(NEW YORK) MintPress – Two decades after Egypt last received loan disbursements from the International Monetary Fund (IMF), the stakes are high in the ongoing talks about a $4.8 billion deal.
On Jan. 7, the IMF’s Middle East and Central Asia director, Masood Ahmed, met with Egyptian President Mohammed Morsi and other government officials to discuss the loan agreement after it was postponed last month because of political unrest set off by Morsi’s attempt to fast-track a new constitution.
Among the points addressed were how the government will spend the $4.8 billion and why the political conditions are now suitable for the country to go ahead with the loan and impose austerity measures requested by the IMF.
The IMF describes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”
Following the visit, Ahmed issued a statement saying, “The IMF remains committed to support Egypt in addressing its increasing economic challenges and moving to a more inclusive model of economic growth through a socially-balanced homegrown program.
“I am encouraged by the authorities’ commitment to take steps necessary to achieve fiscal and external sustainability.” it continued.
“Following our discussions today, and based on the work that is to be carried out, we agreed that an IMF technical team would visit Cairo in the coming weeks to resume discussions on possible IMF financial support.”
The loan has posed a dilemma for two years, causing divisions between those who want Egypt to stay away from borrowing from the Bretton Woods Institution and those, including the ruling Muslim Brotherhood, who say it has no choice.
“When we came to power, the country was in very bad shape economically,” Dr. AbdulMawgoud Dardery, a leading Freedom and Justice Party (FJP) Member of Parliament, tells MintPress News in an email.
“After the regime collapsed, lots of money went out of the country illegally. To jumpstart the economy, Egypt will need that loan badly.”
Indeed, the push to resume negotiations comes after the biggest slide in the Egyptian pound since the 2011 uprising. It has slumped almost 5 percent in the past two weeks, to around 6.4 pounds to the dollar, and it is continuing to extend its losses.
The central bank, which spent almost 60 percent of its reserves in the past two years, has acknowledged they have reached a “critical minimum” level.
The reserves fell to $15 billion from $36 billion in two years and are enough to cover only three months of imports.
The country has reportedly used its reserves to support the pound and secure vital imports such as wheat and fuel.
Planning Minister Ashraf Abdel Fattah al-Arabi has said in the media that the budget deficit could rise to 50 percent — 200 billion pounds or $31 billion dollars — in the fiscal year 2012-2013 “if strict economic measures are not implemented.”
To make matters worse, tourism now brings in about $8.8 billion a year, down from $13 billion before the uprising.
And unemployment has risen to 12 percent in the past two years, according to economist Ahmed el-Naggar of the Al-Ahram Centre for Studies. He said that official estimates are far less than the actual figures in a country where 40 percent of the population lives on $2 or less a day.
Aside from the cash injection the loan would bring, it could also unlock other international funding and support for taking difficult reforms.
“The amount is not the issue, rather the message it sends to other countries is more important,” says Dardery. “I expect other Gulf countries are likely to jump in.”
The age of austerity
But the loan would come with strict conditions. In exchange for financial help, rather than accepting collateral, the IMF requires the government seeking assistance to implement economic reforms, often in the form of unpopular austerity measures, in order to cut its deficit.
That usually means a sharp cut in spending on benefits, development projects and social services, and sometimes comes with an increase in taxes on things like food, alcohol and cigarettes and petrol as well as higher fees for public services such as transportation.
That could be a problem in Egypt, contends Dardery. “Basic needs like food and gas are red lines when it comes to subsidies,” he says.
Critics of the IMF’s conditions argue that in periods of recession and high unemployment, austerity policies are counter-productive and tend to have an adverse impact on the poorest segments of the population.
In October 2012, the IMF itself announced that its forecasts for countries which implemented austerity programs have been overly optimistic, suggesting that tax hikes and spending cuts have been doing more damage than expected, and countries which implemented fiscal stimulus programs, such as Germany and Austria, did better than expected.
In many cases, the imposition of austerity measures has been followed by mass protests, social unrest and even labor strikes.
In 2009, 2010 and 2011, workers and students in Greece and other European countries, for example, organized widespread demonstrations against cuts to pensions, public services and education spending as a result of government austerity measures.
Two years after the uprising in Egypt, political tensions are still high, and the secular-leaning opposition is calling for a fresh wave of mass protests against the country’s new constitution.
Taking action to impose further economic hardship as well could just be the straw that breaks the government’s back, especially with parliamentary elections set to take place in two months time.
“This is a catch-22 issue,” says Dardery.
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