Egypt: the IMF loan

Today, especially after a civilian has been elected president in Egypt, the deal’s chances of being sealed are even greater

Tarek Amr
20 August 2012

“Development is about transforming the lives of people, not just transforming economies”,  Joseph E. Stiglitz, in his book Making Globalization Work.

In June 2011, four months after the Egyptian revolution toppled the country’s thirty-year old dictatorship, the Egyptian authorities reached out to the International Monetary Fund (IMF) for a three billion US dollar loan. The pledge for the loan came in the light of expected deficits in the Egyptian budget as it was then. The loan was rejected later on by the military-led government at that time, stating that debts to the IMF could impose conditions that the military rulers considered an infringement on Egyptian sovereignty.

About six months later, the loan came into view again with the worsening economy. Now, the appointment of a new government by the recently elected Muslim Brotherhood president, Mohamed Morsi, has raised further questions about the one-year-old debate on the loan and its risks.

In December 2001, Argentina’s major cities witnessed civil unrest after the government failed to contain the economic crisis that was going through its third year of recession. There were various reasons for the economic crisis there, but one of them was the large amount of borrowing made by the country's previous president. Oddly enough, the debt crisis came shortly after the IMF had been praising the country’s low inflation and adherence to the policies they had advised. Some argue that IMF recommendation to Argentina were part of the problem. When the Argentine government, following these recommendations, privatized social security, this resulted in a severe reduction in revenue. The fall even surpassed the desired reduction in expenses, and the country’s deficit got even worse. It has similarly been argued that the economic crisis in East Asia in the 1990s worsened thanks to the IMF programme there.   

Back to Egypt. The IMF has not disbursed any loan to the country since 1993, and its role is limited to policy consultation and technical assistance. The poverty rate has, however, increased in Egypt once it commenced structural adjustment according to IMF recommendations. The statistics say that one person out of five lived on less than (inflation-adjusted) $2 a day when the structural adjustment began: today that number has increased to nearly half of the population. Corruption is to blame for sure, yet the structural adjustment that included cutting government expenditures and privatization has played its part. Various experts started to question the effect of the IMF’s policy recommendations. In their defence, the IMF officials argued that conditions are meant to adjust the borrowing countries’ economic policies to overcome the problems that led them to seek financial aid in the first place. Recently, the World Bank and IMF have started to change the loan conditionality, defining it as “more focused”. Yet, those adjustments need to be taken with a pinch of salt, given that the devil is always in the detail.

The borrowing party

A loan is a two party agreement: one party lends money to the other party which borrows it. And to better understand an agreement we need to understand both parties.

Recently, during the holy month of Ramadan, people sat mesmerised in front of their TV sets, watching Ramadan soap operas and TV shows. With high TV viewership comes advertising, and it is hard not to notice that many of those advertisements are for charitable organizations.

During the last years of Mubarak’s rule, the rise of charities collecting money to build hospitals confirmed the ways in which the government was increasingly distancing itself from healthcare, and leaving it to charity. This year, charity advertisements are even more numerous. But they didn’t just stop at health any more: charities have starting collecting money for education too.

Charity is, however, not able to solve poverty problems on its own, and it is in no way an alternative to universal health coverage and government investment in public education. As Muhammad Yunus once said,  “Charity becomes a way to shrug off our responsibility. But charity is no solution to poverty”. 

Last year’s IMF official statement on the loan to Egypt stated that this money will help the country “lay the foundation for a more-inclusive economic program that encourages private sector-led growth”. They also added that the government is to reform the current system of subsidies and move to a VAT-like consumption tax.

That was in June 2011. Today, we need to read between the lines to understand how the current government will move forward with the deal and its interpretation of the conditions on the ground. Momtaz El-Saieed, the current Minister of Finance, was first appointed by the ruling Military Council and remained in his position in the new cabinet formed after Mohamed Morsi’s victory. Mr. El-Saieed warned against attempts to increase funding for various government agencies, as a recipe for disaster, given the country’s overwhelming need to tighten its belt and adhere to the state budget. We have rather good reasons to listen to his advice: El-Saieed’s curriculum vitae demonstrates he has been a Ministry employee for 40 years, during which he participated in numerous negotiations with the IMF and the World Bank. Egypt’s Finance Minister firmly blames the current economic “crisis” on the Egyptian people who, “don’t like to work, they throw trash everywhere, and want money without working”. 

Egypt has signed 36 international cooperation treaties in the period between January 2011 and July 2012, making available $5.8 billion in financing, with $4.8 billion out of the total obtained since December 2011 when Prime Minister Kamal El-Ganzouri came into power. It thus seems that El-Ganzouri and El-Saieed have no problem with debt. A big portion of the debt created during El-Ganzouri’s cabinet was used for the import of fuel and food, but not for real development projects with high social returns. Ironically, the Muslim Brotherhood officials were very critical of the budget earlier drafted by El-Saieed, yet he was kept on in the cabinet after Morsi became president, and El-Ganzouri has been appointed special advisor to the President. 

Will the deal see the light of day? 

Will the $3.2 billion IMF loan see the light? The sharp decline in Egypt’s foreign cash reserves is pushing the country to accept the loan. Add to this that international lenders normally push governments to borrow more. We have seen cases where the likes of Standard & Poor and Fitch change their sovereign credit ratings for countries after IMF deals out of trust that the programme will significantly improve the country's economic stability. Today, especially after a civilian has been elected president in Egypt, the deal’s chances of being sealed are even greater 

Will the Muslim Brotherhood (or their Salafi allies) wholeheartedly agree upon international loans, given that Islamic shari’a forbids the charging or paying of interest? In January of this year, for example, the Salafi Nour party criticized the government’s plans to borrow from international institutions. Instead, their spokesman asked for more accountability for government’s own spending before borrowing. He also called for borrowing from European banks instead, since they “lend in accordance with the Islamic Sharia”. Furthermore, shortly before the Parliament was dismantled, several Islamist MPs opposed a $200 million fund from the World Bank presented as support for the upgrading of sanitation and sewage infrastructure in four governorates in the Nile Delta and Upper Egypt. These MPs declared that interest payments qualify as usury, which is against Islamic law. 

But this doesn’t reflect Muslim Brotherhood’s stance on borrowing in general. Amr Abou Zeid, a Muslim Brotherhood official, has said that they want to begin negotiations with the IMF. He also stated that the Brotherhood would consider loans from the World Bank, and he even announced that it is possible that a bigger package will be sought from the IMF, maybe to $4.8bn. 


Poverty alongside the decline of public health and education services has caused social unrest in the country in the past decade, which finally resulted in the toppling of the regime. Although a planned economy is something from the past, the government should be ready to intervene to solve economic problems when needed. Egypt’s economic situation now is in a recession. Investors are reluctant to invest in the country: the new government should be ready to follow general economic advice for such situations by spending more and lowering taxes and interest rates. 

Instead of lowering the current flat tax rates, progressive taxes might be an option for covering the expenditure and social security programmes. The government is obliged to abide by the law and apply the minimum wage as set by the Supreme Council for Wages, yet minimum wages along with price subsidies for food, electricity and public transport should all be part of the mix discussed by economists agreeing a social safety net programme, and they should come out with the optimum options to maximize citizens’ benefits and reduce expenditure. For example: why not invest more in better public transportation instead of subsidizing fuels, especially when fuel makes the biggest portion (about 15%) of the country’s exports? Why settle on minimum wages while a progressive income tax with negative income tax might be a better option. There should be real discussions among economists about our best options and a will from the government to proceed in implementing them.

A lot of water will flow under the bridge until Egypt and the IMF reach final agreement. The debates about the loan and the risk that comes with it will no doubt be lively. These discussions should, however, focus more on the government's future development plans, budget and expenditure, opening them up for a serious debate.

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