Has the IMF’s Lending Become Too Expensive for its Own Good? The Case for a Lending Rate Cap

Summary:

The IMF is the multilateral port of call for countries in debt distress to seek bailouts and get back on their feet. During the past fifty years, the IMF has extended most of its financial assistance in periods when interest rates were low or declining from previous levels, so its lending activities and associated costs have – at the aggregate level – historically been countercyclical. Since Russia’s invasion of Ukraine, however, the IMF has been increasing its overall financial assistance to its membership while its lending costs are rising. This makes it harder for countries to turn to the IMF even though global economic growth is weak, bond market finance for emerging and developing countries has frozen up, and middle- and low-income countries potentially face their largest debt crisis since the 1980s. The IMF’s role is also subject to other pressures: China has become a major global creditor but has refused to join the Paris Club, and it is seeking to provide an alternative to the Fund. The US and the EU remain by far the IMF’s largest shareholders: if they want to minimise the risks of the IMF becoming less relevant or effective, they should act to reduce its high lending rates during this stagflation episode.  The IMF should therefore introduce a temporary ceiling on its SDRi.

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