IMF push for MENA subsidy reforms

Who benefits?

26 June 2013

The IMF signed a deal with Tunisia in June, after its renewed attempt to lend to Egypt failed in April, while civil society remained concerned about the legitimacy and transparency of the negotiations.

An IMF report released during the April World Bank and IMF spring meetings in Washington cautioned that the Arab countries in transition “continue to face high political uncertainty and social pressures.” It argued for “effective structural reforms” including promotion of “private-sector growth and international trade, as well as attracting foreign direct investment inflows.” Also in April, IMF Middle East department director Masood Ahmed called for “reductions in inefficient spending on generalised subsidies and increased expenditures on targeted social safety nets, as well as boosts to public investment” in the Middle East and North Africa region.

IMF managing director Christine Lagarde, speaking in May, focussed on how subsidy reform is required to reduce income inequality and “help divide the pie more fairly”, via “protecting and augmenting social spending” and “reform of energy and other generalised subsidies”. Speaking at a civil society event convened at the April IMF spring meetings, Isabel Ortiz of the Initiative for Policy Dialogue at Columbia University revealed the “worrisome impacts [of] the elimination of food subsidies in a context where food prices continue to be historically high” adding that these lead to “irreversible impacts on children”.

The IMF signed a deal with Tunisia in June, despite questions about the government’s legitimacy (see Update 85). A $1.7 billion two year stand-by agreement with Tunisia was agreed with approximately $150 million available for immediate disbursement. The first set of policies in the IMF programme aims for macro economic stabilisation through fiscal, monetary and exchange rate policies, including a reduction of untargeted energy and electricity subsidies. The second set of policies aims to address economic growth, including measures to address vulnerabilities in the banking sector and a structural reform agenda “to rebuild Tunisia’s economic model by promoting private-sector development, lowering regional disparities, and reducing pervasive state intervention.” The third set of policies aims to “strengthen social assistance strategies” and assess “the social impacts of the envisaged reforms”, with an aim to reduce inequalities, however, according to the IMF, “social security and labour market reforms still need a lot of consensus building, with priorities yet to be developed by the authorities”.

Egypt still negotiating

Negotiations in Egypt continue after a renewed attempt to reach a deal on a $4.8 billion IMF loan failed in April (see Update 84, 83, 82, 80), while civil society remained critical of the negotiations. Mohammed Mossallem of the Egyptian Initiative for Personal Rights wrote in an April paper that fuel subsidies reforms enacted this year in anticipation of IMF agreement led to an “immediate rise” in commodity prices, and a “diesel crisis with fuel shortages reaching a peak in March, the harvest season”, leading directly to food shortages and “higher prices … ranging from 7 to 30 per cent”.

Speaking at an IMF spring meetings civil society side event Mahinour El-Badrawi of NGO the Egyptian Center for Economic and Social Rights argued that despite the IMF’s claim that the national economic plan is ‘home grown’, it was not made public until after national CSOs brought the case to the national administrative court, requesting transparency in the negotiations. According to El-Badrawi the policies are similar to those of an IMF review of April 2010. She said: “Even as we hear about the need for belt-tightening, we find that every piece of legislation implementing the new economic plan is biased to protect large local and foreign capital-holders. This is the exact reverse of recommendations by human rights bodies to ensure the most vulnerable and marginalised citizens are the ones protected in case of crisis response measures.”

A June blog by Mohga Kamal-Yanni of UK NGO Oxfam argued that the Egyptian government lacks a “clear economic vision” which is “causing public confusion over whether Egypt needs a loan at all”. Furthermore, the proposed deal includes removal of fuel subsidies “despite the clear signs of unrest among ordinary Egyptians as they have already started to suffer the impact of the fuel crisis.” Instead, civil society and academics have proposed alternative measures, including progressive taxation and removal of fuel subsidies for rich people and energy intensive industry, but the government and the IMF have failed to listen.