Commentary

Egypt Promises Austerity for IMF Loan

Middle East In Focus

Middle East Policy Council

Views from the Region

The Egyptian government has just concluded negotiations with the International Monetary Fund (IMF) for a US$12 billion loan in exchange for promised cuts in fuel and food government subsidies. In the past, similar promises have gone unfulfilled, with the Egyptian government unable to deliver unpopular reforms. Egypt’s president, former general and coup-leader Abdel Fattah el-Sisi, has promised that he is committed to making the necessary sacrifices. But, as many Egyptian and regional observers have commented, the agreed-upon austerity will take place in a less than ideal environment. Long-term water shortages and endemic corruption are both likely to make any economic reboot difficult, if not impossible. On top of that, the ongoing polarization of Egyptian society, according to some commentators, promises to make implementation even more harder.

In the run-up to the negotiations with the IMF, Egyptian government officials have been warning of painful cuts ahead, citing, according to this Middle East Observer report, the country’s precarious financial situation: “Egypt should cut down on governmental spending inside ministries and government institutions as it faces a critical financial conditions, the head of Egypt’s economic committee at the parliament said in a televised statement. In an interview on an Egyptian satellite channel, Ali El-Meselhi said that the government should lower expenditure costs by 5 percent, especially with Egypt facing a budget deficit [for the fiscal year 2015-2016]  reaching 13 percent of the gross domestic product....The former minister of solidarity added that the deficit represents a huge burden in the current economic state, pointing out that foreign currency reserves Egypt’s central bank have reached $17 billion – lower than the normal $25 billion dollar. El-Meselhi added that the government was responsible for cooperating with the parliament to put forward a “real” economic reform program to solve the current crisis.”

With the IMF deal concluded, Egyptian and regional media have been quick to provide details of the conditions and the likely cuts that lie ahead, especially in the consumer sector. Citing a Reuters report, the Egypt Independent newspaper worries that “the IMF deal brings austerity few can afford…. Squeezed by economic and political turmoil since the 2011 uprising that toppled Hosni Mubarak, Egyptians are preparing for a new era of austerity. The reforms are part of a program to cut the budget deficit and rebalance currency markets promised to the International Monetary Fund (IMF) to secure US$12 billion of lending over three years. But political opposition to measures involving subsidy cuts, devaluation and new taxes while tens of millions rely on state-subsidized food, make the program ambitious....More recently, Egypt negotiated two IMF deals that were never finalized, including a $4.8 billion loan initially agreed in 2012. The reluctance with which policymakers have previously approached reforms means investors are not rushing back yet....President Abdel Fattah al-Sisi said last week he would not hesitate ‘for one second’ to take the difficult steps necessary to ensure Egypt lives within its means.”

Similarly, this Al Arabiya article, also based on a Reuters report, highlights the challenges lying ahead for the Egyptian government as it contemplates ending fuel subsidies: “Egypt plans to end fuel subsidies within three years and is aiming to increase fuel prices to 65 per cent of their actual cost during the 2016/17 fiscal year....Egypt has reached a staff level agreement with the International Monetary Fund for a $12 billion three-year loan program which is subject to final approval by the IMF executive committee....Egypt lowered its spending on fuel subsidies in July 2014 as part of a five-year plan, raising prices of petrol and diesel by up to 78 per cent, but plan was not followed through in 2015/16. In April, government officials said there was a now plan to reduce spending on fuel subsidies by nearly 43 per cent in the 2016/17 budget. The cost of petroleum subsidies fell to $6.2 billion (55 billion Egyptian pounds) in 2015/16 from 71.5 billion pounds the previous year. Egypt is aiming to lower subsidies for petroleum products to about 35 billion pounds this financial year.”

The IMF austerity package also comes amid fears of long-term water shortages. According to Al Ahram’s Mohamed Abul Ghar, Egypt’s current demographic trends are highly unfavorable for the country’s ability to satisfy its population’s demands for potable and irrigation water sources: “A recent UN report said that 18 countries in the Middle East will suffer a great deal by the year 2025 because of a serious water shortage.... A leading problem is the growing population in the country, which is seeing an increase of 2.7 million citizens a year.... By the end of President Abdel-Fattah El-Sisi’s first four-year term in office, the Egyptian population will have increased by 11 million people, and by over 20 million by the end of his second term should he be re-elected. This increase is catastrophic, and amounts to collective suicide by the entire nation. These millions cannot find enough water resources neither for drinking nor for the irrigation of crops – not to mention the shortage of services they would face....In short, we need to come to terms with the fact that our annual share of Nile water is subject to consistent decrease, and that we are already suffering a serious shortage that is prohibiting the Aswan High Dam from generating electricity beyond 10 percent of its maximum production capacity due to its declining water reserves. Egypt is faced with an imminent threat with far-reaching consequences, and we are not doing anything about it.”

There are also continuing concerns that, as this op-ed by Hassan Abou Taleb points out, corruption permeates all levels of government, as highlighted by the recent debacle on wheat production and collection: “The corruption revealed in wheat collecting is not the first and will not be the last case. Without effective monitoring and a strict legal system, any attempt to combat corruption will flounder....While official statements declared that more than five million tons was delivered, after a partial inventory was undertaken it was discovered that only around half that amount was delivered — three million tons at most. This must be the most blatant daylight robbery of the livelihood of Egyptians and the general budget ever seen....We all realize that corruption at some levels — such as small bribes or tips that have become custom to accomplish legal transactions — are difficult to eliminate completely. This is where society should step in to uphold wholesome moral, religious and behavioral values. Meanwhile, the ruling system should provide forms of effective monitoring and swift legal deterrence. In the absence of integration between these two tracks, combating corruption on all levels would be a false hope.”

Given the regional economic conditions, Al Arabiya’s Turki Aldakhil, suggests that perhaps the best Egypt and its neighbors can hope for is to provide some semblance of stability in the face of anemic economic growth: “The Arab Spring exposed many social and cultural defects, awakening tribal affiliations as sectarianism fed off raging protests....Since the days of Egypt’s late President Gamal Abdel Nasser and the era of Arab nationalism, some Arab republics have idolized some leaders provocatively, and outrageously idolized certain events, coups and revolutions. Meanwhile, people suffered from economic bankruptcy and institutional collapse. This made societies completely separate from politics. As time passes and idolization decreases, a desire for revenge and accountability surfaces....Although some crises are very bloody, they are still in their beginning stages, and we have only seen the tip of the iceberg. Unfortunately, the possibilities range from disintegration to division and ongoing civil war. Perhaps the best-case scenario will be ‘stable chaos’ within fragile economic entities.”

The concern, of course, is that economic reforms require a capable, cohesive, and conscientious political class, as well as a population that is willing to hold them accountable, all of which Egypt, the Daily News Egypt writer Mohammed Nosseir argues, have been in short supply following the 2011 revolution: “The only authentic attempt to establish democracy in Egypt—the revolt against Mubarak in 2011— was a complete failure. There is no doubt that Mubarak’s entourage played a major role in bringing Egypt back to square one. Nevertheless, Egyptian politicians and revolutionaries should admit that they too bear a large part of the responsibility....When we Egyptians think of politics, we don’t think of how to team up, with each citizen playing a significant role in order to fix our outdated political apparatus.  Instead, we all tend to look to a single person—the president—to overcome all of our challenges....democracy is not a switch that can be turned on by revolts, thereby converting the entire nation from an authoritarian mechanism to a democratic one....Blinded by this pride perhaps, we tend to ignore our mistakes completely. If we are to avoid repeating our political failures, it is crucial that we recognize and acknowledge our errors.”

A similar concern is expressed in a recent op-ed by Mohanad Elsangary in Daily News Egypt, who worries about the increasing polarization of the Egyptian society: “It has been over three years since one of the biggest state perpetrated and sanctioned massacres in modern human history, as described by Human Rights Watch, and unless you marked the day of the anniversary­—14 August—you probably haven’t even noticed....The 25 January Revolution was almost picture perfect in the beginning. The ‘us’ liberals, Islamists, Christians, socialists, communists, and seemingly everyone hand in hand, united towards a common goal…. But then it started: the ‘us’ started fragmenting into many others, and the ‘them’ narrative started taking over....We’ve become experts at the art of exclusion. There is no denying there are some differences that can never be reconciled. But if we don’t stop buying into the ‘us’ v ‘them’ narrative they are selling us when it comes to even the most atrocious and blatant human rights violations, soon the word ‘us’ will cease to exist, and the country will be reduced to a whole bunch of ‘them’.”


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