IMF loan to Egypt's rescue, or to its peril?

On August 11 the IMF and the government of Egypt reached a staff level agreement for a $12 billion loan, provided that Egypt finds another $6 billion in external financing.

In the past week Gulf sources, including Saudi Arabia and the UAE, appear to have ponied up at least $2 billion. With some creative accounting applied to other external sources of capital, including recent announcements of project loans by the Russians and Chinese, Egypt will no doubt meet this condition.

The first tranche of $2.5 billion is to be disbursed without conditionality, whereas subsequent tranches are tied to Egypt meeting IMF requirements for economic stabilisation. Those precise conditions have yet to be made public, but are understood to include further devaluation of the Pound coupled with at least a partial flotation; increased taxation, most notably in the form of the long delayed Value Added Tax; and reductions of government expenditures on subsidies and civil service salaries.

This new IMF stabilisation package is, in Yogi Berra's immortal words, déjà vu all over again. In the 1980s and 1990s that organisation extended four loans to Egypt totaling some $1.7 billion. The Mubarak government's willingness to agree to conditionality similar to that being put forward now was testament to its then desperate financial straits.

The previous 1977 IMF loan agreement had blown up in Sadat's face the moment he announced reductions in subsidised foodstuffs, rendering IMF agreements politically untouchable for about a decade. President Sisi's support for this new loan indicates that he, like his predecessor, is desperate for funds, and willing to risk political blowback to obtain them.

As for the macroeconomic impacts of previous IMF and indeed other loans and grants to Egypt, the very fact that a new round of them is about to commence suggests that at most they bought a limited time of fiscal sustainability. They did not lead to structural adjustments of the economy that would have contributed to sustainable growth, as was recently noted by the US Congressional Research Service.

This failure was not due to the loans and grants being too parsimonious. In 1991, the US alone forgave Egypt half the $20 billion it owed Washington, with other creditors following suit. In 2013, the last year for which figures are available, Egypt was the world's largest recipient of bilateral and multilateral aid, receiving $5.5 billion from various sources.

Previous IMF loans did not lead to structural adjustments of the economy that would have contributed to sustainable growth

Egypt's track record of using foreign supplied finance to support domestic reform is abysmal, as current figures suggest. The budget deficit of 12 percent and trade deficit of 7 percent of GDP, combined with inflation and unemployment of some 14 percent and accumulated foreign reserves of not more than $16 billion, all attest to appalling mismanagement of the macro economy and failure to undertake reforms that would alleviate these financial pressures.

As with previous justifications for IMF and other subsidised loans and grants, the present one is of need generated by extraordinary circumstances, not by governmental incompetence. At present those circumstances are the collapse of tourism, downturn of exports, stagnating Suez Canal Revenues, declining foreign direct investment, accumulated foreign debt exceeding 100 percent of GDP etc.

Much of this is blamed on terrorism, and the government claims Egypt is at the forefront of the international battle against it, so is suffering collateral damage.

In reality the financial pain is self-inflicted. President Sisi's government has squandered on white elephant, showcase projects far more than the $12 billion it will receive from the IMF. The Suez Canal widening churned up almost $9 billion alone. It has generated no additional revenues and may never do so.

In 2013, the last year for which figures are available, Egypt was the world's largest recipient of bilateral and multilateral aid

Expenditures and new loans commissioned for the massive, military run irrigation project, planning for the new capital, construction by Russia of a nuclear power plant, and purchase of 24 French Rafale fighter aircraft and two French warships, amount to many more billions of dollars and similarly, pay no returns for years, if ever.

The embarrassing leak that President Sisi had ordered four French executive jets for him and his personal entourage at a cost of 300 million Euros, which came out virtually simultaneously with the announcement of the IMF agreement, combined with Sisi's speech then admonishing housewives to cut back on their consumption, reflect the disconnect between the regime and the economy.

The regime will spend whatever it likes on what it wants, while demanding that those living in the normal economy make whatever sacrifices are necessary to sustain these whimsical indulgences. 

A government that behaves in this fashion should not be supported by the IMF without far more profound, intrusive conditionality than is being imposed. That conditionality should include limits on military spending and on white elephant projects. It should require budgetary transparency generally and that regarding military expenditures specifically. It should require the military to divest its holdings in the civilian economy, a prime source of corruption and economic decay.

Egypt's track record of using foreign supplied finance to support domestic reform is abysmal

It should mandate revitalisation of the moribund regulatory system, including the Central Auditing Agency and the General Organization for Administration, both of which have been subjected to the military's control.

All of this additional conditionality should be directed at the government so as to counterbalance the sacrifices consumers are going to be asked to endure. Otherwise the potential for IMF backlash, as in 1977, is going to be substantial. And again, as in 1977, the blame would be placed not on the government, which signed the agreement precisely because it had squandered public funds and needed more, but on the IMF and those who control it.

The US is the largest single contributor to the IMF and has the greatest voting power within it. Clearly the Obama administration has supported the Sisi government's request for the loan. It has done so out of short-sighted consideration, based primarily on not having more boats rocked in the Middle East as finishing touches are being put on the Obama legacy.

Yet, the IMF agreement has more potential to rock the Egyptian boat than does the Sinai insurgency or any other imaginable form of terrorism in the country. Not being coupled with any meaningful constraints on Sisi and his fellow generals' squandering of public monies, while asking Egyptians to tighten their belt, is a recipe for political disaster.

That the Obama Administration has signed off on this approach embodied in the IMF loan is suggestive of how low its capacities for managing policy toward the Middle East have sunk. 

Robert Springborg is Visiting Professor in the Department of War Studies, King's College London, and non-resident Research Fellow of the Italian Institute of International Affairs. Until October, 2013, he was Professor of National Security Affairs at the Naval Postgraduate School and Program Manager for the Middle East for the Center for Civil-Military Relations. 

From 2002 until 2008 he held the MBI Al Jaber Chair in Middle East Studies at the School of Oriental and African Studies in London, where he also served as Director of the London Middle East Institute. Before taking up that Chair he was Director of the American Research Center in Egypt.

Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.