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Sunday, 18 March 2018

IMF: Cure or poison for Egypt's economy?

Many agree that Egypt’s reform programme was necessary. But as the economy starts to revive, decision-makers must keep an eye on formulating a comprehensive social policy

Ahmed Kandil , Wednesday 28 Feb 2018
El-Sisi , Christine Lagarde
Egypt's President Abdel-Fattah El-Sisi during a meeting with the IMF Managing Director Christine Lagarde in Washington on Wednesday 5 April, 2017 (Photo: Egypt's Presidential Spokesperson Facebook Page)
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Millions of Egyptians will most likely take part in the forthcoming presidential elections. Many of these voters feel the economic pressures as a result of spiralling prices, even more so after President Abdel-Fattah Al-Sisi took what many experts have described as the extremely courageous decision to carry out a package of economic reforms in keeping with the agreement Egypt reached with the IMF on 11 November 2016.

That agreement was “essential and unavoidable” in view of the economic circumstances that followed the 25 January 2011 Revolution and the overthrow of president Hosni Mubarak after 30 years in power.

Under the agreement, the IMF has granted Egypt a $12 billion loan in order to remedy “macroeconomic weaknesses, boost comprehensive growth and create job opportunities.” Towards these ends, the IMF “prescription” or “Extended Fund Facility” programme called for action along three focal areas: monetary, fiscal and structural reforms.

The first required Egypt to shift to a flexible currency exchange policy and to contain inflation. That meant, above all, that it had to float the Egyptian pound. At the fiscal level, the government needed to reduce public debt by cutting back fuel subsidies while increasing expenditures on vulnerable groups such as youth and women.

Structurally, Egypt was expected to facilitate industrial licensing, make financing available for small and mid-size companies, rescind the law that criminalises insolvency and streamline bankruptcy laws.

It would not be easy for both Egyptian decision-makers and millions of Egyptians to accept this bitter medicine. In 1977, when the government lifted food subsidies in order to obtain IMF funding, rioting erupted in Egypt’s major cities resulting in around 80 dead and hundreds wounded. The government was forced to cancel the agreement and restore subsidies.

Since that time, other agreements were discussed, as occurred in 2012, for example, but most were abandoned. It is not surprising, therefore, that many Egyptians see the IMF as an overbearing organisation that seeks to impose its will on developing nations with no regard for their domestic circumstances. Some Egyptians go further to regard the IMF as an instrument for Western hegemony. Such perceptions were among the reasons that compelled previous Egyptian governments not only to avoid applying for IMF funding but also to postpone the annual economic consultations required under the IMF’s Articles of Agreement.

Cairo’s recent agreement with the IMF has restored health to the economy in many respects, although it simultaneously has incurred interim strains for society. For example, the inflation rate has shrunk from its highest level reached in July 2017 (35 per cent) to 22 per cent at present, and it is expected to fall to 12 per cent during this year. Egypt’s GDP is showing remarkable improvement and is expected to register 4.8 per cent growth in July, up from 3.5 per cent in the previous year.

At the same time, investment reluctance as begun to ebb. In 2016/2017, net foreign direct investment reached $7.9 billion, up from $6.4 and $6.9 billion in 2014/2015 and 2015/2016 respectively. In addition, foreign currency reserves climbed to $38.2 billion by the end of this past January, and a $5.8 billion balance of payments was recorded in 2016/2017 in contrast to the minus $0.8 billion in the previous fiscal year.

Nevertheless, many observers fear that the IMF prescription for economic remedies could turn toxic if the focus remains trained solely on macroeconomic indicators such as growth rates, investment influx and export volumes. Improvement in such indexes is crucial to the realisation of economic development, but it is not sufficient in and of itself.

It needs to be accompanied by a social policy that aims to achieve an equitable distribution of income and wealth, to improve labour conditions, to direct resources to human development, to fight monopolistic practices, to provide equal opportunities for education, advancement and competition, and to step in directly to protect the poorest segments of society.

Such mechanisms are essential if there is to be a fair distribution of the fruits of development. Reducing the question of social justice to more pensions and subventions in the absence of a more comprehensive and deeper social policy may temporarily serve to alleviate cases of dire poverty but it will not narrow the gap between rich and poor and achieve social harmony.

Still, it is likely that Egypt will succeed in carrying out its economic reform programme in view of foreign investors’ eagerness to purchase government bonds and the increases in remittances from Egyptian expatriates, the volume of exports and foreign currency reserves.

Observers also anticipate rises in foreign investment due to the deregulation of exchange rates and in tourist revenues, the beginning of natural gas production in offshore gas fields in the Mediterranean, and a readiness on the part of the international community to support Egypt against the backdrop of current regional conditions. 

*The writer is an expert in international affairs at Al-Ahram Centre for Political and Strategic Studies


*This article was first published in Al-Ahram Weekly

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