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.