IMF policies designed for short-term relief will have adverse long-term effects: ECESR

Adel M. Fakhry
11 Min Read

In light of the upcoming winter meetings between the IMF and the World Bank, Daily News Egypt has obtained a research report published by the Egyptian Centre for Economic and Social Rights (ECESR) that questions the International Monetary Fund (IMF) and the World Bank’s policies that are attached to their loans. Interviews were also conducted with chartered financial analysts to discover their perspectives on the matter.

Egypt’s experience with the IMF’s programmes and other international banks in the 1990s proved to be somewhat effective in the short- and medium-term; but in the long-run, the consequences of borrowing from the IMF, to this day, are still manifesting the adverse effects of implementing neoliberal policies, according to research conducted by the ECESR.

Since Egypt moved towards a free economy in the 1970s, several Egyptian governments over the course of history have tried to disassemble the support system and social safety net, the research said. In 1991, Egypt was granted a $562m loan from the IMF, the World Bank, the African Development Bank, and other international financial institutions on the condition that Egypt would accept stabilisation and structural adjustment policies along with the loans.

This attempt at disassembly is reoccurring with President Abdel Fattah Al-Sisi as it did with former president Anwar Al-Sadat’s government—trying to take loans from the IMF and the World Bank in an attempt to abandon its social responsibilities, ECESR said. If successful, these attempts will clear the government’s responsibility towards public opinion, the centre added, so that when public opinion shows dissent and looks for someone to put the blame on, they wouldn’t find anyone but the lenders.

“The government was responsible for the international financial cartel, led by the IMF, coming with these policies that abandon the Egyptian citizen to fix the financial situation in the short-term,” ECESR said.

One of these policies was the liberalisation of external trade, the lifting of restrictions on pricing, switching to a floating exchange rate system, reducing the subsidy bill (especially for the energy sector), and reducing subsidies on fertilisers and pesticides by half.

These policies also included the adoption of a sales tax, the founding of a programme for progressive privatisation of public companies, and establishing the social fund for development which, in the end, showed how ineffective it was at protecting the underprivileged.

Statistics cited in the research paper showed that stabilisation and structural adjustment policies have not improved the balance of trade, which abused hard currency in 1994—Egypt’s imports increased by 4.3% in comparison to 1991, and exports decreased by 11.4%, where the balance of trade deficit increased to 47.3%.

“During this period, the IMF said the implemented policies are successful and have helped put the Egyptian economy in a stable position by which it can achieve high rates of economic growth,” the research said.

This is true, as the statistics cited showed a decline in the poverty level to 16.7% in 2002—in the short- and medium-term, that is. In the long term, the poverty level rose to exceed 27.8% in 2016.

“The IMF policies are meant for short-term relief, but they will have adverse effects in the long term,” the research added.

These policies have not fixed any of the problems which led to Egypt’s current economic crisis, ECESR said, but it has increased its number by enforcing the application of a neoliberal model for all countries involved with the IMF, while not factoring in the different economies of the countries.

It is fair to assume that the IMF is currently leading Egypt in the same direction as the policies of the 1990s, which, in the short–term, will lead to the recovery of the foreign reserve after the government attempts to float the Egyptian pound several times, ECESR added.

According to ECESR, there are no expectations that the current IMF policies will help to decrease the spiking unemployment rates and high levels of poverty, and it is not foreseen that any of the problems that contribute to their existence will be resolved.

The factors that led to the current economic crisis in Egypt are the same factors that existed in the 1980s, resulting from poor management of the first and secondary sectors and the instability of foreign currency sources.

The report additionally mentioned the government’s inability to increase its revenues through appropriate tax rates. In the past two decades, government revenues from taxes have been decreasing against the GDP—the value of tax revenues to GDP is expected to be less than 13% this year.

The ECESR says that this inability is not down to the ineffectiveness tax collection authorities—as the government says—but rather the government’s choice to adopt policies that decrease government spending on social programmes. If the government decreases taxes, it would deprive itself of the necessary sources to fund such programmes.

The research suggested that if the government is truly attempting economic reform it should:

  1. Abandon the IMF’s policies and head in the direction of applying and developing an economic programme built upon developing the first and secondary sectors, while keeping in mind strategic trade theories as a path to decrease rates of unemployment and find different sources of foreign currencies.
  2. As for the current need for hard currency, Egypt can take advantage of the current global recession to take loans from international finance markets, which do not impose regulations or restrictions like the IMF.
  3. The taxation system must be more fair and just through the application of progressive taxes, a reduction in the dependence on consumption taxes, and the creation of a social safety net which attends to the needs of different demographics.

These steps are crucial to avoid more calls for a rescue package when 2041 comes around.

On the other hand, it is expected that these policies will help to reduce the budget deficit by decreasing government salaries and subsidy programmes, the research added.

Although stabilisation and structural adjustment policies did help to reduce inflation in the 1990s, ECESR said, it is not possible for this will be repeated again as there are a lot of procedures that act as a catalyst for inflation. In the best-case scenario, the IMF policies will help to curb inflation from rising too high.

“Additionally, economic growth rates will recover slightly in the short-term, though this will eventually cease due to the decline in consumption and increase in prices,” ECESR said.

Hany Genena, a chartered financial analyst and head of both the research and equities strategies at Beltone Securities Brokerage S.A.E
Hany Genena, a chartered financial analyst and head of both the research and equities strategies at Beltone Securities Brokerage S.A.E

Hany Genena, a chartered financial analyst and head of both the research and equities strategies at Beltone Securities Brokerage S.A.E, said that the true definition of the policies followed by the IMF is: “to live according to your resources until you are able to produce more and have more sources of funding.”

Genena also said that the fund’s prerequisite for an economic reform programme is one of the better parts of being granted the IMF loan. He added that Egypt has lost the majority of its foreign reserves and the IMF is here to solve this problem—Egypt should not be requesting loans again after the IMF loan is granted.

A lot of money should be spent on the main infrastructure of the country because it is what has led this country to face resource shortages, Genena said.

Abou Bakr Emam, head of the research division at Prime Holding, said that the loan will have a positive impact as the IMF asks countries to limit internal loans, limit expenses, and increase revenues. “Many people, myself included, see that the IMF loan as currently the only option Egypt has because it forces the government to develop an economic reform programme as a prerequisite for the loan to be granted—unlike loans from GCC countries,” he added.

Additionally, Emam said, being granted the IMF loan gives foreign direct investors the confirmation that Egypt is safe for their investments, and so gives the country the chance to acquire more FDI that could help revive its economy.

Abou Bakr Emam, head of the research division at Prime Holding
Abou Bakr Emam, head of the research division at Prime Holding

With the IMF being granted to Egypt there will be an expected floatation of the Egyptian market soon. Emam pointed out that this will help enhance the tourism sector revenues as it will provide tourists with a cheaper alternative compared to other countries. This will also help Egypt increase its exports and hopefully revive its economy.

Commenting on the long-term consequences of the policies attached to the loan, Emam said that, during Mubarak’s regime in the 1990s, the country was revived using only one tranche of the loan; Egypt did not need the rest of the IMF loan tranches.

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