Dr. Samir Aita – Cercle des Economistes Arabes
Daniela Gressani – Middle East and Central Asia Department, IMF
Nabil Abdo – Arab NGO Network for Development
Dr. Salma Hussein – Egyptian Initiative for Personal Rights
Ahmad Awad – Phoenix Center for Economic and Informatics Studies
Tariq Ahmad – Aid Effectiveness, Oxfam America
Policy Brief on Egypt’s IMF and World Bank Loan Programs
Focusing on the target of fiscal consolidation
Regarding the objective of Fiscal Consolidation, I will be discussing:
- What the IMF the World Bank have proposed to achieve fiscal consolidation (wages and fuel subsidies cuts)
- How did the IMF call for a parallel policy that undermines this objective (monetary policy)
- Alternatives that could have achieved the same objective without incurring such high social cost.
On freezing the public wage bill, it was neither efficient nor equitable, as it affects inclusive growth, undermines further the performance of public services, and does not tackle the inequality of income within the public sector.
On cutting energy subsidies, it was not efficient as the major cut was actually due to the decline in oil prices. Then the IMF imposed devaluation leading to a surge in the costs (and the deficit). It also did not include a third of the budget of energy subsidies, as natural gas used in energy intensive industries was not included in the IMF mandated cuts. It was also not equitable because the burden on near poor and middle class is more than that of higher income classes. It also hides the generous subsidies that feed politically connected factories.
Alternative views on cutting the public wage bill include, according to the requirements of social justice:
- The reduction in the wage bill must be limited to the remuneration of senior civil servants.
- This reduction should be calculated after obliging the government to merge all private funds, which in turn conceal a large part of the income of senior officials, thus enhancing the fight against corruption and limits disparity of incomes within the government sector.
- Education and health requirements shall not be affected by the freezing in the rates of appointment of civil servants, and a plan must be developed to transfer the surplus in administrative civil servants from the public sectors where labor force is accumulated to service providers’ categories where possible.
Alternative views on energy subsidies include:
- Electricity subsidies: The reciprocal subsidy system should be applied again, whereby the segment of large consumers would pay a price higher than the cost, covering the value of subsidies given to electricity users from among the poor, and thus the cost would be covered while social justice would be achieved.
- The government should begin a subsidies cut program of large companies (from among those affiliated to Mubarak’s regime, according to a recent World Bank study), before making large segments of citizens responsible for the loan repayment bill.
- The subsidies item in the public budget must be published in line with the IMF Handbook of Public Financial Management, showing subsidies to corporates (private and public each separately) compared to subsidies to individuals.
The question to ask becomes whether fiscal consolidation is really a target of these IMF and World Bank programmes, or is that a bluff? While both the Fund and Bank increased VAT, the World Bank required the government to reduce the maximum tax rate (reaching on the rich up to 22.5%). This is a measure that increases the poor distribution of income and wealth in Egypt, and is contrary to the goal of reducing the budget deficit. For the IMF, the achievement criterion is measured by the primary deficit to GDP ratio, which is the ratio of total deficit minus interests. So, the Fund and the Government have agreed to ignore the biggest problem which is the rising interest payments on public debt over the past six years: High interest payments. The IMF itself has said that “interest payments reached almost one third of total budget spending (nearly 9 percent of GDP). The deficit was primarily financed through borrowing from the banking system, about one third of which was direct financing from the central bank”. This procedure leads to distributional effects in favor of the most affluent groups, resulting from a two-way interaction:
- The increase in interest means that the banking sector will benefit directly from the treasury bills holders, by increasing their profits resulting from a non-risk income.
- A limited number of banks control this activity.
The IMF imposed the devaluation of EG Pound. Which ultimately will undermine the objective of the fiscal consolidation.
Instead, policy should focus on:
- stimulating government revenues, especially the revision of the tax system, on the one hand, to achieve justice in terms of the tax burden and on the other to raise the taxes to GDP ratio (currently less than 13%).
- The implementation of the VAT must be accompanied by a progressive tax package on incomes and wealth.
- Capital gains and property taxes: Egypt is ranked the eighth worst country in terms of wealth distribution.
- Mainly because of the absence of taxes on capital and capital gains, (taxes on non-used real estate property, inheritance taxes, taxes on closed apartments (10 million units) or any kind of estate (stocks, deposits, etc.)) and the lack of capital gains taxes such as gains resulting from mergers, acquisitions and sale of real estate, lands and others.
Jordan has withstood many external shocks and is highly reliant on external support. Maintaining this relationship is how it has survived. Yet despite increasing levels of assistance, there are a lot of political and security problems surrounding Jordan. Jordan has failed to develop a sustainable economy and economic growth. The first IMF agreement came in 1989 and mostly served to enable Jordan to continue servicing its foreign debt. During this period living costs had risen enormously and the economy continued to deteriorate. Under IMF patronage, Jordan has witnessed a wave of privatisation, deregulation, tax increases, tariff reductions, elimination of subsidies and public sector cuts aimed at fiscal consolidation. While they also experienced higher economic growth, this proved to be unsustainable and not inclusive. Even when Jordan was out of the IMF programme, it continued these types of policies. When new deals were made years later, they didn’t just stop fuel subsidies, but they even introduced special taxes on these goods. Both sales and customs tax were increased on many essential goods. It very clearly demonstrates that years of Bank and Fund structural adjustment programmes have left the country incapable of addressing its own socioeconomic challenges. These include high unemployment, in particular youth unemployment, low wages, and weak labour market protections. For example there is still no space for unions and collective bargaining in Jordan. The conclusion must be reached Bank and Fund programmes tried and failed to overcome the economic challenges of Jordan.
Aid effectiveness, refugees and displacement
Why is Oxfam becoming more heavily invested in particular in Jordan and Lebanon?
While these countries have experienced growth, it has not been inclusive. There has been increasing inequality. And while poverty rates have fallen, certain isolated populations are not benefitting from broader economic growth. This has also contributed to other major social issues, including governance and corruption issues and huge rates of aid dependency, on top of the unprecedented refugee crisis from Syria.
The number of Syrian refugees Lebanon and Jordan are hosting is enormous. Also the terms on which the countries can lend have changed. There recently were two international conferences pledging money to these countries, which was desperately needed. A new financing mechanism was initiated, the MENA facility, which is aimed at mobilising blended finance. So there is a lot of money coming into the countries.
We are asking the question how this money can support refugees in particular while not exacerbating existing problems. Aid can sometimes do harm. But at the same time it can improve a country’s situation, if governments are strengthened in an accountable way. To find out Oxfam commissioned research with local think tanks to look at what lessons can we learn from previous experiences. Some things we learned included:
- Aid needs to become more predictable.
- There has been a huge dip in budget support for Lebanon. These governments have the capacity to deliver services, they just need more funding, and right now INGOs are sometimes getting more funding than these governments.
- The loans of the last three decades have made many things worse.
- Transparency is not very good. Jordan’s Response Plan helps track some money but doesn’t go beyond the refugee crisis. In Lebanon, transparency is worse. There is no system for transparency or even an approved budget.
- Aid is not always aligned with national priorities. This is more an issue for Lebanon than Jordan.
So, our recommendations are not exactly new. They include enhancing transparency and accountability, national ownership and building response systems. Alignment is important, no more conditionalities should be imposed that do more harm than good, and more budget support is needed. Support also needs to increase to national accountability mechanisms, and broad stakeholder consultation and cso engagement is important. Finally, increased legal protection for displaced communities is essential as well.
- I agree with the need for more systematic discussions with civil society.
- All presentation have stressed how IMF support is associated with difficult policy measures, fiscal consolidation, austerity etc. This is however the nature of our role. We are not in the business of supporting development, we are in the business of helping countries deal with balance of payment issues. That is usually not associated with easy policies. Our main goal is to help countries turn around their economies and grow in a sustainable way.
- I want to stress the importance of country ownership. The vast experience of countries show policies can only be successful if there is country ownership. We have internalised this. We are talking to the parliamentary network, our teams talk to parliaments in countries. We also have conversations directly with civil society. Could/should we do more? Yes. This is work in progress. It is a lesson we have learned.
- However our chief disagreement with the panellists is on subsidies. The IMF remains persuaded subsidies are a bad way of helping poor people or even the middle class. It benefits the rich. Fuel subsidies are also bad for the environment and health.
Daniela Gressani: It is interesting there are many question on taxes. Not a lot of our programmes include measures to collect more property taxes. It is important to note not all countries have capacity to collect these taxes or they might not agree with these policies. We can all agree indirect taxes are not the way to improve fairness. On development, we are learning about the value of public investments in things like infrastructure. We are trying to incorporate that in our programmes now. Governance, we all agree any economic policy grounded on transparency and accountability will be more successful.
Salma Hussein: I did not see any allocation in the most recent budget for nurseries, as the IMF programme mandated. There were no consultations with civil society on this. In response to Daniela, you mentioned IMF policies are by nature difficult. Actually, they are not difficult policies. They are very easy for the rich. All the benefits go to the rich and well-connected.
Nabil Abdo: The IMF likes to say it is a technical institution but it is actually very political. It serves the creditors and bankers. They say compliance is difficult on tax, but this issue is not so much about capacity but rather about political economy. It is simply easier to collect from the poor through wages and consumption. What the IMF is doing is political intervention with a technical face. There is a reason why there is no transparency, it benefits the rich. If the poor would know what is taking place it would be a lot more difficult to pass these policies. So, we have to look more at the political dimensions.
Christopher Jarvis (IMF): To add to Daniella on the importance of ownership. We have a lot of common ground with Dr. Hussein on the prescriptions, like more progressive taxes, etc. but an economic programme has to be owned by the government, and those types of policies were not among the government’s priorities. While we would like to see more transparency, we were not able to press it more for military and security spending for example.
However there is a happier story to tell. On female labour force participation, we wanted to look for policies that would increase this. We talked to lots of people ahead of the programme, including NGOs, academics and the government. It was good the government had ownership on that. We boiled it down to two policies we could agree on:
- Publically funded nurseries
- Setting up a group, including the women’s council, to look at safety of public transportation.