Thursday,21 February, 2019
Current issue | Issue 1121, 8-14 November
Thursday,21 February, 2019
Issue 1121, 8-14 November

Ahram Weekly

On opposite ends

This week a technical team from the International Monetary Fund (IMF) is in Cairo for discussions with the Egyptian government over a much debated loan request of $4.8 billion.  Niveen Wahish sounds out two arguments in favour of and against the loan

Al-Ahram Weekly

Economist Samir Radwan was the interim Egyptian finance minister after the 25 January Revolution. Negotiations over the IMF loan began during his tenure and would have been completed by mid-2011 were it not for a change of mind by the Supreme Council of the Armed Forces, then heading the state. Radwan believes the IMF loan is necessary, among other measures, to bridge Egypt’s financing gap.

Why is the loan important?
We should see the loan from the IMF, the World Bank or regional development banks, in a broader context. We have a financial gap. The financial gap has to be addressed. When I was minister of finance we discovered that the financial gap was $10-$12 billion. That could partly be covered through borrowing from the local market. But interest rates on domestic borrowing have reached staggering levels — 16 per cent compared to eight per cent on the eve of the revolution. Lately we were not able to discharge the bills and bonds we issue at a reasonable interest rate.
Furthermore by drawing on local savings there are two drawbacks. First, it increases national debt and accordingly debt service, which eats up budget resources and limits the government’s ability to do anything. Domestic debt service eats up one quarter of the government budget. Second, it deprives the private sector of sources of finance at a time when the private sector is starving for funds. If you starve the private sector you deprive yourself of a source of future growth.
To break this vicious circle we need external resources. Of course, revenues from remittances and the Suez Canal have been good, but investments have not been forthcoming. The other alternative was borrowing from Arab countries. But they also had demands. They wanted their investors’ problems resolved. And they too wanted that we have an agreement with the IMF. So far, Arab assistance has yielded peanuts.
The IMF’s importance is not the amount of money we get. It is really not a huge amount. The advantage of signing with the IMF is that it gives a message that the country has a set of monetary and financial policies in place that will get it out of the deficit. Egypt is a founding member of the IMF. It joined in December 1945 and it makes a contribution of $1.5 billion. We have a right to borrow three times our contribution.

But there are fears that conditionality accompanies the IMF loan.
There was no conditionality when I was negotiating the loan.  When we first started negotiations with the IMF we had a 100 per cent Egyptian programme worked out by the Central Bank and the Ministry of Finance. They even suggested a devaluation of the Egyptian pound but we clearly said that it was off the agenda. And the IMF accepted our terms.
But Egypt is running high budget deficits. And we had a plan that by 2015/16 we would bring it down to the normal levels of six per cent. To get there, a number of things have to be done, including steps such as the elimination of subsidies.
I, as finance minister, was the one who proposed reducing subsidies. It is not logical that we have $95 billion going to fuel subsidies, a large amount of which is smuggled, or going to five star hotels while the poor are suffering. We should find a way to get the subsidy to those that deserve it, while the rest should pay market prices.
The other thing the IMF agreed to was the notion that social cohesion should be an objective of financial policy. That was a first for the IMF. If we stand firm by what we believe in, they will respond to our demands.

Critics have said that the consecutive governments have not exhausted alternatives before reverting to borrowing.
Admittedly there is a lot of waste in public spending, but it can be tackled on the long term of five years, bearing in mind that waste in the administrative system is not in expenditure but in corruption.
As for other suggestions regarding limiting imports and imposing a progressive tax, that is like cutting your nose to spite your face. These have no place in sound financial policy. We cannot stop imports because half of Egypt’s exports depend on imports. And imported luxury goods are trivial in value.
As for taxation, Egypt did introduce a new progressive tax of 25 per cent on income above $10 million annually after the revolution. True, in developed economies such as the US there is higher progressive taxation, but we should not look to the US because it is a huge and mature economy, which Egypt is not.
Raising taxes is only efficient up to a certain point after which it will cause revenues to drop. It leads to tax evasion and tax avoidance and discourages economic activity.
Some people look at it as a way of attaining social justice; punishing the rich. But I am not out to punish the rich if they pay their taxes. There is plenty of revenue if the tax arrears of LE60 billion are collected.

Critics say that much sought after foreign investment has not done much for Egypt.
We cannot say that investment has not done anything. Investors are very important. Employment has increased but not in tandem with the population increase because we are a young economy. Egypt’s economy should create 700,000 job opportunities. It creates only 380,000. Maybe there were investments in sectors that we did not request, but that is where is the government should play a role. Egypt should have a clear vision of which projects it needs for its development.
Our target is to employ 700,000 annually. That means a growth rate of seven per cent and an investment rate of 25 per cent. The investment rate now is 15 per cent and the savings rate is 13 per cent. What I should be looking out for is where I will get the needed rate of investment of 25 per cent.

What is your opinion on the devaluation of the Egyptian pound?
Any devaluation in a country that imports 60 per cent of its food will mean that the poor will be the hardest hit. Drastic devaluation is to be avoided at any cost. It will harm the poor, prices will increase, and so will our import bill, which accordingly will affect export prices.

Isn’t the loan too late, especially as we have been managing for the past 18 months?
We are not managing; we are drowning. Do you want unemployment to increase further? We need to get the loan immediately. If we delay the signature, conditions will be harsher. We could have done better had we taken the money earlier.


Noha Al-Shoki is one of the founders of the Campaign for Dropping Egypt’s Debt, an initiative created by a group of civil society organisations and individuals concerned with social justice. The campaign aims to audit loans borrowed during the Mubarak era and evaluate their impact on society and people’s welfare. The campaign will then lobby donor governments and agencies to drop Egypt’s illegitimate debts. Al-Shoki is against borrowing from the International Monetary Fund (IMF).

Are you against the IMF loan specifically, or borrowing in general?
We are against borrowing in general, and the IMF specifically.

We know that there are alternatives to borrowing and we have not seen any of the governments that followed the Mubarak regime look carefully into these alternatives. These alternatives include revisiting fuel subsidies, collecting a once-in-a-lifetime wealth tax, progressive taxation and limiting imports temporarily to save our hard currency. Why should we borrow before trying to make ends meet domestically? The problem with borrowing is that it is one of the ways to enslave people. And borrowing has a political dimension to it, just like grants.
As civil society we lament the lack of information on the size of Egypt’s debt. We only know the total size of our debt, but do not have details on who that money is owed to, nor on what terms it was taken, how much has been repaid, and how much is the interest. In Egypt, there is no access to information.
Our debt to GDP ratio is huge. And that means that any borrowing now will be a burden on future generations.
We cannot compare ourselves to the US, which has debt reaching 200 per cent of GDP. The US has a plan on how to repay that money. We do not.

What worries you about the IMF loan specifically?
There are three main problems with the IMF loan. First: where is the economic reform programme the government is discussing with the IMF? Society has not seen the reform programme according to which we will be granted the loan. Isn’t that one of the requests of the IMF? Second: the IMF said it wants to meet civil society, which it has done on previous occasions, but what have they done with the feedback from civil society? How does it figure in the decision cycle? Or is it just a formality? Third: the reform programme presented by the Ganzouri government did not have a vision for the economy, but only piecemeal plans. And they did not inform us on why the loan request has gone from $3.2 billion to $4.8 billion.

What is the appropriate process in your opinion?
From the start, negotiations should involve representatives from the government, civil society, and there should be discussion of what this loan will be used for and how it will be repaid. Civil society should take part from the beginning, not just before the finalisation of the deal.
Over and above, nowadays we do not even have a parliament. There is a lack of transparency combined with a lack of representation of society, and the president has all the powers.

The IMF has said it has changed its policies. What do you think of that?
If that is the case, how come they are still negotiating with the government despite the fact that there is neither a parliament nor popular consensus on the loan? They say one thing and act differently.

Some financial assistance, such as that from the EU and the US, has been tied to signing a loan with the IMF, which means that not signing will deprive us of funds. What is your opinion on that?
We do not need any more borrowing. We need development. We have seen that borrowing has not done much good in past years. Donor dependent development projects have proved a failure, and the revolution is the proof. We need to evaluate the actual benefit of these development projects.

The government said it may not use the money, but just needs the stamp of approval to attract investors? What is your response?
We first need to study what foreign investment has done for Egypt. At the end of the day, they repatriate the profits. Moreover, opening the door to investors without regulation leads some investors to exploit Egypt and establish industries, such as cement and fertilisers that they would not be able to set up in their own countries. Before looking for foreign investors, we should have an internal system to protect our industries, labour rights and the country’s higher interests.

Are loans from other sources, such as Gulf countries, more acceptable?
Such loans are a bigger problem. While we are against World Bank and IMF loans, these institutions nonetheless have accountability procedures and they are committed to transparency. As for Gulf countries, they are inaccessible. Moreover, they are against any free thought and support dictatorships. It is something that civil society must start looking into.

But domestic debt is proving more expensive than foreign debt.
The IMF loan is admittedly at a low interest rate compared to domestic borrowing. But again, what we oppose are the procedures involved in taking the loan, and the fact that there is no real vision for reform.
We are part of the International Debt Audit Network that includes Tunisia, Morocco and the EU. If the EU countries are revisiting their debt, we might as well do that as a developing country and stop indebtedness. If they are in a tight spot, we will be in a worst position given that we are dependent on them economically.

Have you made any progress on auditing Egypt’s debt?
We have not done the audit yet. When we sat with parliament, it was welcoming of the idea and wanted to establish an authority to do the audit. But then it was dissolved. In terms of access to information, we are unable to do much yet. But in the meantime, if the Egyptian government requests a re-audit of the debt, we can move forward. But it has not done so until now. In Ecuador, the government requested a re-audit of its debt and was able to drop around 70 per cent of it.
If the government has people’s interests at heart, it should halt the repayment of debt temporarily. It has the right to do so. The European Parliament, last May, issued a resolution allowing countries going through democratic transition in North Africa need to request an audit of their foreign debt and request a temporary suspension of payments.
It does not affect Egypt’s reputation. They are giving us permission. Why should we not take advantage of it?
This is the way to prevent the depletion of our foreign reserves and reschedule our debt. The system must change and it must place the Egyptian citizen’s interests at heart.


The pound is safe

LAST week the exchange rate of the Egyptian pound fell to its lowest value in eight years. The value of the pound traded on Monday, 5 November, at LE6.12 per dollar, down from LE5.5 before the revolution. Mona El-Fiqi reports.
The slight drop in the pound’s value took place on the first day of the visit by the International Monetary Fund (IMF) delegation to Cairo to negotiate a $4.8 billion loan.
Despite reassurances by Egyptian officials that currency devaluation is not a condition for receiving the loan, doubts exist. Analysts believe that letting the pound slip is a sign from the government to the IMF that it is prepared to be flexible over the value of the currency.
An IMF report entitled “Arab Countries in Transition: Economic outlook and key challenges” said: “Allowing the currency to move in line with market forces — while avoiding excessive short term volatility — would help protect international reserves and competitiveness, while mobilising foreign financing on favourable terms could bridge temporary balance of payment gaps.”
Minister of Finance Momtaz Al-Said asserted there is no relation between the IMF visit and the depreciation of the Egyptian pound last week. Al-Said was quoted as saying that devaluation was not on the table for discussion and that the Egyptian currency’s value depends on changes in global exchange rates and that the Egyptian pound is still safe.
Currency traders believe that the depreciation in the value of the pound is not an issue. Mohamed Ragab, executive manager of Al-Malek Exchange Bureau in Nasr City, said that the pound is down but within a normal range, particularly following the Eid Al-Adha feast holiday.
Khaled Mohamed, executive manager of Al-Reda Exchange Bureau, agrees that there is nothing strange in foreign exchange operations in the past few days. “People like to exaggerate and create rumours, but the pound’s value is determined according to supply and demand,” Mohamed said.

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