Egypt is teetering on the edge of an economic crisis. Cast adrift in a deepening political quagmire over the past fourteen months, the economy has now reached a critical juncture, as the country faces the pressing challenge of financing a large budget deficit as rapidly dwindling foreign currency reserves threaten to crack apart an already fragile situation.
Yet, more than a year after the launch of a revolution driven in large part by economic grievances, the budgetary and fiscal proposals being considered to secure external financial assistance are geared more towards furthering Mubarak-era policies than to promoting social justice.
The state deficit for the fiscal year that ends in June is expected to exceed 140 billion Egyptian pounds ($24 billion), or 8.7 percent of expected economic output, according to the Finance Ministry. Meanwhile, the central bank’s foreign reserves have been shrinking by roughly $2 billion every month, precipitated by a sharp decline in tourism and foreign direct investment since the revolution began.
Over the past year, the government has used up more than $20 billion to prop up the local currency. In February, foreign reserves stood at $15.7 billion, enough for just three months of imports, and with it, the looming prospect of devaluation.
Egypt, like many developing countries, relies heavily on imports, including for staple items such as wheat. (Egypt is the world’s largest importer of wheat, relying on foreign supplies for about 60 percent of domestic consumption). A currency devaluation would increase import prices across the board, severely deepening the recession and prolonging any economic recovery.
“The economic situation is dire but really the Achilles Heel comes with the balance of payment position and mainly with the fact that we don’t have enough dollar reserves,” says Amr Adly, the head of the Economic and Social Justice Unit at the Egyptian Initiative for Personal Rights.
In January, the military-appointed interim government formally requested a $3.2 billion loan from the International Monetary Fund (IMF). The government says it needs $11 billion to avoid a balance of payments crisis and signing a deal with the IMF is expected to open the door to aid packages from the United States, the European Union and the Gulf. The IMF requested the Egyptian government draw up an economic reform plan supported by political consensus in order to secure the loan.
“The IMF has become quite smart lately in the sense that they don’t impose direct conditionality in order to give money,” Adly says. “They ask the government to design the program and they have to accept it so they can release the tranches. So it is indirect conditionality because they won’t give you the money unless they approve of the plan.”
The Ministry of Finance, the Ministry of International Cooperation and the Central Bank drafted a reform program to present to the IMF, the details of which were not released publicly — although a copy was leaked to the media. While the plan’s proposed policies are extremely vague — with few specifics and little in the way of proposed timetables — the document includes the classic phrase associated with IMF loans across the developing world: “structural adjustment,” and with it, a slew of controversial economic amendments.
Aimed at slashing the budget deficit, the document proposes tax reforms to increase government revenues. While lacking any concrete details, it mentions amending income taxes by broadening the pool of tax paying citizens — echoing the polices of Mubarak’s finance minister, Youssef Boutros-Ghali — with no proposals for a move towards progressive taxation.
Reforms to sales tax laws and the possibly of instituting a Value Added Tax are also mentioned. Sales taxes, while easier to implement from an administrative standpoint, are indirect and regressive by nature, targeting different sectors of society with the same taxes when they purchase goods, regardless of income level. In Egypt, where half the population lives below the poverty line and spends the biggest proportion of their income on basic goods, sales taxes place a higher burden on the poor majority.
Egypt’s Economy Still Struggling
The document also includes an element of energy subsidy reform — long a contentious subject within Egypt’s government budget. Energy subsidies absorb a whopping 95 billion Egyptian pounds ($15.8 billion) of Egypt’s budget outlay, or roughly 20 percent. Beneficiaries span the board, from taxi drivers to multi-national corporations — particularly those in energy-intensive industries like cement. Yet the government’s proposal for subsidy reform remains ill-defined and does not indicate which particular energy subsidies will be cut. Even if they were to target the 19 percent that goes to industry, as many have called for, no measures are outlined to counter any attempts by corporations to pass the rising costs to the end-consumer.
“In a word, the government reform plan is lousy,” says Samer Atallah, assistant professor of economics at the American University in Cairo. “It’s basically neoliberal economic policy that doesn’t seem to get the new reality of Egypt.”
Egypt’s last IMF loan came in 1991 to help alleviate the country’s $35 billion foreign debt crisis. The government was forced to adopt a set of structural adjustment policies as a condition of the deal that laid the groundwork for a sweeping wave of privatizations throughout the next two decades. The farming sector was deregulated and a 10 percent sales tax was introduced, among other economic and financial reforms.
“These policies had an extreme adverse affect on the majority of Egyptians,” Atallah says. “People talk about economic indicators that improved after these programs such as the budget deficit and the balance of payments but these measures don’t reflect the daily lives of the majority of poor people in Egypt.”
Negotiations surrounding the current IMF loan come at a time of growing political turmoil in Egypt and the signing of any agreement hangs in the balance. The powerful Muslim Brotherhood, which controls nearly half the seats in parliament though it’s political arm, the Freedom and Justice Party, has locked horns with the ruling military council in recent weeks after largely walking in lockstep with them for much of the past year. The Brotherhood is pressing the generals to remove the military-appointed government, led by Prime Minister Kamal el-Ganzouri, and appoint a new one before the completion of the so-called transitional process in June. The group is also coming under fire for its dominance of the constituent assembly and, most recently, for reversing its previous pledge to field a presidential candidate.
The IMF has made clear that any agreement is conditional on broad political backing, which in practice means the support of the Brotherhood since it will likely lead the next government, whether it comes before or after the Supreme Council’s scheduled handover of executive authority to a newly-elected president.
The Brotherhood has said it supports the request for an IMF loan but first wants the government to produce a more coherent plan. After meeting with an IMF delegation that arrived in Cairo for talks in mid-March, the Brotherhood issued a statement critical of the economic reform package as “general and vague” and said the government did not outline “how this loan will be used, or how it will be paid off.”
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