…Providing significant relief for developing countries
Seithati Motšoeneng
In a bold strategic move to empower low-income countries in overcoming the economic fallout from the COVID-19 pandemic and climate change, the International Monetary Fund (IMF) has decisively announced a 36 percent reduction in borrowing costs.
This significant decrease which took effect on November 1 2024, translates into annual savings of $1.2 billion for developing nations, enhancing their financial capacity to “effectively tackle pressing economic challenges”.
IMF Managing Director, Kristalina Georgieva, stated at a press conference last week that the landmark decision had received unanimous backing from member states at their annual meeting in Washington, D.C.
“For the first time ever, we have lowered borrowing charges for lenders, resulting in annual savings of $1.2 billion,” she said.
Georgieva explained that the pivotal decision was rooted in a comprehensive three-pillar approach designed to drive economic growth, mobilize domestic revenues, and secure adequate financing through international financial institutions, while facilitating private sector investments at reduced costs.
This reform is set to dramatically reshape the global economic landscape by promoting productive growth and effectively addressing the challenges associated with high debt levels and low economic growth.
In a similar press conference, IMF Chairperson, Mahomed Aljadaan, asserted that these reforms were specifically crafted to ensure that low-income countries transitioned from a trajectory of low growth and high debt.
He stated: “We are committed to fostering self-lending while refining our strategies to mitigate high debt situations among low-income nations.”
Mr Aljadaan highlighted the IMF’s determined efforts to enhance capacity development assistance and secure necessary financing for these countries.
He also underscored the urgent need to improve the common framework for sovereign debt relief for lower-income nations.
This commitment is designed not only to adjust the financial terms of lending but also to safeguard the economic stability of borrowing countries while ensuring their fiscal sustainability.
However, local economists have warned that Lesotho should not be ecstatic with the IMF lifeline as the country “does not stand to benefit much.
“There won’t be too much impact to the likes of Lesotho, taking into account the debts that we already have which, are significantly high,” said independent economic analyst Thabo Qhesi.
“So, getting new loans somehow has been discouraged. Even if it does happen, it won’t be significant, it will be very minimal.”
Meanwhile, on October 21 this year, the Executive Board of the IMF announced that it had on October 11, concluded the Review of Charges and the Surcharge Policy, which for the first time jointly covered charges, surcharges, and commitment fees.
The review, the IMF noted, was part of a continuous effort to ensure the IMF’s lending policies remain fit for purpose and that the IMF could support its members in a challenging global environment.
The Executive Board further noted that it had reached a consensus on a comprehensive package of measures to “meaningfully reduce the cost of borrowing for members”, preserve incentive mechanisms for prudent and temporary borrowing, and safeguard the strength of the IMF’s balance sheet.
The reform package which is expected to lower borrowing costs by about US$1.2 billion (SDR 880 million) annually, will reduce payments on the margin of the rate of charge as well as surcharges on average by 36 percent. The number of surcharge payers is expected to decline from 20 to 13 countries (in FY2026).
“Charges and surcharges are important elements of the IMF’s cooperative lending and risk management framework. They provide incentives for prudent and temporary borrowing that help underpin the revolving nature of IMF resources and allow for the accumulation of reserves to mitigate financial risks. This supports the IMF’s financial foundation, enabling it to play its role as a lender at the center of the global financial safety net,” the IMF Executive Board said.
The IMF Executive Board approved the following changes:
i) Lowering the margin paid over the SDR interest rate by 40 percent, to 60 basis points from 100 basis points.
ii) Increasing the borrowing threshold above which surcharges apply by 60 percent, to 300 percent of quota from 187.5 percent of quota.
iii) Aligning the thresholds above which commitment fees apply to the overall annual and cumulative access limits under the GRA (200 and 600 percent of quota, respectively); and
iv) Reducing the time-based surcharge rate by 25 percent, to 75 basis points from 100 basis points.
v) Setting a regular review cycle for the surcharge policy to allow for timely assessments and updates to the surcharge policy framework, every five years or earlier if warranted.
vi) Strengthening disclosures and operational procedures to ensure that the authorities have adequate information on the cost of Fund borrowing earlier in negotiations of GRA financing.
