Egypt, the IMF and austerity: The unholy trinity?
On April 2, a technical delegation from the International Monetary Fund arrived in Cairo for a new round of talks over a $4.8 billion loan. This time, though, Egypt’s socioeconomic and political environment was much worse than the one the IMF team left behind last November when a preliminary deal for the loan was signed. That agreement, however, was suspended in early December at Egypt’s behest due to its failure to raise the sales taxes which were part of the IMF deal. The December suspension was four months ago. Since then, Egypt’s financial needs have grown more dire, and its ailing economy has further weakened.
The country’s transitional politics have turned messier and more polarized, and the sense of despair and hopelessness among the overwhelming majority of Egyptians has become more pronounced. Unable to fully implement the IMF-negotiated economic reform program under these hard conditions, the government produced a milder austerity plan in the hope that it would be able to sell it to the IMF and to the increasingly restive Egyptian public.
The current talks are likely to revolve around two main topics: the Fund’s assessment of Egypt’s new economic program and its offer to Egypt of an emergency short-term credit line of $750 million. The IMF has reportedly voiced its dissatisfaction with the amendments Egypt made to the November economic program, and Egyptian officials were said to be unenthusiastic about the short-term stopgap loan, favoring instead the original $4.8 billion deal.
Regardless of how the ongoing technical talks will progress, a more critical question is if an IMF-supported austerity program – revised or otherwise – can achieve its stated objective of macroeconomic stability, or instead throw Egypt into further chaos. Broadly speaking, whether countries’ fiscal balance can best be restored via austerity measures or by achieving high rates of economic growth has been extensively debated in recent months – particularly in the context of the troubled countries on the periphery of the eurozone . It is no secret that the IMF favors the policy approach of austerity. Egypt, however, is an entirely different case.
At its core, the country’s 2-year-old economic crisis is a political one. One only needs to remember – if just to illustrate the point, and not to defend an indefensible pre-revolution past – that in the last six years of President Hosni Mubarak’s reign, Egypt saw high levels of economic growth, was considered the darling of foreign investors, and had been constantly grouped among the rubric of “emerging economies.” True, there were serious problems with respect to social justice and income distribution; growth was largely rent-based, distorted and heavily tilted toward the more privileged and politically connected segment of the population at the expense of the marginalized and impoverished majority.
And it is also true that growth was achieved amid an autocratic, corrupt and oppressive regime, which ultimately led to its overthrow. Yet, this upward swing (despite the shortcomings) shows Egypt does have an enormous economic potential that could be tapped utilizing a different growth model that both responds to the country’s aspirations and provides its population with equal and decent economic opportunities.
Since the revolution, however, an increasingly turbulent political transition has led to a sharp economic decline, widespread social unrest, and internal safety and security conditions that were lately ranked behind Pakistan, Chad and Yemen according to a recently published World Economic Forum report. Can an austerity-loaded reform plan succeed under these circumstances to put Egypt’s economy on a sustainable path? Would an IMF loan deal alone – that is, if nothing else changes on the political and security fronts – be enough to send a reassuring message to international financial markets and bring back foreign investment to Egypt? There are reasonable grounds for doubt here.
By mainly focusing on the economics of the current crisis and leaving its political roots inadequately addressed, an IMF deal will likely be risking both economic as well as political stability, thus, in all likelihood, pushing the country further to the abyss. Egypt’s post-revolution inflation, poverty and unemployment rates are all dangerously on the rise, chiefly due to an ongoing domestic political crisis that has virtually brought the economy to its knees. So why add more heat to an already boiling pot?
This is not an argument against the need for economic policy reform in Egypt. Rather, it is an argument against the timing and the context of implementing such reforms – both of which are extremely inauspicious. True, there is an enormous amount of waste in the government subsidies program which is largely inefficient, ill-targeted, and needlessly over-consumptive (over a quarter of the state budget). But such reforms are better carried out – and would have a higher chance of success – in a politically stable, economically thriving and socially receptive setting. In contrast, recovery through austerity amid the political and social upheavals in Egypt today is a sure recipe for disaster.
Today, Egypt is rapidly approaching a breaking point. Foreign reserves, which fell to $13.4 billion in March, are well below the $15 billion that the Central Bank of Egypt last December considered as “a minimum and critical level that must be preserved.” Egypt is also running out of hard cash to secure adequate amounts of imported fuel – resulting in crippling shortages that seriously threaten the upcoming wheat harvest season.
Additionally, the Egyptian pound continues its nosedive against the U.S. dollar, losing 10.5 percent of its value since it began its descent late last December – jacking up prices locally and eroding purchasing power in the process. The country’s international credit standing is also on the decline; leading rating agencies constantly give Egypt and its major banks low grades and negative future outlooks. Add continued mounting domestic public debt and a yawning budget deficit to this list, and the size and scope of Egypt’s financial troubles becomes quite evident.
Under these crisis conditions, cash-strapped Egypt desperately needs the IMF loan – along with the international financial support that could follow afterward – to deal with its soaring fiscal deficit and the deteriorating external position, but on terms and conditions entirely different from the ones proposed and endorsed by the IMF. More specifically, instead of pushing an austerity program that has little, if any, chance of success amid political turmoil and near-breakdown of internal security, the IMF and the international community should push instead for a more inclusive power-sharing government, and for a reconciliatory political transition process that should ultimately restore stability, enhance confidence in the country, and provide hope for its future.
Once this is settled, a more inclusive growth strategy that corrects missteps of the late Mubarak era and maps out national priorities and objectives should be designed and implemented in a more conducive political setting. If an already-fragile Egypt is “too big to fail” (for all the obvious reasons) then this is where the international pressure and focus should be. A Financial Times editorial on April 7 concluded: “As part of this [loan] deal, the IMF must insist on all power being vested in elected, accountable and transparent government. This is the only way Egypt can be refloated, as an economy and as leader of the Arab world.” One couldn’t agree more.
Mohammed Samhouri is a Cairo-based economist and a former senior fellow and lecturer at Brandeis University’s Crown Center for Middle East Studies in Boston. Follow him on Twitter @msamhouri. This commentary first appeared at Sada, an online journal published by the Carnegie Endowment for International Peace.