The IMF in Egypt: revolution or coming full circle?

22 December 2012

The Egyptian government has finally concluded an initial loan agreement with the IMF following two years of continual negotiations. The agreement is to be finalised by the IMF board and then signed and ratified by the Egyptian president, who holds both executive and legislative powers following the parliament’s disbanding several months ago. The government hopes that the loan will help to overcome Egypt’s chronic fiscal and financial problems that have become pressing due to the political turmoil following Mubarak’s ouster in February 2011.

The Egyptian economy is suffering from an ever-widening fiscal deficit that has exceeded 11 per cent of GDP in the last fiscal year. The deficit is expected to increase to 13 per cent by the end of the current fiscal year. Moreover, the Egyptian economy has been suffering from dwindling foreign reserves and a deteriorating balance of payments position, with large capital outflows, low investment rates and a slow recovery in the tourism sector.

The IMF loan is seen as a way out of these complex crises. The government claims that Egypt’s foreign debt stock is not that big (around $32 billion) and that the cost of foreign borrowing is far lower than domestic borrowing. In support, they assert that the IMF loan will open the door to more capital inflows including through borrowing from other international financial institutions and via attracting foreign investments.

The IMF loan does not provide a way out of Egypt’s economic troubles, for many reasons. To start with, the IMF loan is worth 30 billion Egyptian pounds ($4.9 billion), which is hardly sufficient to cover the projected budget deficit that is expected to range from 170 to 200 billion Egyptian pounds.

Secondly, even if the IMF agreement opens the door to additional loans, most of the money will go to cover current expenses unless Egypt’s budget undergoes serious restructuring. The new regime has proven to be quite incapable of tackling sensitive economic issues, such as energy subsidies, the exchange rate and taxation policies. The restructuring of public expenditure is a medium-term issue that is contingent upon the new rulers’ political will and their capacity to forge a broad socio-political alliance that may enable them to undertake the necessary reforms. This process is completely independent of the IMF loan and is related to broader political settlements in post-revolutionary Egypt. If no restructuring takes place, foreign loans will just mean a cycle of increasing debt incurred for the sake of financing recurrent expenses with little or no return, making the whole process of indebtedness far from sustainable.

Thirdly, the government claims that the IMF loan will serve as an indicator that the Egyptian economy is on track for recovery and that the country has a clear set of policies. This is expected to support Egypt’s drive for recovery by attracting foreign direct investment and thus generating higher rates of growth. This argument hardly stands as there are other variables which attracting investment is contingent upon: political stabilisation, the international financial crisis and domestic security, to name a few.

One can safely say that the IMF loan will barely contribute to Egypt’s economic recovery. The IMF loan agreement is likely to attempt to solve the state’s fiscal problems through higher indirect taxes, slashing subsidy and devaluation of the local currency. The loan is not inevitable or necessary to support the economy and pull it out of an imminent recession. Rather it risks pushing Egypt into a spiral of public indebtedness that will deepen its fiscal and financial crises and undermine genuine chances of democratisation.

What the IMF loan offers is support for a set of political-economic choices that are predominantly conservative and that aim to reproduce the same old economic settings and interests without the least change following the revolution. The IMF package simply holds the broader base of Egyptians liable to pay for the readjustment of the economy. The package's likely reforms significantly contradict the Egyptian people’s aspirations to remodel the country’s development paradigm to be more just and inclusive.

(First published on Bretton Woods Project; for online access click here)