Should the IMF Charge 8 Percent a Year? The Evolution of the Fund’s Lending Rate Policy and a Proposal for Reform

Abstract

Since 2022, major central banks have raised market interest rates to combat a global inflationary surge, especially in energy and food prices, following the COVID-19 pandemic and Russia’s invasion of Ukraine. This increase has driven up lending rates from multilateral financial institutions, with some countries now paying the IMF up to 8% annually. We raise three objections to this policy: it is pro-cyclical and unfairly redistributes resources from poor to rich countries, exacerbates global monetary policy spillovers, and hinders economic recoveries in developing economies. To address this, the IMF should set an overall cap on its lending rates or implement a sliding scale on the extra interest rate it charges large borrowers.