Egypt and the IMF: Time for a different approach
On April 2, a technical delegation from the International Monetary Fund (IMF) arrived in Cairo for a new round of talks over a $4.8 billion loan. This time, though, Egypt’s socioeconomic and political environment is 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 two-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 Mubarak’s reign, Egypt saw high levels of economic growth, was considered the darling of foreign investors, and had been constantly grouped among “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 upwards swing (despite the shortcomings) shows that 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.