Egypt’s IMF loan: A blessing or a curse?
News of the success of negotiations with the International Monetary Fund (IMF) was received with a mixture of relief, skepticism and concern
News of the success of negotiations with the International Monetary Fund (IMF) and the transfer of the first installment of the $12 billion dollar loan to Egypt was received with a mixture of relief, skepticism and concern. The loan is supposed to rescue Egypt from its economic crisis, most poignantly manifested in the dollar shortage that has been crippling a wide range of economic activities.
Yet, the IMF is always associated with a set of conditions that are more likely than not to have a negative impact on the country’s neediest and most underprivileged and that is why objections to the loan have been anything but few.
A number of political parties, rights organizations, and public figures wrote an open letter to President Abdel Fattah al-Sisi, enumerating the setbacks of the loan. According to the letter, the loan will have a detrimental effect on the Egyptian economy since it will increase the country’s debt: “The public debt will reach an unprecedented level in the history of Egypt’s modern economy and this comes at a time when foreign investment in Egypt is decreasing and so is the revenue from the Suez Canal,” the letter said. “Add to this the decline in tourism and the remarkable drop in Egypt’s foreign reserve.”
The signatories argued that the loan offers a short-term solution to economic and social problems without paying attention to the political dimension of Egypt’s crisis. “The experiences of other countries that went through similar conditions such as Mexico and Greece proved that IMF recommendations only aggravate the situation and Egypt has additional problems such as terrorism and the instability of neighboring countries.”
According to the letter, the loan will create of Egypt a subordinate country, which will not be the case if the loan is discarded in favor of a national program for economic reform designed in a way that makes fundamental changes to the economy and which should involve development programs, halting privatization plans and creating a safety network for the disenfranchised.
According to journalist Karim Abdullah, the problem lies in the fact that the Egyptian government offered a lot of unprecedented concessions in order to curry favor with the IMF. “For the first time in 60 years, the government partially lifted subsidies on bread and fuel, which led to a remarkable price hike that reached 100% in some cases,” he wrote. “Added to this is offering tax facilities for business tycoons and offering investment privileges to international corporations.” Abdullah argued that through doing this the government managed to be on the good side of the US and consequently the major international financial institutions such as the IMF and the World Bank.
“This was done at the expense of the majority of citizens who have ever since been suffering from the madly soaring prices of water, electricity, fuel, foodstuffs, and housing ,” he added, predicting that more measures of a similar nature are expected to be applied. “The government is already planning to modify labor, investment, and bidding laws.”
Banking expert and MP Passant Fahmi argued that at the moment there is no alternative to borrowing from the IMF. “We have a budget deficit that requires an immediate action,” she said. “Heroic statements are useless at the moment. True, there are other solutions, but they will all take a lot of time and we cannot afford this.” Fahmi said, adding that it is important for people who reject the loan to “leave their ivory towers” and think practically.
Fahmi explained that investors are not willing to risk starting business in Egypt because Egypt is seen as unstable and only an economic cover like the one provided by the IMF will restore investors’ trust. “We need stability and the IMF is part and parcel of this stability because it will restore our reputation as a stable country in front of the whole world,” she added. “The IMF will tell the world that we are now a stable country and this is something we cannot do on our own.”
Former IMF Assistant Executive Director Fakhry al-Fiqqi argued that the loan will solve the crisis that resulted from the remarkable hike in the exchange rate of the US dollar whether officially or in the black market. “The loan will be deposited at the Egyptian Central Bank, which means an increase in the foreign reserve so that it will be able to meet the demands of investors and importers who are now resorting to the black market,” he said, adding that the gap between the official exchange rate and that of the black market will start narrowing. “This is in the best interest of investors as well as average citizens for whom prices of commodities will be become stable.”
Economic expert and former IMF Deputy Director Mohamed al-Erian admitted to the validity of many concerns about the loan since the IMF has a reputation of disregarding the local repercussions of the conditions it seeks to impose. For him, making the best of the current loan to Egypt is contingent upon six factors: designing a local economic program that takes the country’s conditions into consideration, addressing the social problems the loan might cause though making sure that the vulnerable echelons of society are protected, the political will to implement the designed program, the adequate external financing, transparency in communication between relevant parties, and cooperation between those parties in case adjustments to the original plan are required.
While acknowledging that there is no guarantee of success, Erian is hopeful: “Egyptian and IMF officials are said to have placed substantial emphasis on a set of pro-growth reforms aimed at improving sectors of Egypt’s economy with significant untapped potential,” he wrote. “Moreover, the agreement is understood to include fiscal, monetary, and exchange-rate measures aimed at containing financial imbalances and ensuring the program’s medium-term viability. And, importantly, it promotes the strengthening of social-welfare programs and safety nets – features that can do much to revive the IMF’s reputation in Egypt and bolster trust among stakeholders.”