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One of the most serious consequences of the 2011 revolutions in the Middle East and North Africa has been the impact of political instability on the regional economy. Egypt has surely felt the fullest force of the blow and now requires a lifeline from the International Monetary Fund (IMF).
The uprisings that resulted in the ouster of the country’s former president, Hosni Mubarak, also resulted in a 3 percent drop in GDP growth. Foreign Direct Investment, previously a success story compared to regional standards, has been reduced to a trickle over the last 12 months, from $11bn in 2007 to less than $2bn last year. Significantly, Egypt’s foreign reserves are also on a downward spiral, and the country is at serious risk of running out of reserves completely if it does not receive foreign aid.
[inset_left]An IMF loan would provide important financial support on a number of fronts.[/inset_left]Egypt’s transitional government is well aware that the economy has become a sinking ship. However, rather than coming together to propose sustainable solutions to what are very serious economic pressures, the various political agendas at play in the context of the transition have stood in the way of sober fiscal policies. Rather than tightening its belt, the military council approved a 14.7 percent increase in the national budget for the current fiscal year. True, this was intended to bolster social programs. Yet the majority of the funds will be allocated to untargeted food and fuel subsidies that tend to benefit Egypt’s wealthy class rather than those actually in need.
The constant change in finance ministers, each with a different solution for the withering economy, has also inhibited a more cohesive approach and allowed fiscal mismanagement to continue unchecked.
Compounding these issues, last June the interim government bowed to political pressure and rejected an IMF stand-by facility worth $3bn. The loan, a veritable lifeline for the struggling economy, was rejected on the basis that the interim government did not have the legal authority to commit Egypt to the loan conditions. It is highly likely that the IMF’s earlier funding of the Mubarak government contributed to growing mistrust.
Faced with a worsening budgetary and liquidity crisis, the transitional government has back-peddled and last week invited the IMF for talks with a view towards accepting the $3.2bn loan. Although this decision is certainly a necessary step in the right direction, in and of itself IMF support is insufficient to solve Egypt’s problems. Given that Egypt’s economic woes ultimately are political, Egypt’s economy is still in deep water.
Undoubtedly, an IMF loan would provide important financial support on a number of fronts. It would ensure that the government remains solvent, and would reduce the estimated $23.7bn budget shortage Egypt will face six months from now. A loan would help restore investor confidence by improving its foreign reserves and demonstrating that the government is committed to implementing responsible economic policies.
That said, the true value of the IMF loan is perhaps best illustrated by considering the consequences if Egypt rejected this lifeline a second time. Without IMF support, Egypt’s stagnant economy would become moribund, unemployment would increase at a time when the labor force is highly sensitive to hardship, and the worsened economic forecast would certainly increase political instability, which in turn would further weaken the economy. The IMF loan is one of the very few options available to Egypt that will allow the interim government to address one of the protestors’ key demands—improved economic opportunities.
The loan in itself is not a panacea that will address all of Egypt’s economic woes. Indeed, analysts across the board indicate it is not enough. According to Royal Bank of Scotland’s Raza Agha, Egypt will need more funding to improve investor confidence. In an interview with the Financial Times, Agha estimated Egypt requires between $10bn and $12bn to return the economy to conditions at the end of 2010—hardly a time of prosperity given that economic grievances were at the heart of the revolution.
Despite the gravity of Egypt’s economic problems, it is far from certain that agreement can be reached between the government and IMF. The IMF is concerned that the terms of any agreement are acceptable to successor governments, and so insists that any deal must have broad political support. This condition has already faced a number of challenges. The Freedom and Justice Party, the majority party in Parliament, have expressed their support for the loan, provided there are no conditions attached.
IMF conditions notwithstanding, the loan continues to face political opposition. At a conference last Saturday, the Popular Campaign to Drop Egypt’s Debt demanded the interim government leave the decision on the loan to the incoming parliament. Although this demand is a reasonable measure for ensuring the legitimacy of the loan to future governments, the conference also voiced general apprehension towards the further acquisition of debt by Egypt. The main grievance voiced at the conference related to the lack of transparency regarding decision-making in Egypt’s economic management. One attendee stated, “The transitional authority purposely uses the scarcely announced financial data to serve its own interests by scaring the public from the revolution at one time, or giving a rosy picture of the economy at another.”
The message of the campaign is clear. Egypt’s economy is inextricably linked to Egypt’s political future, and Egyptians will continue to demand participatory roles in every aspect of Egypt’s governance, including its economy. This does not change Egypt’s urgent need for the IMF loan. As such, political leaders will have to rely on transparent and open dialogue with Egyptian civil society to convince Egyptians that the national economy needs the IMF’s lifeline. Only through collaboration across the political spectrum can Egypt’s sinking economy be saved.
