IMF to review Egypt’s economic reform program 03/17/2017

A child balancing a bread tray on his shoulder in Cairo.

An International Monetary Fund mission will visit Egypt on April 28 to review the progress that the country has made in implementing a series of economic reform policies, Finance Minister Amr al-Garhy announced on Wednesday. The second instalment of the IMF loan, which amounts to $1.25 billion, is conditional on Egypt’s success in implementing these reforms. This review comes on the heels of protests against new bread rationing laws, which erupted across the country last week.

Last August, in a bid to tackle its dollar shortage, as well as its currency- and foreign debt crises, Egypt finally reached an agreement with the IMF for a loan worth $12 billion. A similar amount in bilateral support from various other institutions was also agreed on, thereby making this the largest such deal to ever take place in the region. In order to secure the loan, new austerity measures were implemented, subsidies were cut, and a significant devaluation of the Egyptian pound took place. Many argued that these set of conditions set forth by the IMF would have a negative impact on the country’s middle class and its most underprivileged, and may throw the nation into renewed political and social turmoil, while others have stressed the necessity of the measures and their importance in reigniting the economy.


Seven years ago, just before the 2011 Revolution, Egypt’s economic growth was widely being praised by the international community, including the IMF. Between 2000 and 2010, the country’s GDP increased at an average rate of more than 5% per year, and foreign direct investment (FDI) increased from 1.2% of GDP to over 9%. The world financial crisis had a relatively weak impact on the Egyptian economy and the stock market was evolving into a regional powerhouse. Egypt was even named by the World Bank’s 2008 Doing Business Report, as the “World’s Top Reformer”.

The IMF took much of the credit. In its eyes, Egypt was experiencing a macroeconomic success that was a result of four lending programs that were implemented with the organization in the 1980s and 1990s, and which resulted in reduced inflation and increased confidence in the economy. Some of the changes induced by these programs included moves toward liberalizing interest and exchange rate markets, as well as more conservative monetary policies. These reforms also introduced structural adjustment policies (SAPs), which included trade liberalization, deregulation and privatization, among others.

Despite the perceived macroeconomic success of some of these measures, reality, however, painted a different picture. The reforms came at a high social cost, leading to mass layoffs of workers and rapidly increasing unemployment, as well as growing inequality and a significant weakening of unions. In fact, the average Egyptian did not experience any improvement in their life as a result of the growth. Unemployment increased to 9%-10%, with youth unemployment reaching 40%. Poverty increased, with wages remaining stagnant and one in seven Egyptians living under $2 a day, despite inflation rising from 2.8% in 2000 to 11.7% in 2008. The share of output going to workers’ wages declined far more rapidly in Egypt than in other developing countries, standing close to 25 per cent of the value added in 2009— a strikingly low figure. The poor were getting poorer, while the rich were experiencing exponential growth in wealth.

This growing inequality is, arguably, what led to the 2011 Revolution, with protests calling for ‘Bread, Freedom and Social Equality’. Unrest in the subsequent years has led to a rampant deterioration of the economy. GDP growth fell from 7% in 2008 to 1.8% in 2011, while unemployment increased from 9.2% in 2010 to 12.3% in 2012. Investor confidence disappeared, and the tourism industry collapsed, due to an Islamist insurgency in Sinai.

The October 2015 downing of the Russian jet that took off from Sharm el Sheikh represented a crushing blow to the tourism sector, which, at its peak employed 12% of Egypt’s workforce. Luckily, the last few weeks have shown encouraging signs, as Russia is finally set to be allow its citizens to return to Egypt’s beaches. Russian tourists made up 67.9 percent of Egypt’s tourists in 2015.

Capital outflows had also resulted in intense pressure on the Egyptian pound to devaluate. In order to prevent that from happening, or to at least slow it down, the Central Bank of Egypt (CBE) had been selling off its foreign reserves, which fell from $34 billion at the end of 2010 to $12 billion in 2012, and remained around that number ever since.

The slowing of the depletion of foreign reserves was only sustained by donations from Saudi Arabia and the UAE, totalling more than $30 billion, since 2013. Instead of using that money to implement reforms, it has mostly been used to stabilize the currency and to implement state-sponsored mega projects, which have, so far, achieved little return on investment (e.g. New Suez Canal project). Foreign debt reached a massive 98% of GDP in 2015, with the government continuing to finance its large and poorly targeted subsidy programs, as well as its giant public sector wage bill.

After the Gulf aid dried up due to political disagreements with Saudi Arabia, Egypt was forced to turn to the IMF.

Egypt and the IMF

Egypt had already been negotiating with the IMF for a loan in 2011 under the leadership of the Supreme Council of the Armed Forces (SCAF), and then again in 2013 when the Muslim Brotherhood came to power, but no consensus was ever reached, since both of these regimes were afraid of the social repercussions and political unrest that they might face if the austerity measures were implemented.

These negotiations were for IMF packages amounting to ca. $3 billion, a relatively small amount, compared to the current $12 billion deal. They were also significantly smaller than the aid packages provided by the Gulf nations in 2013, who had little interest in how Egypt’s government spent the money, let alone demand specific economic reforms in return.

The fear that these governments, and indeed the current one, have of implementing a deal with the IMF stems from a long history of distrust among large segments of Egyptian society, who view it as a form of colonization by the West, as Egypt becomes indefinitely reliant and dependant on its creditors. This debt and subsequent loss of decision-making freedom is considered by many a loss of sovereignty.

When popular President Anwar al Sadat attempted to cut bread subsidies in the 1970s, wide riots erupted by the poor and middle class, who targeted symbols of wealth and power, forcing him to reverse his decision. That the government is moving forward with the IMF loan and meeting its conditions, despite the possible repercussions among the populace, indicates that this deal really did represent a last resort for the regime.

The Deal in Detail

The IMF is a multilateral organization whose goal is to provide countries that are facing economic downturns with the financial support that will give them the safety buffer to enact economic reforms. Usually, a set of conditions is negotiated with the countries first before the aid is released in several disbursements. Each disbursement (‘tranche’) is only released after the successful implementation of the desired reforms. If the country fails to do so, the IMF might suspend the aid and cancel the program, or renegotiate the terms of the deal.

On August 11, 2016, the IMF announced that it had “reached a staff-level agreement with authorities in Egypt for a three-year Extended Fund Facility (EFF) in the amount of US$12 billion. This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider Egypt’s request in the coming weeks.” This approval was conditional on Egypt successfully implementing several reforms, without ‘backing out’ or experiencing a public backlash. In the following two months, the government took several unprecedented steps to ensure that the IMF deal does not fall through:

(1) The government of Egypt (GoE) cut a large portion of its fuel subsidies, particularly the ones targeted to the rich, with the goal of promoting labour-intensive industries, and ‘freeing up resources that can be spent on priority areas such as health, education, research and development, and social protection.’11 Gas prices increased by an average of 42%.

(2) Subsidies on household electricity were cut.

(3) The price of sugar for ration card holders increased by 40%, partially due to the increasing cost of exports, and partially due to the lifting of subsidies. This has mainly affected the poor and middle class.

(4) A three-year freeze on taxing capital gains on stocks was announced, to promote FDI and job creation.

(5) The GoE announced that an unspecified number of state-owned companies would be partially privatized, to strengthen the private sector and promote growth.

(6) More than $6 billion in bilateral loans from other countries and multilaterals (Saudi Arabia, the UAE, the African Development Bank, the World Bank, international sovereign bond issuance) was aggregated. This was a condition set by the IMF to secure the loan.

(7) The GoE also introduced tax-reform in the form of a Value Added Tax (VAT) for the first time in Egypt’s history. This has led to an increase in the cost of a countless number of goods, although parliament made exemptions for some staple foods consumed by the poor.

(8) Finally, and most importantly, the GoE succeeded in implementing a free float of the Egyptian pound in early November, which the IMF calls ‘a flexible exchange rate regime’. This has led to the currency depreciating by more than 50% against the US Dollar and greatly reducing imports. The aim is to eventually make exports and tourism more competitive, however, it has also led to a currency crisis where middle class Egyptians are attempting to buy US Dollars off the black market, in order to protect their savings. The GoE also set tight limits on credit cards and withdrawing foreign currencies, in order to keep the devaluation of the pound under relative control— the currency fluctuations have yet to completely balance out.

After the “success” of the devaluation (there was limited public outrage—protests were quickly silenced), the IMF promptly announced the acceptance of the loan program and the transfer of the first tranche to the GoE.

In an effort to learn from past mistakes, the IMF emphasized as one of its conditions the need to implement such reforms, while preserving and strengthening social protection programs for the country’s poor. The GoE promised to direct about 1% of GDP from fiscal savings towards “additional food subsidies and cash transfers to the elderly and poor families. Resources for social programs such as school meals, subsidies for infant milk and children’s medicine, and vocational training for young people will also be preserved, and in the case of free school meals, greatly increased.”

Additional conditions to be implemented in the future include legislative reforms, such as facilitating access to finance for small and medium-sized enterprises and streamlining industrial licensing, as well as further cuts to energy subsidies, government spending and government bureaucracy.

When the deal was reached on November 8th, the IMF announced on their website the ultimate goal of the loan: “The EFF supports the authorities’ comprehensive economic reform program to restore macroeconomic stability and to support strong, sustainable and job-rich growth. The program, once approved by the Executive Board, aims to improve the functioning of the foreign exchange markets, bring down the budget deficit and government debt, and to raise growth and create jobs, especially for women and young people. It also aims to strengthen the social safety net to protect the vulnerable groups during the process of adjustment.”

Public Backlash and Criticism 

The IMF deal has received strong coverage in Egypt. On one hand, state media praised the plan and hailed it as a necessary measure that will pull Egypt out of the dark tunnel. On the other hand, the deal has received heavy criticism from leftist and liberal groups and, obviously, the banned Muslim Brotherhood. In reality, though, the criticism has often been ideological and rarely delved into the the details of the loan deal.

Public opinion in Egypt often regards the IMF as an organization whose main priority is not to spur development and save troubled economies, but rather to be a lender, whose main purpose is to protect the interests of its creditors, namely the foreign ministries of the leading economies in the world, and the lobbies that direct them. Under the banner of ‘liberalization’, the short-term needs of creditors are said to often be prioritized over the long-term goals of the people living in the economy.

The IMF’s website itself states that its goal is ‘to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.’ However, it is widely believed that this emphasis on balancing books and stabilizing exchange rates comes with a high cost for the middle and lower class.

This was obvious during the last reform program, which was implemented around the turn of the millennium. Even though GDP growth was satisfying, the average Egyptian only got poorer. Under the IMF’s guidance, the GoE implemented a rigid inflation targeting policy, while fiscal policy was regarded as subordinate. Accordingly, the main goal of the program was stabilization, with the hope that the by-products of this stabilization would be higher growth, higher employment and better wages. However, the Egyptian example and even economic theory show that this is not true.

In Egypt, the 1996 privatization program led to disastrous sales to public banks and regime cronies and a quick deterioration of the living standards of most Egyptians. In 2004, the top tax rate was cut from 42% to 20%, leaving the richest Egyptians paying as much in taxes as workers.

In Greece, who received a similar but much larger (€110 billion) bailout deal, austerity measures were imposed within a straight jacket that “precluded exchange rate depreciation or the use of an independent monetary policy as a policy offset to the adverse impact of budget belt-tightening on aggregate demand”. The insistence on achieving a budget surplus impeded economic growth and recovery. The IMF later admitted that it significantly underestimated the size of Greece’s fiscal multipliers.

In 2008, Indian economist Montek Singh Ahluwalia, who called for less government control and a larger role for the private sector, said: “The international financial institutions, the IMF in particular, have tended to see public investment as a short-term stabilization issue, and failed to grasp its long-term growth consequences. If low-income countries are stuck in a low-level equilibrium, then putting constraints on their infrastructure spending may ensure they never take off.”

It can be argued that the IMF’s reform program to liberalize the Egyptian economy in the 1990s and early 2000s even failed by neoliberal standards. The structural issues that faced Egypt, such as its inefficient industry and agricultural sector, over-reliance on tourism and Suez Canal for foreign currency, failing education, healthcare systems and widespread corruption, are all problems that were never addressed and are still plaguing the country today.

Next Steps 

On April 15th, 2016 at the IMF/World Bank meetings in Washington, the IMF Managing Director, Dominique Strauss-Kahn, admitted that the organization indeed must do a better job of linking its abstract economic and financial indicators with ‘what is really important to the people in the street’ and to address the problems of high unemployment and growing income inequality.

It is clear that without the deal, Egypt’s economy could have very likely ground to a complete halt, with the lack of production increasing prices, and the country’s credit rating and FDI consistently falling. Bankruptcy was a real possibility and some of the moves were long overdue, but structural issues with the economy urgently needed to be resolved, and still do. There have been encouraging signs, as FDI has significantly increased since the reforms were implemented and the currency has been relatively stable.

However, the deal must protect the lower and middle class from the extreme surge in prices due to inflation. The IMF has already emphasized the importance of following a “rights-based approach” to development by building a strong social safety net that will protect the country’s most underprivileged from the looming austerity measures. However, dedicating only 1% of the fiscal savings to food subsidies is far from enough, especially as that will leave the middle class with the brunt of the pain. Bilateral funding from the World Bank and the EBRD should be used to support the middle class and to invest in health care, education and to close the skills gap, without which the workforce will never have the skills necessary to make the jump up to industrialization.

Egypt must be allowed the freedom to temporarily run relatively high fiscal deficits and higher rates of inflation, counter to the conventional IMF macroeconomic policy mix, particularly in the case of political shocks, natural disasters or global economic downturns. The government should have the policy space to use a wider range of alternative fiscal, monetary, financial and trade policies, that are not part of the IMF policy kit, even if that includes scaling up public investment, providing a wide safety net or implementing protectionist measures to support certain industries, if that is deemed necessary. These policies were implemented by all developed nations at one point or another to grow and protect their industries.

The country must also take a capacity building approach by developing more effective legal frameworks, promoting transparency, cracking down on systematic corruption and improving institutional development. Such an approach also entails strengthening financial infrastructure to enhance credit information and creditor rights and to improve collateral regimes. This must be done to increase the number of financial services and promote more competition among banks and investment firms.

Finally, other factors, such as the security situation in Sinai and the return of tourism will be decisive for the success of the loan. Egypt urgently needs to gradually move towards a more representative democracy, in order to reduce the current tension within society. Activating public participation in executing the economic reformation program and thereby gaining public approval will be essential in avoiding renewed unrest.

There has been some pressure by the IMF on the Egyptian government to increase its fuel subsidy cuts and reluctance by the latter to do so. For now, however, it is likely that the IMF will give the go-ahead for the second tranche. The IMF’s managing director, Christine Lagarde, confirmed last month that Egypt was making good progress in the loan programme. She added that the currency is likely to stabilize after months of fluctuation and praised the government for its focus on the Egyptian people and the most vulnerable segments of society.



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