Egypt has applied for a USD4.8 billion loan from the IMF to save its economy
Less than two years into the January 2011 Revolution finds Egyptians bitterly complaining of widespread poverty, increased unemployment, spiraling prices, frequently recurrent shortages of basic commodities, to say nothing of the frequent walkouts by workers in pivotal services such as the walkouts by doctors and public transportation drivers. The general feeling among Egyptians is bitter discontent at failed hopes and a sinking economy.
So, with the country in the unenviable position of rising social unrest and an economy that has to be jumpstarted, Egypt has applied for a USD4.8 billion loan from the IMF. The IMF has announced its willingness to help Egypt; a visit is shortly expected by IMF officials to work towards finalising the deal.
Sinking economy
Some economic experts believe the loan is the only lifeline to Egypt##s sinking economy. It can be used to finance the growing budget deficit, support the depleted foreign currency reserves, and reduce the deficit in the Balance of Payments, natural consequences of the pullback in tourism and foreign investments. The presidency, the government and the majority party—the Muslim Brotherhood’s Freedom and Justice Party—all agree that borrowing from the IMF has become an inevitable last if not only resort to save the economy.
An IMF loan, experts argue, has many advantages. It comes at the lowest interest rate; and the conditions regarding credit facilities and repayment terms are favourable compared to other lending sources. Add to that the impossibility of continuing to finance the budget deficit through domestic debt, since this has become more costly for the treasury and the entire economy because of the rise in interest rates.
State officials have applauded the IMF loan. The presidential spokesman Yasser Ali said the loan was to be repaid at 1.1 per cent interest over five years, and was not bound to any [explicit] conditions.
Prime Minister Hisham Qandil said the Egyptian government will be the sole authority entitled to decide the areas for spending the loan.
The loan will also help Egypt secure other loans from other financial institutions.
Notwithstanding, many economic experts see the IMF loan as an ineffective monetary policy tied to harsh conditions imposed by the IMF. They warn that the IMF loan will cause hefty price rises, and thus increase the burdens on the population and the country’s foreign debt.
Foreign dominance?
Mukhtar al-Sharif, Professor of Economics at Mansoura University, says that Egypt is currently in the throws of a staggering economic crisis and is in dire need for foreign currency to provide cash flow. The IMF loan is essential to reduce the budget deficit, solve the depletion of cash reserve and adjust the Balance of Payments. It would also help upgrade Egypt’s currently poor international credit rating, since it will be taken as a vote of confidence in Egypt’s ability to ride out the crisis.
Yet Dr Sharif deplores the inability of Egypt’s post-revolution governments to come up with ideas to end the economic crisis without resorting to borrowing from the IMF, a move which risks placing the fate of the people of Egypt under foreign dominance.
Under the current circumstances, Dr Sharif fears the loan will not be invested in profit-generating projects to help repay the loan, but will be used to cover essential monthly expenditures such as gasoline, fuel oil, electricity, and other commodities. It might also be used, he says, to solve some category-specific demands; this would create a temporary state of economic tranquility that would serve to enhance the Islamist ruling regime’s image.
Austerity measures
Abdel-Khaleq Farouq, economic expert and head of the Nile Center for Economic and Strategic Studies confirms that Egypt is suffering a huge funding gap, given that the deficit in both the Balance of Payments and the State budget amounts to some USD20-25 billion. Although the IMF loan can help fill this gap, it will put Egypt under a kind of international trusteeship which will force the government to take austerity measures that mainly affect the poor, such as reductions in social security and salaries. Every three or four months, the IMF conducts a follow up of the implementation of the austerity measures before approving the next payment, a humiliating action for Egypt.
It has also been rumoured that the IMF will require a devaluation of the Egyptian pound, a measure which would result in another rise in the already rising prices.
The IMF, Dr Farouq believes, makes out as though it has changed its policy of imposing conditions on borrowers, but the fact is that the IMF’s new approach is more elegant but the content is basically the same. In the past, it used to impose well-defined programmes on the borrowing countries; today, it asks governments to give answers to a number of questions, and accordingly the loan is approved or rejected.
Least of the evils
Gamal Zahran, political science professor at Suez Canal University, calls for investigating other alternatives before saddling future generations with additional debt. Unfortunately, according to Rashad Abdou head of the Egyptian Forum for Economic and Strategic Studies, Egypt is negotiating with the IMF from a weak position, and can do nothing but accept or refuse the deal, and abide with harsh measures for economic reform.
In case of Egypt, Dr Abdou says, a reduction of subsidies will be harsh on the average man-in-the-street, and will kill the aspirations for social justice that rose with the January 25 revolution. Category-specific demands will increase and the government will have to choose the lesser of the two evils. If it abides by the demands, the budget deficit will increase even more; if it doesn’t, strikes will spread, production will come to a halt, roads will be blocked and a “revolution of the hungry” may erupt.
Mustafa al-Wakeel, member of the Egyptian Democratic Social Party’s high committee, shares the same point of view. He strongly disapproves resorting to foreign debt. Many countries that made that mistake learned the lesson the hard way, he says, and had to suffer the IMF’s constant interference in their internal affairs. Gradually, they were forced to reduce expenditures by decreasing subsidies and eventually deviating from the path of social justice and causing great harm to the average citizen.
No fireman
Finally, no words may sum up the current dilemma better than the advice by economic writer Rick Rowden, author of The Deadly Ideas of Neoliberalism: How the IMF has Undermined Public Health and the Fight Against AIDS.
Rowden’s words of wisdom addressed to the Egyptians say: “There is no doubt that Egypt needs emergency external financing to see it through the temporary economic side-effects of the recent political transformation, but such financing does not need to come from the IMF. Instead, Egypt should look to its regional neighbours and other emerging markets such as Brazil, China and East Asia to bridge together the financing it needs and thereby remain free to pursue serious development strategies.
The IMF is not a friendly development institution, nor an objective fireman ready to help put out financial fires.”
So why does not Egypt resort to those other alternatives cited by Rowden or others? Both Dr Sharif and Dr Farouq confirmed that Egypt did attempt to acquire financing through partnerships with cash-rich countries, but got not one positive response. So for now, it looks like the IMF is the only establishment willing to lend a helping hand.
WATANI International
14 October 2012