IMF Loan to Egypt: Short-term Gain for Long-term Pain

Egypt has agreed a $12bn loan with the International Monetary Fund in an attempt to restore confidence in its distressed and fragile economy and tackle severe foreign exchange shortages. The economy has been struggling since the 2011 revolution that ousted Hosni Mubarak and foreign investors have to a large extent turned away from the country. The loan would supposedly help provide a boost for the country’s foreign reserves ahead of any devaluation of the Egyptian pound.

Mr Chris Jarvis, the head of the IMF delegation says that the reforms to be supported by the IMF loan were intended at enhancing the functioning of Egypt’s foreign exchange markets, narrowing the budget deficit and boosting growth and job creation. The anticipated economic reforms will include a further devaluation of the pound and a further decrease of fuel subsidies according to the Financial Times. The government has also recently introduced a VAT law to parliament and this week it hiked electricity prices.

He said that over the three years of the programme, government debt should decline from 98% of gross domestic to 88%. The government is also suffering a fiscal deficit that is expected to be 12 per cent of GDP for the financial year that ended in June. Egypt has been enduring a severe dollar shortage since the end of last year, largely because of the decline in tourism, a vital source of foreign currency. The foreign currency scarcity is significantly hurting importers and manufacturers, who also complain about central bank measures to rationalise the allocation of foreign currency.

Resorting to a loan from the IMF has spurred a large debate in Egypt especially that the most populous country in the Arab world has a ‘history’ with the Fund that many associate with economic agony and loss of sovereignty. But what is the IMF as an institution all about? It is rather useful to highlight the main mission of the institution as to rationalise expectations about the intended outcomes of the loan on the Egyptian economy and its impoverished people. As per their official website, the IMF’s primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

The IMF’s mission by default is ensuring ‘fiscal prudence’, in other words balancing the books as well as stabilising financial and exchange rate markets. The IMF often becomes the lender of last resort when developing countries get into economic mess. When a country’s debt level reaches a critical point it becomes nearly impossible to borrow from international capital markets or it must pay a very high interest rate. The IMF steps in by lending capital at a lower rate and that makes default less likely.

But the IMF’s intervention to stabilise financial markets in developing countries more often than not comes at a great social cost. This is for a very simple reason that is trying to reduce budget deficit, debt levels and stabilising financial markets requires harsh policy measures to free funds for the aforementioned targets. Without delving into the intentions of the IMF and the power relations that shape this global institution, I only aim here to highlight that the stated mission of the IMF is inherently contradictory and unhelpful in the context of a developing nation, though in crisis, such as Egypt.

A report published by the European Network on Debt and Development (Eurodad) concludes that IMF imposed conditionality on borrowers tend to be associated to harsh austerity measures and delve in sensitive policy areas. These conditions are ever more invasive on domestic policy and comprise interference with tax and expenditure; reducing public sector wages; championing cuts to welfare programmes, including pensions; restructuring and privatisation of public enterprises; and reducing minimum wage levels. Eurodad draws our attention to the recent conditions imposed on the Ukraine which “include a cut in energy subsidies for consumers and a rise in gas prices by 50%”. Our recent memory of the debt crisis in Greece, exhibit the damaging nature of austerity policies. Greece with the help of the Troika entered a perpetuated vicious cycle of economic humiliation, which has not ended up to this moment.

Having been the main target of IMF policies throughout the 1990s, through abiding by all IMF advice, privatising everything that could be, liberalising industries, lowering corporation taxes and tightening public spending, Argentina suffered a catastrophic economic collapse in 2001. The IMF admits it got it wrong with Argentina as it got it wrong with plenty of other nations.Russia is perceived as one of the IMF’s greatest failures. The IMF has extended loans of around $20bn, making Russia its biggest borrower in the 90’s, and yet reforms were close to non-existent. Russia’s debts to the IMF were so large that the only way to guarantee repayment is to keep lending more. The Russian government comprehended at the time that the Fund’s commitment to “success” wanes its ability to enforce threats. The IMF was unwilling to be firm on widespread corruption, failure to implement reforms and cynical manoeuvres to reduce reported budget deficits by failing to pay civil servants, coal miners, soldiers, and others according to Allan Meltzer in his study ‘’Asia: An Analysis of Financial Crisis’’ prepared for the Federal Reserve Bank of Chicago.

He adds that the IMF also turned a blind eye on corruption in Indonesia. In other countries such as Korea, it accepted fragile financial systems used to subsidize projects favoured by government officials or their political supporters. He states that ‘’the main question about these and other failures is whether the IMF lending delayed reform both directly by lending and by encouraging private capital inflows. These additional resources may have contributed to reform, but they also permitted bad policies to continue’’. The scope of this article cannot highlight all examples of the IMF’s failures in achieving even its intended objective of rescuing indebted countries. It seems that if countries are genuinely faced with debt problems, the IMF’s intervention only makes matters worse. But I would like to shed the light on Egypt’s experience with the IMF.

Since 1991, the year Egypt accepted an IMF structural adjustment programme and implemented wide-ranging economic reforms. Egypt’s neoliberal economists pointed at the time to its remarkable levels of annual GDP growth as proof that “Washington consensus” blueprints for the developing countries actually work. According to a Guardian’s article (And the Rich got richer) ‘’Coming on the back of an economic crisis precipitated partly by profligate government spending on arms sales (subsidised by US aid), the regime of President Hosni Mubarak signed up to an IMF loan that was conditional on economic liberalisation. Those conditions – relaxed price controls, reduced subsidies, an opening up of trade – were met with gleeful abandon’’.

Since the IMF loan, Egypt was subject to successive waves of neoliberal reform. In 1996, a huge privatisation wave kicked off, which led to scandalous sales to public banks and regime cronies and a quick deterioration of living standards of the majority of Egyptians. Then 2004 brought a new cabinet which cut the top rate of tax from 42% to 20%, leaving the top layers of society paying exactly the same proportion of their income as those on an annual salary of less than 700 Dollars. Special economic zones were established, foreign investment reached ($13bn in 2008), a dream figure by today’s standards. Economic growth reached 7% and Egypt was portrayed as the economic model for the developing nation. Yet, public discontent of the deteriorating economic conditions and lack of opportunity for the majority of Egyptians resulted in a wave of strikes and protests that ended in ousting Hosny Mubarak in 2011 and political turbulence Egypt is still suffering from up to this moment.

The IMF neoliberal recipe did not do Egyptians or the economy even by neoliberal standards any good. Egypt today is suffering from inflation levels that are throwing millions into poverty. Egypt’s structural economic deficiencies have never been addressed such as its inefficient industry and agricultural sector, failing education, healthcare systems, over-reliance on tourism and Suez Canal for foreign currency and widespread corruption. Egypt’s entrepreneurship and business climate are also severely burdened by its inefficient bureaucracy, ineffective judiciary, bloated governments as well as unstable and insufficient enforcement mechanisms. Furthermore, a widening fiscal and current account deficits and high debt levels Egypt is encountering today clearly demonstrates that the IMF’s medicine is only a short term gain for a long term pain.

As highlighted earlier, the IMF core mission does not allow it to address Egypt’s structural problems. Its austerity and liberalisation recipe can only result in a temporary fake improvement in monetary and macro indicators at the expense of the living standards of the majority. The burden of the ‘’economic reforms’’ will most probably be borne by the most vulnerable in society. Austerity in my opinion does not make any economic sense taking into account Egypt’s current situation. Austerity means cutting public expenditure, which is essential for stimulating the economy and job creation. Stifling public expenditure in a recession can only lead to more recession. Cutting education, healthcare and infrastructure budgets will only lead to more failure in those sectors, which in any healthy economy are considered a symbol of sustainable progress.

The IMF institutional capacity also does not allow it to change the institutional setting and the political climate of the borrowing country. The IMF will most probably turn a blind eye to the chronic corruption of the public sector and the army’s economic empire. It is beyond the IMF’s capacity to force the army to give up its control of strategic public assets such as land. Furthermore, the IMF will be in no position to eliminate wasteful expenditure on arms and mega projects that have no clear return on investment.

Allegret and Dulbecco (2007) discussed this phenomenon of the IMF institutional failure in their paper ‘’The Institutional failure of the IMF Conditionality’’. They believe that conditionality appears to be ineffective in bringing about policy change as ‘’borrowers do not view the withholding of funds as a credible threat’’. In addition, the effectiveness of conditionality is undermined by difficulties in monitoring compliance. Also, the IMF conditionality suffers from the one-size-fits-all approach. It uses best practices and theoretical benchmarks without investing sufficiently in obtaining knowledge of the initial conditions specific to each country, such as domestic political factors and the cultural environment.

Is there another solution to the IMF loan? I believe this is a very difficult question to answer. Yet, one cannot disregard the political events and failed policies of the last 5 years, which led us to the current difficult situation. Bad economic management is the main reason why Egypt is suffering today and any sustainable long-term solution has to simply address this. A clear industrial policy that aims at investing in productive labour-intensive industries accompanied with on the job training shall be a policy priority to any policy maker in Egypt in a country suffering from high unemployment levels and diminishing industrial sector. Providing credit and institutional support to small and medium enterprises and providing incentives for collaboration between the big industries through allowing smaller companies to supply them with equipment that are usually imported and hence ease pressure on the demand for foreign currency. More investment in agricultural technologies to raise crops per acre rather than wasting water on land reclamation. Providing incentives for the private sector to penetrate vital sectors for Egypt’s security such as water desalination amid tensions with Ethiopia over the Renaissance Dam.

Egypt has abundance of land, I would say it is its biggest asset. Instead of giving land to a handful of investors to build gated communities for the wealthiest, land can be used in more sustainable manner. Green tourism projects along the coasts, renewable energy projects as well as low-cost housing are all examples of more prudent use of land. Low-cost housing in particular is essential for millions of Egyptians who are not entitled to bank loans simply because they have insufficient collateral. Land or a low-cost flats ownership can break this vicious cycle.

The IMF loan’s impact on Egypt is deemed to have a negative impact on Egypt’s economic well-being taking into account recent evidence as well as the institutional shortcomings of the IMF as an institution to enforce sustainable policy change.

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