Why did Egypt reject IMF/WB loans?
This post has been updated below — now with feedback from the World Bank.
It's a question whose answer escapes me. Egypt is facing an economic crisis in the year ahead, even if there are some signs of recovery from the dire months immediately during and after the revolution, and has a long-running fiscal deficit problem that's only getting worse. Why is it not taking money that comes fairly cheaply (in the sense of low interest rates and not many strings attached) and that it could use for some stimulus spending to accelerate the recovery?
Egypt will not borrow from the World Bank and International Monetary Fund after revising its budget and cutting the forecast deficit, even though a loan had been agreed, Finance Minister Samir Radwan said Saturday.
The 2011/12 deficit in the first draft budget was forecast at 11 percent of gross domestic product, but was revised to 8.6 percent because of a national dialogue and the ruling army council's concerns about debt levels, the minister told Reuters.
"So we do not need to go at this stage to the Bank and the Fund," Radwan said, adding Egypt, which had borrowed from the IMF under ousted president Hosni Mubarak, still had the "best relations" with the two U.S.-based institutions.
Despite the budget revisions, the government said it still expected growth of 3.0-3.5 percent, in line with previous forecasts, which some economists said could prove optimistic.
Egypt this month agreed on a $3-billion, 12-month standby loan facility from the IMF, which Cairo had said came with more lenient terms than usually associated with such lending.
The IMF and World Bank had been among a range of foreign countries and bodies to offer funds to Egypt to help cover a big budget shortfall after the economy was plunged into turmoil by the mass protests that drove Mubarak from office on February 11.
Egypt's cabinet had approved on June 1 a budget for 2011/12 that increased spending by a quarter to create jobs and help the poor. That was revised in a new draft announced Wednesday that included raising income tax and reducing fuel subsidies.
Gulf Arab states are among those who offered support.
Radwan said Qatar had provided $500 million for budgetary support in the past week. "That is a gift," he said, when asked if there were any conditions attached to the Qatari cash.
He said Saudi Arabia had earlier offered a similar amount.
So the GCC countries are financing the budget deficit. I wonder what kinds of strings are attached to that. It's true Egypt can return to the IMF/WB at a later point — for instance for the next fiscal year (2012/13) budget, assuming it will be available under the same conditions, which is not guaranteed. Another reason not to contract new foreign debt right now might be that it's better if a more legitimate, elected government is the one making these decisions.
But it remains odd. Last night a friend — an economist who specializes on Egypt — emailed me this about the move away from the IMF/WB package, in response to the points I made above:
A discouraging move, I think. The vacillation from the Ministry of Finance over the past month doesn’t create confidence in those who are responsible for economic policy and the management of public finances. How is it possible to move from a draft deficit of 11% of GDP to a final deficit of 8.6% of GDP without reducing your estimate for growth? And is it wise to have a fiscal contraction during Egypt’s worst economic shock in decades, when private sector investment is going to be very low?
So why has this happened? The IMF money was cheap, and came with relatively few strings attached, as far as I can tell. The terms of the loan would have been transparent, with a published interest rate and a repayment schedule. The IMF’s preferences (not conditions) are for a better-targeted subsidy system and for greater transparency on public finances – who could argue with that? The same goes for the World Bank’s budget support.
This decision is the product of a marriage made in hell between the authorities and the well-meaning but misguided social forces that give the authorities cover. The government seems to prefer ‘gifts’ with uncertain conditions (from GCC, US etc.) to more transparent and sustainable means of financing the budget deficit. And the social forces, for many of whom ‘neoliberalism’ is a shibboleth, seem to think that not accepting IMF money and relying on such gifts or illusory liquidity in local banks will allow Egypt to be more independent. Perhaps they don’t understand how serious the economic situation could get, or how gifts are never for free.
In the short term, I don’t think the man on the Shubra al-Kheimah omnibus cares whether budget support comes from the IMF or Saudi Arabia or the EU. He will care when there’s no work and he can’t find a butagas canister to warm his family’s home this winter. You are right that they can probably come back to the IMF later, but by then the economy might in a darker place, because the public sector stimulus will have been far smaller than it could have been.
And in the long term? The chief danger, I think, of accepting gifts from donors, rather than loans that must be repaid, is that it does not put the public finances on a sustainable path (by raising taxes, cutting subsidies etc.). The giving of such gifts creates a moral hazard. I have heard many times over the past few months that Egypt is too big to fail, because of its location, size, treaty with Israel etc. The risk is that successive Egyptian governments continue to seek rents (gifts by another name), based on this idea of too big to fail, rather than put their country on a path to economic self-sufficiency and independence.
One optimistic view of Egypt’s future has it becoming more and more like Turkey. One of the remarkable things about Turkey over the past two decades is that it has begun to develop a more independent foreign policy. This is partly due to the decline of some neighbouring powers – the Soviet Union, Saddam’s Iraq – but this has also happened in spite of the rise of other powers such as Iran. Turkey’s economic development has meant that it is less dependent on rents, and more self-sufficient. This has given it room for greater political autonomy.
One counter-example is Jordan, for which country grants are an important support to fiscal and external balances. Does Jordan have political autonomy?
I've written of the dangers of Egypt's "too big to fail" syndrome before. The big question is, what are the hidden costs of accepting these handouts? Or getting too used to them? There was a time in the 1980s when the Mubarak regime was continuously panhandling, using the prospect of trouble in the country (and ensuing geopolitical consequences) quite successfully to get bailed out time after time, including the big bailout it got after the 1990 Gulf war when half of its debt was forgiven. That method of economic management didn't really work out for the Egyptian people then, obviously. So why should it now?
Update: The FT's Heba Saleh gets more details from the minister of finance:
Mr Radwan said the decision to scrap the loans was in response to public opposition. He said the military council, in power during the current transition to elected rule, had decided “not to burden” those who take over from them with heavy loans.
Mr Radwan had presented a draft budget earlier this month, which foresaw a 25 per cent increase in public spending and a deficit of 10.9 per cent. He has now revised his targets, cut his spending plans and forecast the deficit to be 8.6 per cent.
“We have reduced allocations to ministries, but we have tried to retain everything to do with social justice,” said Mr Radwan. “We have maintained the spending on salary and pension increases, but we are now allocating less than we would have liked to education, health and housing.”
Mr Radwan said the funding gap in the next budget was $24bn dollars, and he planned to borrow $20bn domestically and rely on aid and grants to cover the rest.
So to recap, the money is going to civil servants who have already gotten steady increases in salary over the last few years, but not to education, health and housing which would reduce the main expenses of most of the population and have been already suffered from severe under-investment in recent years? Are they just buying support of the six million civil servants who could bring public administration to a standstill at this point?
Update 2: A spokesperson for the World Bank emails:
"We have been in ongoing discussions with the Government of Egypt over a lending program with a focus on governance reforms and employment generation. The central aim of this program is to support access to information, enhance transparency and accountability, and generate employment opportunities. These were basic demands of the recent uprising, which we support. As far as we are aware these discussions are ongoing, and we have heard nothing from the Government to suggest the contrary. If there is no IMF program, we will have to take stock."