No strings attached?

Egypt to get billions in foreign aid subject to IMF conditionality

3 October 2012

Egypt has been in talks to get over $11 billion in foreign aid, of which at least $7.5 billion will be contingent on IMF approval, sparking concerns from activists over policies likely to be imposed by the Fund, just as it has ended its conditionality review.

After its first free presidential elections in May, Egypt asked the IMF for a $4.8 billion loan in August. An IMF mission was due in the country at end September and Egyptian officials expected the deal to be concluded by December. Since the ousting of former president Hosni Mubarak in 2011, Egypt’s foreign reserves have dropped by over half, leaving the government facing a record budget deficit and a balance-of-payments crisis. European Union officials said in September they would give Egypt €500 million ($645 million) if it secured the IMF loan. Egypt’s prime minister Hisham Kandil added there were talks of $1 billion in budget support from the African Development Bank and the World Bank, which “would come after an IMF deal”.

US officials were also negotiating a $1 billion debt relief deal with Egypt to be completed with the IMF programme, as well as another $500 million in mostly budgetary support. But Eric LeCompte of NGO Jubilee USA Network warned in a statement that “we need to understand this relief in the context of the $35 billion that Egypt owes to several external lenders. We should be looking at ways to bring all of the lenders to the table and arbitrate more of the external debt in a way that recognises that some of this debt is not the responsibility of the people – but the responsibility of a former corrupt regime.” Other pledges to Egypt from Qatar ($2 billion), Saudi Arabia ($4 billion), Turkey, United Arab Emirates, Kuwait and China ($200 million) brought the total to over $11 billion.

Also in September, senior executives of around 50 US corporations visited Egypt to discuss new investments and “urged the government to adopt more business-friendly legislation”, according to Nick Dearden, of UK NGO Jubilee Debt Campaign. He added that Kandil “promised easier profit repatriation for companies coming into the country.” However, Noha El-Shoky of the Popular Campaign to Drop Egypt’s Debt questioned the need for an IMF loan and suggested that “if foreign companies are required to reinvest their revenues domestically rather than repatriate them, Egypt’s foreign reserves will not be depleted”. Samer Atallah from the American University in Cairo argued that “progressive taxation and a full scale shake-up of subsidies to ensure they only benefit the poor” could help Egypt.

Talks of IFI loans have faced opposition in Egypt, including from religious and political groups, some of whom are affiliated with the governing party of Egyptian president Mohammed Morsi. Egyptian newswire Ahram Online reported that activists protesting in August against the IMF and World Bank deals because they “would lead to the further impoverishment of the Egyptian people”. The points of greatest contention are the austerity measures, such as food and fuel subsidies cuts, likely to be required by the IMF. In September, the Popular Campaign to Drop Egypt’s Debt organised a conference in Cairo, where activists called for a full audit of the Egyptian debt and rejected the IMF loan, “pointing to the stringent austerity package … which Egypt would likely have to follow in order to qualify for loan instalments”, according to Egyptian news website Ahram Online. Discussions on an original $3 billion IMF loan had stalled in 2011 over the conditions attached to it (see Update 77).

Also in September, Amr Adly of the human rights group Egyptian Initiative for Personal Rights wrote that austerity measures were included in a leaked government programme that will need to be accepted by the Fund for the loan to be approved. Adly said: “This amounts to conditionality in reverse, because unless the government submits a programme that is likely to be approved by the Fund, no money will be released”. He added “What is even more alarming is that the IMF, the World Bank and other … IFIs … seem to be the only ones that have a clear strategy for Egypt’s economy, which is simply the furthering of neoliberal measures”.

Conditionality review

The talks between Egypt and the IMF came as the Fund concluded its conditionality review, which had been due in 2011 (see Update 75, 74). In September, executive directors “welcomed the findings that conditionality has become more focussed, more closely aligned with programme goals, and generally well-tailored to country characteristics and initial macroeconomic conditions.”

However, the review admitted that the opposite has been happening in Europe (see Update 82) but claimed it did not cover these loans since “most of these programmes are ongoing, so it is difficult and premature to assess them fully.” Peter Bakvis of the International Trade Union Confederation said “the failure to include the European loans in the core analysis of the conditionality review is not a minor omission. The European crisis lending … has become by far the Fund’s most important area of business. Fully 94 per cent of the IMF’s outstanding credit is currently allocated to European countries.” He added that the review “takes it on faith … that the deregulatory labour market reforms imposed in Europe are necessarily growth-enhancing”.

A divisive issue in the review was how IMF conditionality “could undermine ownership”, with “some directors express[ing] concern about the use of conditionality that is outside the executive branch’s controls”. In a survey conducted as part of the review, when asked if country authorities provided a first draft of the Memorandum of Economic and Financial Policies that makes up IMF loan programmes, 84 per cent of Fund staff disagreed. The review found that ownership could be improved by “more frequent and accessible analysis of programme design in a cross-country perspective”, as well as by “transparency that would allow stakeholders, such as academics, journalists, and market analysts in programme countries to express informed views on programme design and conditionality issues.” It recommended that a standard process should be developed for staff to collect external views, but gave no further details of how or when this would be done.

In September the IMF also finished the first phase of its review of lending facilities (see Update 82, 81) for low-income countries (LICs), concluding that the 2009 reforms (see Update 67) have “clos[ed] gaps and creat[ed] a streamlined architecture of facilities better tailored to the diverse needs of LICs”. It found that “longer-term IMF programme support has helped LICs support economic growth and build macroeconomic buffers, while short-term financing during the recent crisis helped preserve vital spending and facilitated a rapid recovery.” However, “creating a sustainable concessional financing framework will require securing additional resources – either through use of gold windfall profits or regular fundraising”. The board will discuss a second stage of the review later, as well as the use of resources from remaining windfall profits from gold sales, but no specific timeframe was given.