Egypt: Economics and governance in the IMF deal

Ziad Bahaa-Eldin
Wednesday 3 Aug 2016

Last week the government announced that it was in advanced negotiations with the International Monetary Fund and expected an agreement to be signed before year’s end for $21 billion in loans over the next three years, including $12 billion from the IMF and another $9 billion from other international institutions and financial markets

The announcement put an end to speculation and conflicting official statements and should be welcome for this alone, since it allows society to follow and participate in the debate about a step that could be decisive for the country’s economic future.

Discussions about the IMF deal in the next few weeks will likely end with the House of Representatives approving the agreement and its conditions, on the grounds that there is no other alternative in light of declining investment and productivity and rising inflation and public debt.

In fact, there are few alternatives. In the last two fiscal years alone, from beginning of July 2014 till end of June 2016, domestic public debt increased from LE1.6 trillion to well above LE 2.6 trillion, while foreign public debt rose from $46 billion to $53 billion.

As a percentage of GDP, public debt increased from 95 percent to 100 percent. Meanwhile, the Egyptian pound has lost about 45 percent of its value against the dollar in the parallel market, and inflation has jumped from 10 percent to 13 percent, with unemployment fixed at 13 percent.

What the government hopes to get from the deal is low-interest loans that will allow it to overcome the current crisis, access to global financial markets, and return of foreign investment.

At the same time, the agreement will require the government to show better fiscal management, more coordinated economic policies, and greater transparency. On the other hand the agreement will likely obligate the government to pursue policies that, at least in the short term, will raise prices, reduce subsidies, and limit social spending, even as the middle and poor classes are already straining under high prices and poor public services.

It will also mean an unprecedented increase in foreign debt, bringing it to nearly double what it was two years ago, especially if other agreements made this year go forward.

The discussion shouldn’t, however, be merely about whether to accept or reject the IMF deal. It should explore how the state can change its economic approach, so it’s not just a matter of taking on more foreign debt and further burdening the middle and poor classes without a genuine improvement in economic management. To coincide with the IMF talks, I suggest we think about and try to advance the four objectives below through social pressure: 

First, redefine the state’s role in the economy: what should the state produce and what should it encourage the private sector to produce? Where can it promote an appropriate climate or impose necessary regulation?

The status quo is untenable. It harms the economy when the state’s administrative and military arms do everything and rely on their sovereign status to compete with the private sector without defining the role of either one.

Second, reconsider the social distribution of the tax burden and ways to broaden the tax base and combat tax evasion. The tax system needs to be calibrated to promote investment and social justice.

In contrast, the current tax regime, leads to a constant search for easier revenue streams and is a less wieldy tool to achieve social policy objectives.

Third, reassess public spending priorities in order to direct limited resources and energies away from ill-thought out, costly projects, regardless of their political and social benefits, and toward improvements in existing infrastructure and public services and utilities that serve the vast majority of citizens in their everyday lives.

Fourth, strengthen parliamentary, civic, and political oversight of the agreement with international financial institutions, and the economic and social impact of these programs. Oversight should not end when the deal is signed and approved by parliament—that’s actually when it begins. Every phase of the program must be subject to accountability, review, and correction. This requires more transparency so that Egyptian society has access to the same information as international institutions and experts.

Finally, I hope economic decision makers realise that a climate in which freedoms and the rule of law are eroded, a climate of apprehension and interdiction that does not offer conditions for political and civic participation, is anathema to investment. It inhibits creative energies and innovation and fosters corruption. There can be no talk about economic or fiscal reform without a more relaxed political climate, flourishing freedoms, and respect for the constitution and law.


I ask readers to bear with me as I take a short break. I’ll be back next month.

*The writer holds a PhD in financial law from the London School of Economics. He is former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investment. This article was published in Arabic in El-Shorouq newspaper on Monday, 1 August.

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