Tag Archives: Drop Egypt’s Debt

Guest Post: Why We Don’t Support Egypt’s IMF loan

Rebel Economy asked Ahmad Shokr, a Ph.D. candidate in Middle Eastern history at New York University and a founding member of the Drop Egypt’s Debt campaign, to lay out the key problems critics have with a planned International Monetary Fund loan to Egypt. 

[caption id="attachment_1221" align="aligncenter" width="580"]Drop Egypt's Debt ( Drop Egypt’s Debt [/caption]
  • 1. You are a vocal opponent of the International Monetary Fund loan. Can you explain why you are against it? Is it because of Egypt’s history of troubled relations with the Fund or the lack of transparency over the negotiations, or both?

Our campaign is mainly opposed to the policies that will be linked to the IMF loan. The government reform program (to be approved by the IMF) is aimed at achieving macroeconomic stability through three interrelated sets of policies—spending cuts, higher taxes, and greater exchange-rate flexibility. For the most part, ordinary Egyptians will foot the bill for these policies in the form of higher sales taxes and inflation (caused by the currency depreciation and, eventually, the subsidy cuts). These austerity measures will come at a time when many Egyptians had hoped for an improvement, not a deterioration, in their livelihoods.

Everyone agrees that Egypt faces serious macroeconomic challenges in the short term—namely its budget and balance of payments deficits. To begin solving these problems the government should have acted differently:

First, it should have fostered a more genuine and inclusive societal dialogue to reach a wider consensus on the required reforms and how their cost would be shared across society. Second, it should have begun to implement at least some policies earlier rather than relying on short-term palliatives (like depleting its foreign-exchange reserves to protect the value of the pound and relying on periodic cash injections from the Gulf). The government did neither. Now, Egypt faces a deteriorating economic situation and a reform program for which average Egyptians will pay most of the cost. And that’s to say nothing of the ongoing political mismanagement that contributes to Egypt’s economic troubles.

  • 2. Egypt’s economy has sunk even lower in the last few weeks. What are the steps Egypt needs to take to get on the right track? What is your version of the Muslim Brotherhood’s “Renaissance Project”?

Over the past year and a half our campaign has argued for more progressive policies in two key areas:

1) We have advocated a fairer distribution of the costs of fiscal restructuring. The government could do this by relying less on indirect taxes (that impose an equal cost on all consumers regardless of their ability to pay) and making a stronger effort to levy more taxes on the rich (for example, a more progressive income tax scale) and their business assets/activities (some ideas that were proposed have included a dividend tax, a one-time wealth tax, and a stronger property tax).

2) We wanted to see a clearer vision for what the government plans to do with the money it earns from the spending cuts/higher taxes. All the versions of the reform program that I have seen are centered on deficit reduction. Notwithstanding the government’s vague promises of job creation and inclusive growth, there is no clear plan for how much of that money will be re-directed towards investments, quality services and infrastructure, safety net programs, etc. A real reform program would have a much broader vision than simply adjusting public finances. There are important lessons to be learned from Europe, and other parts of the world, that a singular focus on deficit reduction through austerity is not the road to economic prosperity.

Any program for long-term economic improvement would have to look beyond immediate challenges, like Egypt’s twin deficits, and think further into the future. To my mind, two of Egypt’s biggest long-term challenges are employment and income distribution. 

We hear a lot from government officials about the need to revive the economy—by attracting investors and restoring economic growth—but less about the government’s vision for how the benefits of that growth (if it is restored) would be shared across society.

The experiences of many economies, especially over the last twenty years, tell us that trickle-down effects do not happen on their own. They require an infrastructure—minimum wage legislation, good labor laws, strong unions, a national strategy to promote investment in labor-intensive sectors—to spread the wealth of society more equally. At this stage, Egypt’s leaders have no clear vision for accomplishing any of those things. Until they do, any talk about investor confidence and economic growth will sound all too reminiscent of the late Mubarak years.

  • 3. There is a lot of talk about corruption in Egypt. Are there clear steps to start changing the system to end the era of the “soft state”?

To talk about fully eradicating corruption may be somewhat fanciful. State-business networks exist in virtually every country and the key question is what mechanisms exist to monitor these networks and hold them to account. Among the political leadership, there’s a lot of talk about establishing oversight and accountability procedures, but little of substance has been done so far. In 2012, Egypt fell six places in Transparency International’s annual Corruption Perceptions Index. Among those in power, there has been an ongoing preference for resolving corruption cases involving Mubarak-era figures through deal-making and reconciliation.

I would also caution against how the term “corruption” is employed. In Egypt, there’s a tendency to blame the ills of the past on corruption. Egyptian officials (and even international funders and experts) sometimes reduce Egypt’s variegated and complex challenges to the problem of corruption as if it were a root cause of economic misery. Sure enough, cronyism and kleptocracy are real problems that have damaged Egypt economically.

But the problems I’ve described above—income inequality, the uneven distribution of economic entitlements and responsibilities, job insecurity and weak social protections—are not simply the result of unethical economic behavior. They stem from the way economic decisions are made and, in particular, the adoption of certain neoliberal policy choices. It is erroneous to assume that ending corruption would somehow solve these problems by allowing free-markets to function efficiently and fairly.

Egyptian leaders need a more fundamental change in their perception of the country’s core economic challenges and a different vision for the future. Unfortunately, I am not optimistic, at least in the short term.

Breakfast Wrap: The Flaws of Egypt’s Anti-IMF Loan Movement

Egypt’s talks with the International Monetary Fund for a $4.8 billion loan should be frozen because the negotiations are secretive and lack popular support, Bloomberg has reported citing a letter released by 17 political parties, civil organizations and labour groups.

The letter is addressed from the Popular Campaign to Drop Egypt’s Debt, an umbrella group which has lobbied hard against the loan since negotiations started last year, the report says.

Among the signatories are three political parties affiliated with former presidential candidates, and a party set up by the Muslim Brotherhood’s youth wing, Bloomberg reports. The April 6th Movement, which took a leading role during last year’s revolution, has signed the letter, as well as unions active in Egypt’s labor movement.

The letter addressed to the prime minister Hisham Qandil and the IMF managing director Christine Lagarde says:

Loan negotiations process has “lacked transparency” from the government and IMF, talks continue in the absence of a parliament and public consultations have been “inaccessible”. 

“With little transparency and no clear economic program, the potential loan agreement continues to lack the ‘critical mass’ of support that the IMF requires as a necessary condition for financial assistance.”

Though an open debate about the loan is healthy, especially considering the rich history (Rebel Economy has produced a timeline covering three decades of Egypt-IMF talks) there are several flaws to this broader lobby movement, which will hinder any action against the loan.

Here are some issues that should be noted:

◊  The lobbyists, including the Popular Campaign to Drop Egypt’s Debt, see the IMF loan as one of the main causes of Egypt’s economic downfall today.  However, history shows that every IMF loan programme is followed by a period of economic liberalisation and boom. But then incessant corruption and bad economic decisions took force. In fact the IMF told Egypt in the 1970s that subsidies should go, now widely considered to be extremely bad for the economy. However the 1977 bread riots in Egypt led leaders to renege on that decision.

◊  Those opposing the loan misdirect their suspicion at the problem of rising external debt.  That’s not the real elephant in the room here. The real issue is spiralling domestic debt caused by a terribly indebted oil sector and mismanaged budget. External debt stands at about $33 billion.  Domestic debt is about $200 billion. That is mostly caused by energy subsidies, which use up to a quarter of the government’s spending (more than health and education combined, and then some).  If you want to talk about external debt, how about the billions of dollars not on the government’s balance sheet owed to oil companies for energy exploration? 

◊  The alternatives offered by lobbyists include solutions inherently linked to the IMF.  The most popular option is debt relief.  That solution has been popular with the IMF and Egypt in the past and probably will be in the future. For example in the late 90s, the IMF facilitated a framework for obtaining the cancellation of 50% of Egypt’s official debt from countries that are members of the Paris Club.

◊  Finally, as Nadine Marroushi, the reporter behind the story above points out:

The problem is lobbyists don’t seem to have a unified and articulated front on what economic policies need to be implemented. The fact that energy subsidies need to be reformed hasn’t taken root on a grassroots level. People are so focused on being against the loan for all sorts of reasons, many very justified (such as inflation), some just plain ignorant (such as chants that go: “we’re against the IMF’s conditions, we’re against the CIA), but there isn’t enough public discussion and pressure about what the economic problems are and how they need to be tackled. 

If these groups want any chance in delaying a loan, there must of course be some kind of unity in why the loan is opposed. The reactionary approach to anything linked with the IMF must stop if a coherent conversation can begin.

But of course the government are mostly at fault.  They have failed to open up a transparent dialogue on this negotiation process, leading to further suspicion and fury.  And, attempting to pass off the loan as Sharia-compliant is really not helping.

We know that fuel prices need to rise, and we know that Egypt needs international help (the US has in the past offered debt relief that has saved Egypt from bankruptcy). The government needs to address the nation clearly and firmly describing what needs to happen and why. We know big changes are going to happen because they must.

But the government’s weakness breeds suspicion and until Mohammed Morsi and his government can be strong, lobby groups and other political parties will hold them to account making the economic transition difficult.