In business firms, an employee is entitled to appeal for an advance payment guaranteed by his or her salary. Before approving the move, however
In business firms, an employee is entitled to appeal for an advance payment guaranteed by his or her salary. Before approving the move, however, the financial department checks that the advance payment required is not too big for the borrower to adequately pay it back, even if in installments. The practice is standard, and there is no room for protesting or accusing employers of undue interference in an employee’s private life.
If the practice is respected on the personal or business level, why should it be any different in international relations? To be specific: when Egypt applies for an international loan, why do we fall prey to excess sensitivity and deny creditors the right to question the efficiency of the Egyptian economy or set regulations to guarantee the repayment of the debt? Despite efforts to float the economy following the revolution, it was inevitable for Egypt to pay the high price of political turmoil. Projects stumbled, investment retreated, production and exports stalled, tourism suffered and the stock market fell. The impact on development plans and foreign currency reserves was ruinous. Today, Egypt has to resort to foreign borrowing to provide the country with the liquidity required to inject new blood into the economy and confront the budget deficit and economic stagnation.
As an IMF member, Egypt appealed to the international institution for a USD3 billion loan. The IMF, for its part, said it was investigating the appeal and would dispatch a delegation to review the state of the Egyptian economy before taking the decision. At this point, the media and a host of politicians—none of them economists—rushed to declare their opposition to any “intervention in Egypt’s domestic affairs”. Some went so far as to condemn the IMF’s alleged pursuit to dominate the Egyptian economy in order to serve the interests of Western powers. A fierce campaign was launched to “defend the dignity of Egypt” and reject IMF conditions.
The IMF, for its part, paid no attention to this fuss and announced the recommendations the Egyptian government should abide by to get the loan. These recommendations, or conditions if you like, reveal an obvious course of action that would work to float the economy, correct some flaws, and make sure Egypt can pay back the loan. I list them here, to see whether they represent a blessing or a curse for the Egyptian economy:
• The IMF should be granted the right to follow up on the performance of the Egyptian economy on a quarterly basis and to demand that the government releases periodic reports on the monetary policy, to facilitate IMF monitoring of the government’s commitment to the conditions of the loan.
• The Central Bank of Egypt (CBE) should release quarterly reports on the performance of Egyptian banks. The IMF urged the financial sector to enhance the marginal efficiency of capital and reduce the risk rate in accordance with the Basel II agreement.
• The IMF should be granted the right to check the budget deficit rate, foreign currency reserves, the CBE’s domestic assets and the magnitude of the loans taken by the Egyptian government. In this context, the IMF called for a degree of flexibility regarding the foreign currency reserves, so the CBE would be free to interfere to prevent the fall of the Egyptian pound; there should be room for it to rise and fall within safe limits.
• A new customs law should be issued to ameliorate the customs system and increase revenue.
• A 50 – 60 per cent cigarette tax should be imposed.
• Broadening the tax base and replacing the current sales tax with a value-added tax.
• A midterm plan to direct subsidies to the most impoverished should replace the current subsidy system.
• The tax base should be widened to include profits generated by stock market-related activities and to integrating private funds, which constitute some EGP2.5 billion, into the budget to fortify and monitor it.
• Studies should be conducted on the commodities that cause prices to rise, to understand and tackle the reasons behind the rise in inflation.
• The IMF board of governors would review on a quarterly basis the progress made by the Egyptian government. This would coincide with the date of offering the batches of the loan.
• Once Egypt accepts these recommendations—or conditions—an agreement would be signed between the IMF on the one hand and the CBE and Egyptian Ministry of Finance on the other to define the obligations of each party. Egypt would take a USD3.2 billion loan at 1.31 per cent annual interest in addition to the loan expenses to cover the budget deficit for the 2011-2012 and 2012-2013 fiscal years. The loan would be paid back in 3-5 years. Egypt’s share in the IMF is almost half the value of the loan (USD1.9 billion).
As I see it, these recommendations focus on correcting the path of the Egyptian economy through increasing tax and customs revenues without touching on the poor. Why then the fears that the IMF is plotting to control the Egyptian economy and humiliate the Egyptian people? I cannot find any trace of conspiracy in this offer. Everything, however, will depend on economists’ judgment and the outcome of the negotiations between the government and the IMF.