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The IMF Misunderstanding in Egypt

Following a series of strict austerity measures that Egypt had to enforce in the 1990s (including privatisation of major companies) the International Monetary Fund rightly has a poor reputation in Cairo.

Almost two decades later, the prospect of another interaction with the IMF has angered many.

This short post explains why the IMF is actually a helpful entity, and despite its strong US-government driven agenda, will help Egypt enormously.

I read the following critique of the IMF on Muftah, a website dedicated to discussing Arab politics and economics.  For the most part it was an interesting piece that delved into the historical relationship between the IMF and Egypt. However some critical parts of the article are misinformed:

As history demonstrates, implementation of the 2012 IMF loan will likely exacerbate socio-economic divisions in Egyptian society: it will encourage even more privatization, thus further enriching the wealthy local elite; it will likely lead to the cancellation of key subsidies and an increase in taxes; and it will most probably make a minimum or maximum wage cap impossible in the near future. As such, because of the IMF loan, the revolutionary demand for social justice is unlikely to materialize any time soon.

It is expected that in January 2013, Morsi will implement the planned tax hikes, and remove some of the fuel subsidies. This will likely lead to severe social unrest, and possibly even spark the “hunger revolution” many in Egypt are expecting.

Firstly, the IMF loan is the cheapest option available for Egypt to recover from its extremely precarious economic position. A $4.8 billion loan at 1.1% interest is far, far cheaper than the ridiculously expensive government securities Egypt is selling now (paying off the high interest rates on these are eating up around 15% of the government budget, economists tell me).

 

Secondly, as part of the IMF loan, Egypt’s must enforce an economic package that is directly aimed at helping the most vulnerable. That means reforming energy subsidies, which are the the biggest drain on the budget. The government spends a quarter of its budget on keeping fuel at artificially low prices, though the impacts of these subsidies rarely reach those who most need them, because the poorest often have to resort to more expensive black market fuel.

To describe reform of energy subsidies as negative is severely misinformed at a time when the country’s addiction to this terribly inefficient system has literally brought the country to its knees. The government has billions of dollars of additional debt (aside from the budget deficit) that keeps piling up because of a wasteful system of selling cheap energy but buying it at international prices.

Thirdly, tax hikes are a standard method for governments wanting to generate revenue. Yes, they’re unpopular because after all, who wants to pay taxes? But these won’t affect the poorest in Egypt because as the cost of electricity and water goes up, the very poorest will be exempt from paying additional cash.

Finally, the article’s subtle criticism of the dominance of the US in influencing the IMF, and therefore Egyptian politics is misplaced. I have spoken to some government officials that tell me the full economic plan submitted to the IMF includes reforms that aren’t as drastic as they would have liked. Yet, the IMF agreed and signed off on these despite wanting more because they need Egypt to survive.  Egypt is too big to fail.

In fact, the US needs Egypt’s economy to be strong (not only for trade ties but as a political strength in the Middle East).

No one ever said Egypt’s economic recovery would be easy. You either cut spending or earn more money. Egypt is trying to do both without impacting too many people.



6 Comments


  • H Khalil
    Posted January 6, 2013 at 4:38 pm | Permalink

    I think yours is a very simplistic way of looking at Egypt’s economic problems and solutions. I am specifically concerned with the tax reforms and energy subsidies. I am shocked that you would believe the government would really really do the necessary reforms without touching the livelihood’s of the poor, please read the actual reforms as published in the gazette and try to understand how the subsidy and tax reforms are 1. dangerous to the low and middle-income classes and 2. do not bring in enough revenue to defeat egypt’s budget deficit. http://ecesr.com/wp-content/uploads/2012/12/%D8%AA%D8%B9%D8%AF%D9%8A%D9%84%D8%A7%D8%AA_%D8%B6%D8%B1%D8%A7%D8%A6%D8%A8_%D8%A7%D9%84%D9%85%D8%A8%D9%8A%D8%B9%D8%A7%D8%AA_%D9%88%D8%A7%D9%84%D8%B9%D9%82%D8%A7%D8%B1%D9%8A%D8%A9_%D9%88%D8%A7%D9%84%D8%AF%D9%85%D8%BA%D9%87_%D9%88%D8%A7%D9%84%D8%AA%D8%B1%D8%A7%D8%AE%D9%8A%D8%B5.pdf

    This is not an anti-propaganda for the IMF loan, this is a call for alternative thinking. There is something called wage-led growth.. Why is austerity the only solution? Why do we have such limited sights? In my opinion, its partly because there is a lack of a coherent alternative discourse, but also partly because of the political pressure of the IMF.

  • DavidCButter
    Posted January 6, 2013 at 7:41 pm | Permalink

    You make a lot of good and concise points on why any responsible government in Egypt should move ahead with the IMF deal as soon as possible. I have a couple of quibbles:

    1. The subsidy reforms and tax rises should help the most vulnerable in the long term, but these social groups will be affected in the short to medium term, particularly if the reforms are subverted by vested interests that have prospered through manipulating the subsidies system.

    2. If one is recommending the current IMF deal, I don’t think it makes sense to start off by saying that the previous deals have been deservedly criticised. The IMF agreements of the mid-1980s and early 1990s were not particularly harsh–if they had been that austere, how come subsidies are still such a drain on the budget? Also I would not define privatisation as an enforced austerity measure. There’s a lot of academic argument on both sides of the privatisation case, but most privatisation in Egypt involved small and medium-sized companies (not major companies) that would have long since have sunk without trace without the injection of capital that came with their sale.

    Keep up the good work.

  • Mahmoud Elkhafif
    Posted January 7, 2013 at 1:04 pm | Permalink

    My friend Raja Khalidi has drawn my attention to your article, if you allow me I would like to make a couple of comments:

    It is easy to say that one likes the IMF proposed facility to Egypt or dislikes it. But what is difficult is why the like or the dislike, especially if it has to do with societies and real humans and peoples? To answer the why one cannot neglect the implementation and result of the IMF supported economic programmes in Egypt and other developing country since the late 70s and 80s. The formulation of these programmes is founded on the conceptual framework of the so called “Washington consensus” (IMF, World Bank and US Treasury), which is based on the premise that markets are the best solution for every thing and the produce the best allocation for the scarce resources among rich and poor within countries and in between countries. And therefore government intervention is a no no and therefore its role should be kept to the bare minimum and public enterprises (even those with essential and high social return) should be privatized and should be run by the private sector, even under monopoly (or near monopoly) and corruption conditions as it is the case in almost all developing countries. The result of the economic programs supported by the IMF in the last 30-40 years produced the result which led to the polarization between the rich and poor at the national and international levels and the concentration of wealth with the rich. The result of these programs is the social discontent and the Arab spring/revolutions. On top of that the IMF and the World Bank did not change its approach and conceptual framework. All what has been changed is the addition of the social dimension to the proposed programs, and these as a friend of mine says are not to reduce poverty but to make poverty looks acceptable and to make the poor better able to adopt to poverty, but not poverty eradication or even reduction.

    Yes the financial cost of the proposed IMF is little compare to domestic financing, but the real cost is that of pursuing the same policy approach which Egypt implemented in the last 40 years and led to the social discontent and 25 January revolution. The IMF programs always (and this proposed one is not an exception) focus on cutting the expenditure which could further shock an already debilitated economy, while at the same time does not put any emphasis on raising the public revenue, because of the fear that the government role will be expanded. While in the case of Egypt and because of the corruption of the previous regime (which continues to exist) the problem is the erosion of the public revenue side. If you stop this erosion the revenue will increase and the deficit will decline and there is not need for IMF facility!

    Yes the IMF is and will be easy with Egypt this time, not only that the IMF is eager to give Egypt the facility not because they are in love with Egypt and not because the USA wants Egypt to have a strong economy (on the contrary they want Egypt to have a dependent economy), but because they want to hook Egypt and keep the country pursuing the same kind policy of the last 40 years and therefore don’t give Egypt a chance to think about a real alternative economic-social development policy.

    But at the end, economic policies follow and serve political choices, and the conceptual foundation of the Washington consensus is not for the poor individuals and countries but for the rich. If you read Arabic I wrote a number of Articles in AlShorouk Daily, where I explained alternative ways to finance the deficit. The following are the links to these articles:

    http://www.shorouknews.com/columns/view.aspx?cdate=20112012&id=adcaf7af-2108-4635-86e6-cba1f56236c4
    http://www.shorouknews.com/columns/view.aspx?cdate=02012013&id=9e05bc55-ddda-458d-9a83-942fd77bc9bc
    http://www.shorouknews.com/columns/view.aspx?cdate=29022012&id=8034c7e8-929d-4b39-b587-b04b2b95e891
    http://www.shorouknews.com/columns/view.aspx?cdate=13122012&id=b0a9b644-1f1b-474c-bd34-659f931df274

  • Ahmed
    Posted January 7, 2013 at 1:36 pm | Permalink

    The devil is always in the details. You can raise taxes to be more progressive (by raising income taxes) or could be more regressive (by raising sales taxes as the government had earlier proposed). You may also call for “directing subsidies to their rightful recipients” but in reality end up scrapping subsidies altogether because the current government simply does not have the capability, infrastructure or data to direct subsidies to anyone. And as the other readers have pointed out, is austerity really that wise?

    I do not mind the IMF loan but I hate the shady arguments and misrepresentations that the government and its advisors have been making thus far.

  • Nasser Gamal Eddin
    Posted January 7, 2013 at 3:40 pm | Permalink

    So your argument is: yes it is going to be bad but this is the only way, this is standard procedure folks and the government will try to dampen the effects…

    1. Yes there are many other ways…Two blatant examples are: Egypt state TV incurs 400 million EGP of losses each year because of its failed drama productions alone. Also the government continues to spend BILLIONS on an over-bloated security apparatus that has 1.2 million individuals on its payrolls.

    2. Government is corrupt and incapable…it cannot protect the “most vulnerable”. (does “most vulnerable” mean the “poorest of the poor”? who are the “most vulnerable” exactly?)

  • writtenmania
    Posted January 8, 2013 at 6:14 pm | Permalink

    Helping whom? I’m in Egypt and Egyptian.. more than 80% of the population are struggling to make ends meet not to mention about 40% barely living as human beings.. the austerity plan will never affect only those ’20%’ as you seem to imply whilst helping the impoverished.. will rather push the very fragile middle class(or what’s remaining of it) into poverty.

    Personally I don’t think the IMF loan itself will do that much harm but certainly won’t make any difference and I’m not talking out of my socialist beliefs. It all looks quite grim, you need real and quick development in this country of a population approaching 100 mil, You have 2 major issues that must be addressed without any delay, water scarcity and energy needs required for such development. No country of such population will have any real hope in a future without becoming heavily industrialised which will require 10-20 years plan. Can the water and energy problems be solved? yes, but you will have to go nuclear perhaps investing in gen3 safer and more efficient reactors which will subsequently help in water/desalination projects and land reclamation in the desert.

    Can this be achieved without borrowing, it’s a strong yes and no bank, EU, or whatsit organisation will simply hand out such a loan..you have to take serious measures and look internally for such funding..not by cutting out subsidies-that almost all go to the poor(almost all are poor anyways) or increasing taxation on crucial food staples..but by taxing the rich and those who gamble in the stock market freely and other more dramatic measurements starting at the government’s expenditures itself and the army’s top brass who spend like there’s no tomorrow. The real question is there a political will for that? obviously and sadly no.. without going into too much details but the MB can’t afford to upset certain ‘elements’ managing the economy..nor do they have a vision.

    Without real development and the usual Mubarakist year-by-year “solutions”, it’s just beating around the bush while the country heads towards economic mayhem.. IMF loan or else.

    P.S. new Keynesian policies are rubbish when it comes to developing countries..it’s rubbish anyways.





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