President Morsi’s government led by Hisham Qandil insists the controversial $4.8 billion IMF loan has no strings attached. Even though the loan was frozen, after the government had tentatively signed it in December and promised it would not harm the poor in Egypt through eliminating or suspending indirect tax hikes on 25 goods as a preemptive move.
Even though negotiations were relaunched simultaneously with a price hike in butane gas for the poor, the government still insists on telling us its economic plan is entirely “national” and has nothing to do with the loan or its negotiations.
The prime minister went even further by saying the plan will be applied with or without the IMF loan. “There are no preconditions, the IMF will merely check how committed we are to our national programme,” he said.
Meanwhile, a technical commission from the International Financial Organisation (not known for its objectivity) is visiting Egypt to scrutinise this national plan and negotiate its clauses, timeline and expected foreign currency reserves. More importantly, it will also look at the amount of deficit allowed in the state’s budget in the coming years.
The prime minister argued in a television interview on Friday that the value of the loan is unimportant and unnecessary, since it primarily provides a guarantee for international investments. Meanwhile, the Minister of Planning told us on Saturday the value of the loan could go up to enable Egypt to meet IMF demands regarding reserves and level of deficit.
Austerity is not a “national” policy
During his visit to Algeria on 22 October 2012, the prime minister told the media “the government will soon begin applying austerity measures to address the budget deficit”. That is the real name of the “national” plan that his government has been incessantly trying to pass since then until today without success – and it never forgets to assert it attained social consensus on it. But what does austerity even mean?
The South Centre in Geneva (a research centre on developing countries, in which Egypt is a founding member, and aims to support alternative development policies) issued a report on 24 March titled The Age of Austerity.
The report focused on six basic austerity measures implemented around the world in recent years, especially in developing countries. These include: (i) elimination or reduction of subsidies on fuel, agriculture and food products (present in 100 countries); (ii) wage bill cuts/caps, including the salaries of education, health and other public sector workers (in 98 countries); (iii) rationalising and further targeting of social safety nets (in 80 countries); (iv) the restructuring of pension systen (in 86 countries); (v) rationalising spending on healthcare (in 37 countries); and (vi) labour market flexibilisation (meaning, freedom to dismiss workers, implemented in 32 countries).
The study by Isabel Ortiz and Matthew Cummins tells us these six measures coincide with “expanding the tax base”, which is a term that translates in practical terms as imposing taxes on the poor by expanding indirect taxes on consumption or submitting value-added taxes (implemented in 94 countries).
The “Economic Takeoff” plan the government claims has consensus is nothing more than the above. In fact, it is an extension of austerity policies started by the former regime and its finance minister, who fled to London, Youssef Boutros Ghali. (Notice the similarity between reducing the budget deficit one per cent annually for five years that Ghali had begun – which only stopped because of the world recession – and the plans of Qandil’s government).
The programme primarily focuses on cutting subsidies and raising indirect taxes on cigarettes and other goods, as well as plans to expand these types of taxes instead of taxing the rich (our wealthy and our investors are the world’s least taxpayers), or amending budget distortions funded by those earning fixed wages which is close to the sum of all profit-making firms.
Regarding wages, the government refuses to raise them (except for the police and army of course), but also keep in mind the drop in real wages in recent years and a decline in the share of wages in GDP. As for liberating the labour market in favour of investments, Mubarak’s regime already accomplished that.
Meanwhile, the incumbent government insists on maintaining the same very low spending on the health sector – contrary to Morsi’s campaign promises that pledged to raise health spending to 12 per cent of public spending.
Thus, austerity in Egypt is part of a world trend funded and sponsored by the IMF in its literature and recommendations. The study observes that austerity is not linked to the financial crisis in the US and Europe, but extended to developing countries including Egypt.
Such austerity is not a national invention or unique or a result of the special case of Egypt’s economy. Neither is it the accumulation of public debt or the revolution or any other reasons being promoted. It is the direct implementation of policies that serve certain interest and outlooks that IMF and other world financial organisations seek to promote and maintain.
The privileged know not austerity
The Contemporary Arabic dictionary defines austerity as the opposite of prosperity, meaning making do with the bare necessities of living without luxury. The Al-Ghany Arabic-Arabic Dictionary, however, suggests: austerity is being frugal with oneself, making do with the necessities without indulgence.
The austerity of Ghali/Qandil/IMF is unlike the definition in the dictionary since it primarily targets the bare necessities, not the luxurious and indulgent. It restricts desperately needed public investments to rejuvenate the market and create jobs, and imposes more burdens on the poor who already suffer from a severe decline in income. It also ignores fair distribution of wealth and income which had triggered the revolution to begin with.
The South Centre study highlights this by stating: “The worldwide propensity toward fiscal consolidation can be expected to aggravate the employment crisis and diminish government support at a time when it is most needed. The costs of adjustment are being thrust upon populations who have been relentlessly coping with fewer and lower-paying job opportunities, higher food and fuel costs.”
For example, in Egypt food subsidies are a small percentage of overall subsidies. Nonetheless, the waste rate amounts to 30 per cent of its value according to the World Bank in a 2010 study. The same study reported that if it wasn’t for subsidised baladi bread, the 2008 economic crisis would have “pushed another 20-30 per cent of Egyptians below the poverty line”.
(Growth rates at the time were more than five per cent, but inflation rose because the cost of food increased – a condition we will soon suffer because of the devaluation of the Egyptian pound against the US dollar, which is a requirement of the IMF loan according to Hassan Malek in a recent interview with Reuters).
Simon Johnson, a former senior economist at the IMF, published an article in February on the Project Syndicate website titled Austerity’s Children. Johnson wrote: “Those who are more likely to be affected by financial crisis are the ones least likely able to defend themselves”.
He summarises the bias of austerity policies against the politically poor, more so than economically poor, by noting: “From 1993 to 2011, average real income for the bottom 99 per cent of the population (by income) rose by 5.8 per cent, while the top one per cent experienced real income growth of 57.5 per cent. The top one per cent captured 62 per cent of all income growth over this period”.
The Ortiz/Cummins study concludes that austerity policies, that favour Qandil’s and Ghali’s investors, weaken the economy’s ability to recover, be fair and permanent. In Al-Ghany Dictionary, the people’s lead an austere life meaning their living conditions have worsened and their livelihoods become morelimited. In economics,and in the IMF, it means: worsened living conditions for the majority and limited livelihood for the poor in order for the wealthy and investors to live in luxury.
This article was first published in Al-Shorouk daily