Five objections: what is the problem with the World Bank loan?

The leaked terms on the World Bank (WB) loan and its associated program raise several reservations, especially after the presidential decree on the loan and its associated program was leaked as well.

These reservations are related to the lack of transparency in violation of the constitution, as well as economic policies the government has chosen to implement in the coming years, which overall are hostile to social justice.

I. Conditionality threatening the democratic sovereignty of the people:

The government sought a $3-billion loan from the WB. The terms set forth in the leaked document on the loan agreement stipulates that Egypt will receive the first tranche of the loan—$1 billion—for development policy financing. This particular type of loan, granted by the WB to member states, requires the government to commit to a raft of specific measures, set forth in advance in agreement with the WB. The receipt of each tranche of the loan is conditoned to the implementation of each stage of these measures. The loan agreement is preceded by a set of measures intended to prove the government’s good faith (prior actions). The government carried these out in 2014 and 2015 without informing the public of its intention to solicit the loan and without informing the public that the loan was conditioned to the implementation of these measures.

II. The secrecy of negotiations and the failure to follow constitutional procedures

The first objection to the loan is the secrecy surrounding the negotiations over conditions, which precluded a public social debate.

The government only declared its intention to borrow from the WB in meetings in the fall of 2015, although negotiations over and implementation of obligations began more than a year earlier. The loan agreement was signed at night, only days before the parliament convened for its first session on December 19, to avoid any social debate on the agreement.

This contravenes the constitution, Article 127 of which states:

The executive authority may not obtain a loan or financing, or commit itself to a project not listed in the approved public budget that entails expenditure from the state treasury in a coming period, except with the approval of the House of Representatives.

Article 151 of the constitution states:

The president of the republic shall represent the state in its foreign relations, and conclude and ratify treaties following the approval of the House of Representatives. They shall acquire the force of law following their publication pursuant to the provisions of the constitution.

However, the Egyptian constitution contains no provision regulating the international agreements in the absence of the parliament. In this case, we should refer to the general rule, which requires the president, when concluding any agreement or treaty in the absence of parliament, to put the agreement to the body as soon as it convenes. This is confirmed by the phrase “following approval of the House of Representatives.”

Using the general rule and also based on the two foregoing articles, the president’s authority is limited to signing the agreement and putting it to the parliament “as the principal legislative authority.”

Moreover, the WB is bound by the constitutions and local laws of borrower countries.

Based on the confidential agreement, the government chose to commit to development policies that reflect no real development agenda or any orientation to social justice. In fact, it placed a binding condition on itself and the people to only alter these policies with the approval of the WB and to refrain from any reforms except with WB approval. All of these restrictions were exchanged for the paltry sum of $1 billion, which covers only half of Egypt’s wheat imports in one year, or about one-tenth of its oil imports.

In exchange for the loan, the government committed itself to three areas of reform:

1. Supporting public fiscal discipline

2. Achieving a sustainable supply of energy

3. Improving the business climate

Who identified these policies as reform priorities? Why do this government and the one that preceded it consider these worthy priorities? This at a time when the government is unable to meet the popular demand for improved quality and access to education and health and its inability to increase public spending in these sectors and in scientific research, pursuant to the provisions of the constitution.

The government did not seek the WB’s assistance in diversifying the economy, supporting the provision of public services, increasing employment, or developing public finance (in order to meet the constitutional requirements in education, health, and scientific research)—all of which are areas, according to the WB website, to which this type of loan applies. These are Egypt’s reform priorities.

III. The government is concealing the real situation

The secrecy also extends to certain facts about the economic and political situation which the government is concealing from the people, most importantly: lagging growth, rising energy prices, the opening of monopoly sectors to the private sector, and political instability.

Growth

Growth is slower than government projections and will remain sluggish until 2018–19. According to the leaked document, the growth rate began to slow in July 2014 and continued to slide over three quarters until March 2015 due to depressed overall demand, despite the large increase in government investment.

This means that government investments were not enough to generate sufficient revenue for the citizenry and did not create appropriate jobs that would assist citizens in purchasing goods and services. Investments also did not bolster exports, which could generate foreign currency.

In addition, the WB expects the Egyptian pound to decline further against the dollar, reaching 9.3 by the end of 2019.

Stability and justice

Economic and political risk is on the rise in Egypt, in contrast to the prevalent government discourse. The WB notes that this loan is high risk, first of all due to the economic crisis in Egypt, which may limit its ability to meet loan payments. (In addition to known and unknown loans, the WB notes that Egypt requires some $4 billion in 2016 alone whose source is yet to be identified.) The loan is also risky given the political instability in neighboring countries and, more importantly, in Egypt itself due to the lack of social justice, the country’s limited ability to create jobs appropriate for youth, and high inflation in food prices, which impacts the two poorest quintiles of the population.

 

Steady increase in electricity and fossil fuel prices

1. The loan document does not address the rising price of electricity and fossil fuels (gas and diesel) to be borne by the industrial and tourist sectors (private-sector firms with heavy consumption). We, as consumers in the household sector, cannot know therefore how much we are and will shoulder due to reduced subsidies in comparison with major consumers in the private business sector. In fact, it appears from the document that major consumers (cronies and monopolists, according to the WB definition) will not be affected.

2. The poor are subsidizing electricity for the rich. According to the document, the government is obligated until 2018–19 to sharply increase prices in all kinds of energy for consumers. According to the loan document, in 2015 prices for petroleum derivatives increased 40–78 percent, while electricity prices rose by 31 percent in 2014 and 19 percent in 2015.

Remarkably, the government agreed (or proposed, according to the WB) to double the average price of the kilowatt hour to LE0.45 by increasing the price only for small consumers, rather than the rich or large consumers. In comparison, in 2007 Egypt had a sliding-scale subsidy system for electricity, with the rich paying more for their consumption to cover the cost of subsidized electricity for the poor and thus keep the value of the subsidy off the state budget.

Privatization returns

In contrast to promises made by Ibrahim Mehleb in the first Sisi government and in contrast to the 2015–16 state budget, the government pledges to the WB to privatize the energy sector or, more accurately, to open up energy markets to the private sector: electricity, natural gas, and oil. These sectors are characterized by the presence of large corporations, meaning that they are necessarily monopoly sectors. In this case, the people must be informed of the impact this will have on their bills for these services (especially the electricity and natural gas bill). It is also necessary to ensure that these companies are not in the hands of Mubarak regime cronies. The WB warns that they control legislation and hold a monopoly on several benefits and economic activities and hence the bank calls for the creation of a regulatory body for this sector in particular. It is feared that large corporations politically connected to decision-making circles will capture these markets, in light of the weakness of regulatory bodies.

IV. Government pledges are hostile to social justice

Any bank should confirm the borrower’s ability to pay back his loan. For this reason, the WB imposes cuts to the three most important items in government spending without consideration for the impact on social justice. The three items are wages, energy subsidies to households, and interest on public debt.

Reducing the public wage bill

In contrast to promises made by President Abd al-Fattah al-Sisi, the government at the beginning of the fiscal year began cutting overall government wages, which are projected to constitute 8.2 percent of GDP. The WB is asking for a further reduction to 7.5 percent by 2018–19 and for a freeze on new civil service appointments.

The EIPR believes that social justice requires:

1. Limiting these cuts to the remuneration of senior state employees

2. Calculating these cuts after requiring the government to include all extra budgetary funds, which conceal much of the income of senior civil servants. This would support anti-corruption efforts and address wage disparities within the government sector.

3. Excluding education and health from the hiring freeze.

 

Reducing the energy subsidy bill

Cutting energy subsidies is an acceptable goal in and of itself, but the issue is how such cuts can be implemented in a way consistent with social justice aims and sustainable development. The document addresses in detail the energy subsidy bill for the household sector without even a reference to the biggest beneficiary of government subsidies: a bloc of major industrial, tourist, and service facilities. As profit-generating enterprises, these facilities should only receive state support with public approval.

The demands of social justice require the government to start cutting subsidies to major companies (Mubarak regime cronies, according to a recent WB study) before putting the onus of the loan on the broader citizenry.

 

Reducing public debt by shouldering the poor with the biggest share:

The WB requires Egypt to reduce public debt (as a percentage of GDP) in the name of fiscal discipline. The government is therefore obligated to:

1. Increase revenues by imposing a value added tax (VAT), which is inimical to social justice aims and affects the poor more than the rich. In turn, the WB requires the government to reduce top income tax rate to 22.5 percent, which will further skew wealth and income distribution in Egypt and does not further the objective of reducing the public deficit.

2. Take measures targeting possible government obligations:

 

Social justice measures required:

1. Analyzing the causes of the increasing interest on the public debt and taking measures to reduce it. Interest on the public debt now accounts for about one-fourth of the public budget, but the WB only addresses the increasing interest rate from the perspective of associated risks (the risk of loan default). The interest rate on public debt is higher in Egypt than the average in other countries with the same level of public debt (as a percentage of GDP), but neither the WB nor the government examines the reasons for it. As such, the WB only asks the government to increase the duration of its loans, which leads to higher interest rates.

2. Introducing a set of taxes on high incomes, wealth, and capital gains (such as the sale and purchase of apartments and land and mergers and acquisitions) in order to reduce government debt.

This is preferable to a VAT. Article 5 of the loan document contains, in addition to the general conditions imposed on this type of loan, certain conditions specific to Egypt.

According to the loan agreement, signed by the minister of international cooperation, Sahar Nasr, attached to the decree signed by al-Sisi, as a condition of the loan, the WB must declare its satisfaction with “progress achieved by the borrower in implementing the program and the borrower’s macroeconomic policy framework, provided it includes the adoption of a VAT regime.”

According to Mada Masr website, the central position of a VAT law is also apparent in the loan document recently published by the WB, which notes that the adoption of a VAT in Egypt is a condition of enforcement. This is a legal mechanism that permits the WB to withhold the loan funds even after the conclusion of the agreement until the WB declares its satisfaction with the implementation of certain conditions.

Governments prefer VATs because of the ease of collection and the minimal administrative costs, but they are regressive taxes, with the burden falling harder on poorer social classes. A VAT will also not address the income gaps in Egyptian society. According to status report on the Egyptian economy published by the WB in December 2015, wages account for 30 percent of gross national income while profits takes up 70 percent, the exact opposite of the distribution in developed capitalist economies.

 

V. WB violates its own rules twice in one loan1

In addition to not receiving parliamentary approval, the loan document does not fulfill the WB’s own requirement for an assessment of the poverty and social impacts of the program policies it dictates.

According to the implementing policies for this type of financing, published on the WB website, for policies with likely significant effects on poor and vulnerable groups, the WB summarizes in the program document “relevant analytic knowledge of these effects and the Member Country’s systems for reducing adverse effects and enhancing positive effects associated with the specific policies being supported.

If there are significant gaps in the analysis or shortcomings in the systems, the Bank describes in the Program Document how such gaps or shortcomings would be addressed before or during program implementation, as appropriate.”

Yet, the program document contains simple analysis for only one of the measures, which is the rise of electricity bills. While the accumulated impact on poverty should be assessed for all measures, as the policies’ adverse consequences for social justice and although the policies will impact the poor more than others.

This file was prepared by Salma Hussein, a researcher with the EIPR; attorney Tareq Abd al-Aal wrote the legal commentary. The paper was edited by Ashraf Hussein, the director of the economic and social justice unit