The IMF loan to Egypt: Right answers, wrong questions
The government claims that the IMF has no conditionality clauses linked to its prospective $4.8 billion loan. But what it fails to say is that its entire programme, which it authors, is subject to IMF approval
, Thursday 6 Sep 2012
The government is said to be negotiating the biggest IMF loan ever in Egypt's history, worth $4.8 billion. The loan is to be used for at least three different purposes, government officials and the ruling Freedom and Justice Party say. The first is to support the ever-widening budget deficit, which is expected to hit a record LE150 billion this fiscal year.
The second is to support Egypt's dwindling foreign currency reserves that have reached a historical low of $14.4 billion, falling from almost $35 billion in January 2011.
The third is to mitigate the balance of payments deficit. Some economists and policymakers are echoing Kamal Al-Ganzouri's Cabinet claim that bringing the IMF into the scene now can help send reassuring signals to local and international investors.
According to this argument, the IMF's presence means that Egypt's macroeconomic policies are sound and that the country's market reforms are not going to be reversed by the post-Mubarak political order. All in all, the government, the presidency and the majority party all hold that the IMF loan is inevitable in the immediate term to pull the economy out of an imminent recession and possibly a foreign currency crisis.
The government's stance is indeed justifiable. The IMF after all does offer the best interest rates, being the world's cheapest creditor. The loan offered by the Fund is at a low interest rate with good repayment terms. Over and above, domestic borrowing has proven to be considerably more expensive than foreign borrowing in terms of debt service, not to mention its crowding-out effect on private investment. What is the problem then with the IMF loan?
The government's argument may be the right answer to short-term questions. However, what about longer term concerns? The IMF is no commercial bank that lends money in return for profit. Rather it is an international organisation in charge of overseeing the macroeconomic stability of its member states.
Hence, the IMF's mandate extends to the very heart of fiscal, monetary and trade policies that are officially pursued on the national level. Accordingly, the real question that the government, the opposition and Egyptian civil society together should be addressing is what impact would the IMF loan have on Egypt's social and economic policies in the aftermath of the biggest popular protest in the country's modern history?
This gets us to the critical question of IMF conditionality, which the government has been denying altogether. Government officials have been insisting that the IMF has no conditionality clauses to impose on the country, which is something that is hard to believe. If there are no conditionality clauses at all, then why has the government been holding successive negotiating rounds with the Fund throughout recent months? What are they negotiating?
The IMF indeed has conditions to impose on the Egyptian government. Yet the IMF no longer imposes hard conditions on borrowing countries like the ones of the 1980s and 1990s, which proved to be neither politically sustainable nor economically successful. Instead, the IMF turned to indirect conditionality where the Fund approves the government programme so as to conclude the loan agreement. This amounts to conditionality in reverse, because unless the government submits a programme that is likely to be approved by the Fund, no money will be released.
The government's programme, as a matter of fact, is the subject of negotiation between the IMF and the government. The programme that was leaked last March shows the government's commitment to stabilise the economy through slashing budget deficits (cutting subsidies and raising revenues), or what can be called "austerity measures" designed by the Egyptian government to be approved by the Fund.
The government programme is a roadmap for macroeconomic stabilisation in the coming years. The conclusion of the IMF loan means that the Fund will become a de facto partner in managing Egypt's social and economic policies in the years to come. This is taking place at a time when the government is in a weak position vis-à-vis the Fund given its dire need for foreign financing to mitigate the ever-deteriorating balance of payments.
What is even more alarming is that the IMF, the World Bank and other international financial institutions (IFIs) seem to be the only ones that have a clear strategy for Egypt's economy, which is simply the furthering of neoliberal measures. They now have enough leverage to enforce it as well through loans.
Conversely, the newly-elected president and his majority party hardly have any alternative vision for Egypt's developmental model after the revolution. The priority is given to short-term recovery of the economy through generating high rates of growth and attracting foreign investment, while borrowing to support foreign reserves, as if Mubarak's Egypt was not already growing at high rates and as if the country was not fat with reserves on the eve of the revolution.