IMF loan comes with policies that will hurt many Egyptians

Posted Sep 4, 2016 by Ken Hanly
The Egyptian economy has done poorly during the presidency of Abdel el-Sisi. The IMF is coming to the rescue with a three year loan package of $12 billion.
International Monetary Fund (IMF) Managing-Director Christine Lagarde (C) arrives to take part in a ...
International Monetary Fund (IMF) Managing-Director Christine Lagarde (C) arrives to take part in a meeting of G20 finance ministers, in Chengdu, China's south-western Sichuan province, on July 23, 2016
Fred Dufour, AFP
A Bloomberg article suggests that the loan is most likely to be good money thrown after bad. The loan is expected to be bolstered by further funds from Arab Gulf States. During the last three years, Egypt has received about $50 billion from Gulf supporters but the economy remains in the doldrums. The tourism industry has more or less collapsed and there is a lack of foreign investment. The amount of foreign currency just to supply imported basic needs for Egyptians now exceeds $80 billion.
The official jobless rate in Egypt is around 13 percent, but the rate for young people is more than double that. The annual trade deficit is about 7 percent of GDP while the budget deficit is about 12 percent. Tunisia with similar problems has a budget deficit of just 4.4 percent.
While the collapse of the tourist industry contributes to Egypt's economic woes, the economic policies of the government have also contributed. The government likes to spend huge amounts on mega-projects often of dubious worth instead of spending on basic infrastructure. El-Sisi's dream of a new capital at a cost of $45 billion appears to have been shelved fortunately. While the government started programs of cuts to fuel and agricultural subsidies, to decrease red tape, and raise taxes, they were all dropped. A plan to let the Egyptian pound depreciate was also dropped but inflation has increased.
The IMF is now demanding that el-Sisi devalue the pound and impose a value-added tax (VAT). Such measures will increase costs to consumers. Already a quarter of the 90 million Egyptians live in poverty. Almost the same percentage are illiterate. With a growing population Egypt could soon run out of water, especially as it employs some agricultural practices wasteful of water. The education system is totally inadequate and underfunded. Even el-Sisi admitted in 2014 that the nation needed 30,000 new teachers. However, money was not budgeted to hire them. Bloomberg concludes: Egypt should invest in simple infrastructure such as roads, schools and water-supply systems; make it easier for small and medium-sized business to get bank loans; and break up the military-industrial monopolies in everything from washing machines to olive oil. It also needs to end the crackdown on civil society, and move toward a free and fair presidential election. Much of the economy is controlled by the army. El-Sisi is not about to allow any political freedoms that might threaten his power and that of the armed forces.
The IMF has had a long history of negotiations with Egypt after the 2011 elections but there was opposition to conditions imposed so the negotiations were shelved. Under the Mohamed Morsi regime the negotiations were renewed.
A package of $4.7 billion was negotiated. Eventually the IMF backed out of negotiations because it said there was lack of political support for the deal. The IMF demands a sales taxk of 12.5 percent that was not acceptable to the Morsi government. However, the new loan involves even more demands. There must be an end to subsidies, a VAT tax, reduction of governmental jobs, and devaluation of the Egyptian pound. All of this will have a devastating effect on many Egyptians. Most Egyptians will not be able to afford the increased costs. 95 percent of Egyptians earn less than $14 per day and more than 25 percent earn less than $1.50 per day.
The economy under Morsi made modest gains with inflation hovering around 6.9 percent. Three years into the rule of el-Sisi after Morsi was overthrown, inflation is at about 14 percent and the Egyptian pound has lost half its value. The IMF demands it lose even more. Debt servicing is already taking up 31.5 percent of the budget but with additional debt this can only climb.
Much of the loan money will simply flow into the pockets of corrupt politicians and others. The government's own auditor estimated that over four years an estimated $67 billion was lost to corruption. His reward for revealing this was to be sacked and charged with harming Egypt's image. The regime seems not to have a clear vision of how to progress economically but resorts to mega projects it thinks will have positive propaganda value.
The brutality of the regime breeds terrorism which in turn makes attracting foreign capital difficult because of the security situation. The austerity policies associated with the IMF loan will cause even more social unrest. As an article in the Economist points out the ranks of young and embittered Egyptians without jobs are swelling. Options are emigration or, for a few, jihad. This sets the stage for another social explosion.