does the IMF make?
Who owes the most money to the IMF?
B… Argentina is the IMF’s largest debtor with a total outstanding debt of $42.2 billion.
How does the IMF make money?
The IMF’s resources come primarily from the money that countries pay as their capital subscriptions (quotas) when they become members. Each member of the IMF is assigned a quota based largely on its relative position in the world economy. Countries can then borrow from this pool if they get into financial difficulties.
What does the IMF Loan money for?
Unlike development banks, the IMF does not grant loans for specific projects. Instead, the IMF provides financial support to troubled countries to breathe while they implement policies that restore economic stability and growth. It also provides precautionary financing for crisis prevention.
