Egypt should say 'yes' to emergency assistance, but 'no' to the failed development model of the past
CESR Research Consultant Rick Rowden explains why Egypt should be wary of any IMF loan agreement that requires a return to the ineffective policies of the past. This document can de accessed in pdf format here.
As continuing political turmoil pushes the Egyptian economy deeper into financial crisis, there is no doubt the country is in need of short-term international assistance. Nevertheless, the policy advice and conditions likely to come as strings attached to such assistance will do little to set Egypt on a path towards sustainable and equitable development, and may well undermine efforts of citizens to realize economic and social rights. This is especially true regarding a new $4.8 billion dollar loan currently being negotiated with the International Monetary Fund (IMF).
The need for IMF assistance comes as Egypt’s foreign currency reserves dwindle; they have declined from $36 billion on the eve of the January 2011 uprising in Cairo’s Tahrir Square to just $13.5 billion today. The financial crisis has been fuelled by a sharp drop in foreign investment and tourism due to the transition process and lingering political instability. The IMF loan, originally agreed last year, has been delayed amid constant feuding between the ruling Islamist parties which support President Mohamed Morsi and the coalition of opposition parties which are at odds over the future character of Egypt’s political system. This situation makes it difficult to achieve any political consensus on how best to reform the economy.
With political uncertainty spooking international investors, the Egyptian pound has fallen by 14 percent against the US dollar on international currency markets since the beginning of the revolution, leading the Egyptian Central Bank to spend more than $20 billion of its reserves in trying to prop up the value of the currency. The weakening value of the currency has made much-needed imports of oil and wheat even more expensive, and this has in turn placed a huge burden on the national budget as it tries to maintain the subsidy system that provides cheap energy, cooking gas and wheat to the majority of the impoverished population. Wheat and energy subsidies account for 5 and 20 percent of the budget, respectively, and the rising costs have increased the budget deficit to 12.3 percent of GDP.
However, its widely predicted that a key condition required to access the IMF loan would be a promise by Egypt to reduce its budget deficit to near 8.5 percent of GDP by next year. As devised, the unpopular economic policy would set out blanket cuts to these subsidies as well as tax increases which could further inflame the unstable political situation. Yet, being awarded the IMF loan is seen as a necessary step in order to open to the way for an estimated $15 billion of dollars in further assistance from the World Bank, US, EU, Gulf Arab states and other donors. Whether this is true or not remains an open question, as Qatar and the US have already offered Egypt some aid even without it having first secured the IMF loan. And just last week, Qatar again stepped forward to offer Egypt an additional $3 billion in immediate assistance in the form of bond purchases and said it would extend gas supplies to Egypt this summer as needed. This offer came just as IMF negotiators arrived in Cairo to continue their efforts to finalize the loan. Furthermore, Egypt’s difficulties are exacerbated by the fact its exports have traditionally gone to Southern European markets, which themselves are in crisis and not importing as much as they used to.
Despite the current political turmoil, the short-term financial crisis cannot be separated from the long-term failure of the national economic development model which has, over the last few decades, deepened the poverty, unemployment, inequality and social injustice which fuelled the 2011 uprising against Hosni Mubarak’s regime. Today, over 40 percent of the population lives on less than $2 a day, while a tiny group of super-rich has increased its fortunes. This failed development model, which was promoted by the IMF, World Bank, USAID and other western aid donors, included premature trade liberalization, financial liberalization and the privatization of public assets in the context of a cruel and unaccountable kleptocracy that benefited Egypt’s tiny economic and political elite while worsening conditions for the majority of the population. Such conditions worked to block not only basic civil and political rights of citizens but also the realization of economic, social and cultural (ESC) rights as well.
Critics of negotiations with the IMF, including Egyptian civil society organizations (CSOs) such as the Popular Campaign to Drop Egypt’s Debt, the Egyptian Center for Economic and Social Rights, the Egyptian Initiative for Personal Rights, along with labour unions and opposition parties have drafted a public letter claiming the negotiation process has not been inclusive, transparent or participatory, and that the deal will only add to Egypt’s foreign debt burden and the continuance of the same failed development model of the past few decades.
During government meetings with an IMF delegation in Cairo last November, protesters took to the streets to express their anger at the proposed loan and their concern over possible austerity measures that would come with it, leading President Morsi to suspend the package and delay loan negotiations. Critics cited the long and unpopular record of previous IMF support for the Mubarak regime. For example, the blog Rebel Economy produced a timeline of Egypt's history with the IMF. And the Egyptian Centre for Economic and Social Rights, which filed a lawsuit over the nontransparent nature of IMF negotiations, called on the government to disclose details of the national economic plan it offered to the IMF as a precondition for the loan, as well as records of all meetings, loan conditions and recommendations the IMF will impose on Egypt.
Ahmad Shokr, a founding member of the Popular Campaign to Drop Egypt's Debt, said, “The fact is this economic reform program was never presented publicly and was never put up for a serious public debate.” Last September, the Campaign organised a conference in Cairo at which activists rejected the new IMF loan and called for a full public audit of all Egypt’s previous foreign debts.
Although the US has promised Egypt up to $1 billion in debt cancellation once it accepts a new IMF loan, the Jubilee USA Network warned in a statement that, “We need to understand this relief in the context of the $35 billion that Egypt still owes to several external lenders. We should be looking at ways to bring all of the lenders to the table and arbitrate more of the external debt in a way that recognises that some of this debt is not the responsibility of the people - but the responsibility of a former corrupt regime.” Nevertheless, on February 10, the US ambassador to Egypt, Anne Patterson, was not shy in making public demands for Egypt to honour the financial obligations of the previous regime, essentially paying the debts incurred by the undemocratic Mubarak government.
The IMF loan is likely to call for ending the universal application of fuel and wheat subsidies and directing them more directly to the poorest citizens, along with increasing the Value Added Tax (VAT) on basic consumer goods, which tend to be regressive in nature, negatively affecting the poorest consumers. While the subsidies contribute to the deficit, Moustafa Bassiouny, an economist at the Signet Institute in Egypt, says the crisis is mostly driven by very low levels of economic growth. He argues that lifting subsidies on cooking gas is not the answer, as they represent a very small saving on a commodity that many poor people in Egypt need, while there are other types of subsidies benefitting the well-off which are not being addressed. “The government is directly channeling the full effect of the subsidy removal to the poorest segments of society,” he says. “This is not only fiscally ineffective but morally inconsistent.”
But as a tactical manoeuvre, the IMF “has become quite smart lately in the sense that they don't impose direct conditionality in order to give money,” says Amr Adly, the head of the Economic and Social Justice Unit at the Egyptian Initiative for Personal Rights. Instead, “they ask the government to design the program and they have to accept it so they can release the tranches. So it is indirect conditionality because they won't give you the money unless they approve of the plan.”
The views expressed in this article are those of the author and do not necessarily reflect the position of CESR.