There are those that will feel that with Egypt, the International Monetary Fund is back up to its old, discredited trick of imposing, as a condition of a loan, ruinous terms that seem custom-made to produce economic hardship among those who can least afford it and as a consequence, political unrest.
It now looks as if the IMF will withhold a crucial $ 4.8 billion loan to Egypt, because it deems President Muhammad Mursi’s initial plans to put Egypt’s financial house in order, with tentative tax and price rises, as being insufficient to justify its support.
Without the loan, the financial prospects for the country look grim. Continuing political unrest, economic stagnation and a collapse in all-important tourism revenues mean that Cairo’s foreign exchange reserves are dwindling fast. Now standing at $ 13.5 billion, they represent less than three months import cover.
Without the IMF’s $ 4.8 billion, a further $ 9.5 billion of finance from other providers, will not be released. The money men in Washington are not happy with the Mursi plan to reduce Egypt’s deficit from almost 11 percent of gross domestic product to nearer 9.5 percent next year. They want a far more rapid reorientation of the country’s finances, including the sharp reduction in subsidies on fuel and food, which current consume more than a fifth of the state budget. A source close to the apparently increasingly bad-tempered negotiations between the government and the IMF, has said that the Washington bankers are insisting that the markets be sent a clear signal, so that “confidence” can be restored.
Banks around the world may need confidence that they can work with Egyptian counter-parties, though with commercial risks already high, they will be charging fat fees for whatever funds they do choose to advance. But in talking about confidence, the IMF misses the wider point. Making Egypt jump through unrealistically difficult financial hoops, in return for its loans, is going to be hugely damaging to political and social stability. Until Egypt can find political equilibrium, there is little or no chance of any restoration of its economic fortunes.
Without a pickup in business activity and tourism, there will be precious few good Egyptian risks for the international markets to embrace. Therefore by withholding its loan, the IMF is in fact guaranteeing that Cairo’s finances and political stability will be further undermined, the very thing that it is supposed to be avoiding.
Twenty years ago, the organization built itself a dismal record in Africa. Its gray-suited officials pedaled the same harsh solution of slashing government budgets, increasing social tension and leaving the weakest to fend for themselves or survive on bilateral aid, in return for loans which themselves, very often carried tough terms. The predictable result was often default and re-financings.
There has to be a stronger political element to the IMF’s lending. Egypt certainly qualifies as a special case. The subsidies that so distort the state budget have existed for years. They were introduced and maintained in essence to keep the population quiet. At least if they could eat cheap bread and cook on cheap kerosene, their basics were taken care of. Indeed in the late 1970s, when one of Anwar Sadat’s governments attempted to reduce the subsidy on bread, there were extensive riots in which dozens died. The price hike was abandoned and the ministers responsible for trying to introduce it were obliged to resign. Indeed those bread riots have informed successive Egyptian governments ever since. But not it seems the IMF.
No one doubts the need for Egypt to undertake far-reaching economic reforms. The key issue is the speed at which they should be introduced. Mursi is absolutely right to want to proceed cautiously. It is not simply that he does not wish his Muslim Brotherhood party to court unpopularity in the run-up to the fresh elections. He also appreciates that the pain a very large number of ordinary Egyptians will feel, over and above their current troubles from joblessness and political uncertainty.
The IMF seems disinclined to believe Mursi when he says that he will stick to a gradual program of fiscal and economic reform. It is saying it wants to be certain that change will come and the best way of achieving this is to see concrete results immediately. Yet given the IMF’s own past record, it ought to realize that what it is asking of Egypt is unrealistic. The money men need to be thinking again.
The IMF is wrong about Egypt
