Tuesday,24 October, 2017
Current issue | Issue 1122, 15 - 21 November 2012
Tuesday,24 October, 2017
Issue 1122, 15 - 21 November 2012

Ahram Weekly

The visit of “Mrs Box”

Samer Atallah voices his reservations on borrowing from the International Monetary Fund

Al-Ahram Weekly

The visit of the International Monetary Fund (IMF) delegation is reviving ongoing debates on how to tackle pressing economic issues in the country, either in the short term or in the long term. Proponents of borrowing from the IMF argue that it is the cheapest way to finance our fiscal and external deficits. Also, the lack of alternatives leaves us no other option. I beg to differ.
There are basic concerns that we should all agree on to start with. We, as a society, need to be involved through multiple channels in the process of formulating economic policies that affect our livelihood in this critical political transition. We need to know the trade-offs. We need to understand the repercussions of any policy. Additionally, any economic plan to reverse the current slowdown in economic activity has to be subject of a broad consensus. Also, our current political reality lacks any checks and balances on executive power in the absence of an elected parliament. However, the fund delegation is conducting its negotiations with the government in an environment that lacks transparency and participation from civil society and political parties. Surprisingly, this is taking place in spite of multiple statements from fund executives emphasising the need for a “home grown” programme with broad political approval. I am left with two plausible explanations. Either the fund has the impression that the government of Egypt went through the due process of consultations. Or the fund statements aim to improve the image of the ongoing negotiations.
My objections go beyond issues of transparency and participation. Policies that are normally supported by the IMF hurt the poor and are not sustainable. In spite of changes in rhetoric, IMF economists believe in efficiency rather than equity; believe in markets more than government policy. It is not conceivable that the fund would approve an economic programme that would contradict this ideology. It never did. So far, what has been announced or leaked of the economic programme currently being negotiated includes energy subsidy reduction, increasing government tax revenue through increasing the tax base and value-added taxation, and “increasing competitiveness” through a slow-path depreciation. The energy subsidy is the biggest challenge. It consumes nearly a quarter of government expenditure.
The suggested plan allocates coupons for gasoline and diesel consumption based on the average quantity of consumption of a vehicle. Consumers will be charged a subsidy-free price for any quantity over and above the allocated coupons. Households will use their rationing cards to get subsidised gas canisters.
This plan fails on two grounds. First, it lacks an understanding of the limitations of our bureaucratic system. I have strong doubts that such a mechanism would result in a successful targeting of subsidies. Second and most importantly, it reflects the inability of the government to tackle the large share of subsidies that goes to industry. This is not surprising considering that the government has made it quite clear, since it came to power, that supporting investment is its ultimate objective and priority. An alternative approach is to focus exclusively on restructuring the industrial usage of energy and the domestic usage at the high end. It has been suggested that industry would pass through any increase in its cost production. The answer to this is designing a programme that starts gradually with industries with high margins of profit. It is not a secret that some of these industries enjoy substantial market power.
In a better world, the government would leverage anti-trust laws and institutions to reset the balance. The second track also fails to address the pressing issue of social justice. The so-called “progressive” taxation proposals are nothing but a mediocre change in the taxation law of Mubarak’s regime. The tax brackets are too large to include employees who make a monthly salary of LE4,000 and executives who receive 25 times as much. The striking and shocking element of the recently announced “changes” is the very low tax exemption limit of LE5,000. Basically, the government philosophy is to tax those whom it can tax, not who can afford to pay tax. The last track targets the Egyptian pound to reduce the pressure on the balance of payments. The flip side of such policy is to increase the price level across the board for essential goods for Egyptian households, precisely food imports.
Again such a policy favours the exports sector against average Egyptians. Alternatively, the government could have taken measures to reduce luxury imports and install temporary measures on capital outflows. But unfortunately, we have been bombarded with doomsday scenarios that are an exaggeration of current economic conditions. According to Masoud Ahmed, the IMF’s Middle East and Central Asia Department director, there is “less pressure” on an agreement now given the stabilisation on foreign reserves.  In Lenin Al-Ramli’s play Wighat Nazar, the character of “Mrs Box” visits an institution that caters to the needs of blind people. She commends the management and vows more international support. The problem is that this support has been going only to the big bosses at the top, never to the blind people. “Box” and “fund” mean the same thing in Arabic.

The writer is assistant professor of economics at the American University in Cairo.

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