Trapped in a cage of debt: A look at North Africa's complicated relationship with the IMFhttps://en.majalla.com/node/298391/business-economy/trapped-cage-debt-look-north-africas-complicated-relationship-imf
The experiences of North African countries with the International Monetary Fund (IMF) have often culminated in a failure to achieve desired results. While some countries are haunted by the spectre of bankruptcy, others are threatened by having to reintroduce structural reforms.
Egypt, Tunisia, and Morocco are the top Arab IMF borrowers, with a total debt estimated at $20.5bn, according to recent data released on August 25, 2023.
This includes Egypt’s $16.68bn, Morocco’s $1.9bn and Tunisia’s $1.83bn.
Meanwhile, Algeria’s last loan from the fund was in the 1990s. The country has been steadfast in its refusal to borrow again, despite any crises it faces, as president Abdelmadjid Tebboune argues that foreign borrowing undermines national sovereignty.
Libya, until the final moments of late Colonel Muammar Gaddafi’s rule, was among the IMF’s creditor member states. In fact, it remained a global lender until the end of March 2011, according to a report issued by the IMF in August of that year.
It is also the only country in North Africa that has remained free of any IMF programmes since 2013. The institution only resumed its monitoring of the country during the first half of this year, after a decade of absence, citing the country’s armed conflict.
This is unlike the two other Arab Spring countries, Egypt and Tunisia, whose return to IMF borrowing was the first manifestation of major changes brought about by their respective revolutions.
Egypt’s ongoing struggle
Egypt’s experience with the IMF differs from other North African countries. Its heavy debt portfolio makes it second in the world on the list of IMF borrowers, after only Argentina.
Egypt has benefited from various financing programmes with the fund, signing seven agreements over the decades.
The first, worth $186mn, came under late President Anwar Sadat as part of his economic stabilisation programme (1977-1981). The latest was signed in October 2022, under the “extended credit facility,” amounting to $3bn.
Egypt’s relationship with the IMF is a fluctuating one. It started with Cairo obtaining membership with the fund in 1945. Over the past 78 years, the country has been met with a combination of strictness, rejection, and nonchalance.
Egypt's relationship with the IMF is a fluctuating one. It started with Cairo obtaining membership with the fund in 1945. Over the past 78 years, the country has been met with a combination of strictness, rejection, and nonchalance.
After a "successful" 2016 agreement, Cairo received the utmost admiration and praise from senior fund officials. But subsequent developments showed that this success was only relative, if not non-existent, given the magnitude of the loan, which is the highest in Egypt's history ($12bn) and the disappointing result.
The loan failed to achieve IMF's goals of "addressing macroeconomic vulnerabilities and promoting inclusive growth and job creation."
The 2016 deal may have been a missed opportunity for Egypt's deeply troubled economy. During this period, Cairo was able to mobilise significant external resources (more than $10bn) to finance its economic recovery programme and engage in implementing some of the reforms included in the loan agreement.
Am slightly stunned at the negativity at the IMF/WB spring meetings on Egypt. People are frustrated the Pound has once again been repegged. That's not optimal, but Egypt's Pound is basically back to its 2016 low. Let's give Egypt's policy makers the benefit of the doubt please... pic.twitter.com/pIrv0qeGpx
However, the results ultimately showed shortcomings within the policies adopted, and the country had to go back to the IMF for two other types of funding in 2020. The first, worth $2.77bn, came under the Rapid Financing Instrument Programme.
The second was a "confirmation agreement" as part of a $5.2bn emergency assistance programme to support the country's response to the fallout from the Covid-19 pandemic. Another agreement was signed late last year.
Egypt has also requested $1.3bn in new IMF funding before the end of 2023, as part of the IMF's Resilience and Sustainability Trust that aims to support some 70 countries suffering from foreign exchange scarcity.
In general, assessments of Egypt's ongoing engagement with the IMF appear to be consistent.
The country's 1991 agreement, worth $375mn (and reached under the late President Hosni Mubarak) stands out as a potential high point in the country's history of crises. Despite notable social repercussions, the agreement is considered a landmark event, especially when compared to the country having to resort to the Paris Club on two separate occasions.
The terms of this agreement led to several positive outcomes. These included cutting the budget deficit by rationalising expenses, phasing out subsidies, reducing the wage burden, decreasing public sector expenditure, reforming the banking sector, and enacting privatisation measures through the Business Sector Law.
This, in addition to adopting effective tax policy reforms, the liberalisation of foreign trade, easing customs restrictions and introducing laws to stimulate foreign investment.
The agreement was seen as successful by many, thanks to the strength of the Mubarak regime and the country's glaring need for stability after wars, economic shocks, and financial hardships.
However, others found that the agreement would have been insufficient were it not for the regime's political pragmatism at the time. Its decision to engage in the war on Iraq opened doors to financial support, as members of the Paris Club agreed to reduce its total external debt by half. As a result, its debt fell from 106.9% of the GDP in 1990 to about 27% in 2001.
Tunisa's stop and start
Around the same period, in the early 1990s, Tunisia – the second Arab country in the list of biggest IMF borrowers – recorded a quantum leap in its economy, thanks to what liberal experts consider the success of its structural reform programme.
At the time, the country's regime – under late President Zine El Abidine Ben Ali – was considered to adhere quite well to the IMF's recommendations.
Neighbouring countries Morocco and Algeria were in similar situations, leading the region's regimes (barring Libya) to use the IMF as a saviour. This was a result of serious fiscal deficits, the collapse of foreign currency reserves, and a record rise in external debt.
As for Tunisia, the fund had become its long-standing financing partner, thanks to strategic relations between late leader Habib Bourguiba and America.
Tunisia's prime minister at the time, the late Rachid Sfar, backed what is considered the most important – yet most dangerous and socially brutal – agreement, finalised in 1986 as part of a structural reform programme.
The dealings between Tunisia and the IMF were rooted and sustainable. They continued uninterrupted from 1964 until 1991. For two decades after that, however, Tunisia managed to not borrow a single dollar from the IMF. It broke the spell by knocking on the fund's door again in 2013.
By 1984, the IMF stipulated that reforms should commence, including the lifting of subsidies, which in turn triggered the Tunisian "bread riots". These violent demonstrations protested rising bread prices, thanks to IMF's austerity programme.
By 1984, the IMF stipulated that reforms should commence ... which in turn triggered the Tunisian "bread riots". These violent demonstrations protested rising bread prices, thanks to IMF's austerity programme.
Two years later, Tunisia signed an agreement that brought with it more painful austerity policies: cutting of public sector employment, raised interest rates, capped domestic borrowing, reduced public expenditures, a rise of indirect taxes, stimulation of foreign investment, and the privatisation of 560 state-owned companies.
The agreement helped the country to avoid the worst, but it also ushered in a so-called "rule of families" era, according to a World Bank report.
In 2019, a public body in charge of transitional justice penned a letter to the IMF; they demanded an apology and financial compensation for victims of policies that stemmed from the 1991 agreement. They also called for the cancellation of Tunisia's debts, which they considered illegitimate, as "they were used for the benefit of the ruling families."
Since 2011, Tunisia has concluded three funding agreements with the IMF – one in 2013, one in 2016, and one in 2020, to counter the fallout from Covid-19.
But Tunisia's experience with the IMF in the past decade has differed largely to experiences spanning from the late 1960s to the early 1990s.
Reforms haven't been implemented due to political instability and incompetence of successive governments.
The situation worsened after the country entered a transitional phase on July 25, 2021, which led to the disruption of a new $1.9bn deal, due to President Kais Saied's rejection of so-called dictates, as well as his fear of a repeat of the 1984 bread revolution.
Algeria and Morocco
Tunisia's two unfriendly neighbours, Algeria and Morocco, have a different relationship with the IMF. The two countries underwent similar difficulties when implementing structural reform programmes in the late 1980s and early 1990s.
Morocco, since 2012, has benefited from four successive agreements under the precautionary and liquidity line, each worth about $3bn. The last agreement was in April under a flexible credit line of $5bn.
But Algeria has learned from past experiences. It's both the largest economy in the Maghreb and the last country in the region to join the IMF in 1963.
Algeria's current political leadership refuses to revive the habit of borrowing from the IMF, no matter what challenges it's up against.
President Tebboune says this is, first and foremost, a way to "protect national sovereignty," and secondly, a deterrent to reliving the 1994 agreement.
Algeria's current political leadership refuses to revive the habit of borrowing from the IMF, no matter what challenges it's up against. President Tebboune says this is, first and foremost, a way to "protect national sovereignty.
Tebboune's comments came during the Covid-19 crisis. To manage it, Algerian authorities adopted an austerity policy by cutting their budget in half.
Unlike North African countries that experienced the bitter 1990s through "structural reforms," the relationship between the IMF and Algeria turned into a peer-to-peer one.
There was a huge recovery in the country's foreign currency reserves, which presented the possibility of searching for what Finance Minister Karim Judy called – in Parliament in 2012 – "influence within international financial institutions," while defending the government's decision to lend the IMF $5bn.
In 2018, however, the governor of the Central Bank of Algeria denied that this amount had been transferred to the IMF, stressing that Algeria, like 60 other countries, had committed to putting $5bn at the fund's disposal in the event of exceptional global circumstances.
Meanwhile, Morocco, which joined the IMF in 1958, has continued to borrow heavily from the IMF. Its relationship with the institution is a more flexible one, due to its political stability.
Its position is relatively strong, especially when compared to the "Arab Spring trio" of Egypt, Tunisia, and Libya. It also fares well when compared to Algeria, which underwent changes after popular protests ended President Bouteflika's rule.
Morocco was in debt default in 1983. This failure forced it to engage in a structural adjustment programme that ran until 1993, to counter severe financial imbalances, a budget deficit of 12% of the GDP in 1983, and a rise in public debt to 82% of the GDP, while foreign currency reserves barely covered two days of supply.
Libya... the exception
Libya stands out as an exception among North African countries. It has taken zero loans from the IMF.
Libya, which became a member of the fund in 1958, strengthened its share in 2012 thanks to a decision of the transitional government led by Abdurrahim El-Keib, who announced that the country's 1,121,000 drawing right units (equivalent to $1,735,000) would be raised to 1,573,000 units (about $2,430,000).
Libya stands out as an exception among North African countries. It has taken zero loans from the IMF.
Libya deals with the IMF with "pride" and enjoys relative freedom because of it.
A professor of economics at the University of Benghazi, Dr Attia Al-Mahdi Al-Fitouri, told the media: "Libya has never received loans from the fund, doesn't need them, and therefore can violate the fund's rules and guidelines, unlike countries in need of loans, which are required to impose tough austerity policies on their citizens."
North African countries have different priorities when it comes to their dealings with the IMF.
For one, Algeria and Libya aren't interested in the IMF directly interfering with their policies. Their relationship with the fund is controversial, as their stances vary from questioning its reports to simply considering it a "worthless consulting office."
Morocco, on the other hand, is doing what it can to avoid going back to a structural adjustment programme. The 1980s programme brought with it widespread consequences, drawing warnings from the governor of the Moroccan Central Bank, who was finance minister at the time.
Meanwhile, Egypt seeks more flexibility from the IMF. The Carnegie Middle East Centre stated, in a report issued on July 6, 2023, that the fund has been dealing with Egypt with unusual rigidity because of the country's failure to implement reforms, especially the liberalisation of the pound.
Egypt's top priority is to secure repayment of $3.86bn in short-term debt and $11.38bn in long-term debt by the end of the year.
Defaulting is also a concern for Tunisia, which has yet to reach an agreement with the IMF.
Today, Tunisia and Egypt represent two chronic cases for the IMF.
Between them, there have been countless failed and fruitless attempts to implement "reform" programmes over the last 10 years, which have only deepened their economic, financial, and social crises.