Egypt is currently taking a series of massive measures which officials say will help fix the country’s ailing economy. In recent weeks, it has received loans and investment pledges from Italy, Turkey, the United States, Saudi Arabia and China. In the past month, it has entered negotiations for a US$4.8 billion loan from the International Monetary Fund.
The cash flow from the IMF and other countries is being accompanied by a domestic plan that officials say will get the economy back on track and growing, and deal with the government’s widening budget deficit.
The adopted plan, Prime Minister Hesham Qandil told international news outlets earlier this month, is to implement subsidy cuts already stipulated in this year’s budget, to begin selling Islam-sanctioned Sukuk bonds and other government debt, to privatize portions of electricity production and to maintain the country’s Qualified Industrial Zones, a Mubarak-era program that allowed duty-free exports to the US for companies making products using an Israeli component.
Since the crowds of protesters left Tahrir square over 20 months ago, economists and politicians have worried over the financial fallout of the political upheaval. They have pointed to the widening budget deficit and widespread slowdown in economic activity, and made prescriptions for loans and reform.
But the conversation has remained within the realm of politicians and economists, its jargon failing to percolate the city’s coffee houses and street corners. The very subjects of these policies — drivers purchasing gasoline or farmers in their fields — have not been presented with the arguments for policies that could ultimately change the cost of gasoline or farmer’s grain.
In light of the government’s movement to embrace a set of policies that closely resemble those of the former regime, Egypt Independent decided to break them down, highlight their potential implications for the economy and ordinary Egyptians, and look at possible, if unorthodox, alternatives.
The solution: foreign loans
The IMF loan is not the first the country has taken. In the 1990s, the fund authorized about US$391 million in stand-by credit (the option to borrow at any time) in support of the Mubarak government’s economic and financial reform program.
Then, the fund was endorsing a reform program of large-scale privatization and opening the country to international investment and trade.
If the country takes the most recent loan, Egyptians could expect more of the same conditions of the past 30 years. Qandil’s policy announcements earlier this month show a near-identical path to that of the Mubarak school of economics.
Egypt has historically not been a huge borrower, but under Mubarak the country’s debt grew to 80 percent of its GDP. The figure is not massive by international standards, but substantial and worrisome to some analysts. The most indebted country, Japan, owes more than twice its GDP.
Most of Egypt’s debt is internal, at roughly US$205 billion according to the Central Bank of Egypt’s figures for fiscal year 2011/12. That’s six times the country’s US$33 billion foreign-held debt.
In the 2012/13 budget, the government allocated over a quarter of all spending to debt servicing.
An alternative: raising taxes on the rich
Qandil has already mentioned plans for a progressive tax system, but if Egypt adopts a system that resembles those of free market economies in the West, the very rich could be the least burdened by taxes. In the US, a confusing progressive tax system sometimes allows large breaks to society’s wealthiest investors. Critics say more straightforward taxes on the rich are appropriate.
The country could tax high dollar purchases, such as luxury cars, or impose a land tax of investment tax, as economic journalist Wael Gamal said during a recent conference.
The government could also tax foreign companies and investors, or implement capital outflows to prevent money earned in Egypt from being spent abroad. Malaysia implemented a capital outflow limit in 1997 after the Southeast Asian financial crisis instead of taking loans from the IMF.
“Right now, we are essentially subsidizing other countries on our own account,” says Yahia Shawkat, an architect and a member of the campaign to abolish Egypt’s debt.
Currently, Egyptian policy is to keep taxes on foreign investors low. Qandil and the IMF’s announcements indicate the country will hold to this course, and further reduce taxes and other costs that may deter investment.
The Malaysian currency significantly fell in value due to the policies, but the country’s robust export sector stepped up to boost the country’s GDP. Malaysia’s central bank also had a significant cushion of foreign reserves to help the country get by during the slump in foreign investment, which Egypt does not.
Capital outflow controls would also require precise planning — policymakers would need to determine where the largest drains of capital are.
Some international economists also warn that limiting the economy’s highest rollers has a dampening effect. But Gamal and other economists like him believe the limits could redirect investments to more job-productive and beneficial industries for the country.
Samer Attalah, assistant professor of economics at the American University in Cairo and a member of the campaign calling for Egypt’s debts to be dropped, suggests that the capital outflow limits be adopted on a trial basis. He said it is high time Egypt’s leaders started thinking outside the monetary policy box.
“Why do we resort to measures that deteriorate the majority of Egyptian households, instead of radical measures that might in the long term be better?” he said.
An alternative: canceling debt
There are alternatives to racking up debt, some say, and valuable lessons to be learned from countries that have refused to pay debts.
“If Egypt takes the loan, all it will be using it for is paying off the old debts,” Nick Dearden, a representative from the Jubilee Debt Campaign UK, told Egypt Independent on a recent visit to Cairo.
He said there is a strong moral case for Egypt’s debt to be declared as “odious,” a legal term that describes debts incurred under an unjust or corrupt government. As the country gets deeper into IMF negotiations, the Egyptian debt will be repackaged, papers will be signed, and deals will be sealed.
“Egypt doesn’t have long to make its case,” Dearden said.
For debt to be declared odious, Egyptians must first conduct a debt audit, an investigation into the sources of the debt and the conditions it was borrowed in.
Maria Lucia Fattorelli coordinated a citizens’ debt audit campaign in Brazil, where more than 40 percent of the budget is eaten up by debt, some owed to the IMF. She said auditors found that much of the debt was from private international banks, and had been re-packaged and sold as government bonds.
“It is a system of bleeding,” for countries such as Brazil and Egypt, she told Egypt Independent.
Fattorelli and Dearden say the situation calls for a flat-out refusal by Egypt to pay its existing debts. Ecuador made a similar move in 1999, and Argentina in 2001.
But were Egypt to default on its debt or accept the IMF loan, how would these choices affect the average citizen?
If it accepts the loan, Egyptians can expect the country’s economic policy to continue as it has for the past two decades. Egyptians could likely expect to see higher taxes across the board, in an effort to finance the debt payments.
If it defaults, the government would be able to pay off the majority of its budget deficit with the money it would save by not paying its existing debts. Egypt paid nearly LE106 billion in interest on the country’s debts last year, and would likely pay even more this year. The 2012/13 budget projects the deficit to reach approximately LE135 billion.
But even with Egypt no longer having to service its debts, the Central Bank would still have to devalue its currency. The current rate of spending international reserves — about US$1 billion a month — is unsustainable.
The economy would also likely take a huge hit — a currency devaluation and hike in prices of imports, which would probably raise prices across the board. Egypt relies heavily on food imported from abroad, particularly wheat. A 2010 study by Alaa Hassaballah, a board member of the Alexandria Foodstuff Association, found that 60 percent of Egypt’s annual wheat consumption is imported. It is likely that many Egyptians could end up paying more for their daily bread.
Defaulting would be difficult for the domestic banks that hold over 86 percent of the country’s debt. Without international financing, the government would have to watch many banks fail. Small businesses would have virtually no credit at their disposal.
Egypt would also become a pariah amongst international lenders after defaulting, and foreign investors could back out in the unpredictable environment.
In the longer run, Fattorelli and Dearden say the Egyptian economy could emerge stronger. But, defaulting requires biting the bullet in the short term and looking for help outside of the established international institutions, while building up domestic production.
The short-term was not rosy for Ecuador and Argentina. In Ecuador, a free-fall in the price of the currency and rapid inflation meant the country’s leaders had to switch to the US dollar. In Argentina, creditors are still knocking, asking for their recompense for the unpaid debts in international arbitration courts.
But a short-term period of economic contraction and deep restructuring is worth it in the long run, Fattorelli said.
According to Dearden, the alternative is worse. “We become addicted to a flow of foreign capital that’s volatile, only reinforcing dependency,” he said.
But a country also needs a strong popular resolve to drop the debt, Fatorelli said, which Ecuador had cultivated. She said that for Egypt to take similar measures, the average Egyptian needs to see that the country’s economic policies are not a bastion for the initiated, but, rather, a matter of concern for every citizen.
The solution: public-private partnerships
Public-private partnerships (PPPs) are an arrangement by which a cash-strapped government can bring in private sector companies to help deliver national services and infrastructure.
Egypt has been conducting projects through such partnerships since 2006. A 2009 Ministry of Finance update on public-private partnerships lauded their benefits. It said the partnerships provide new investment capital for infrastructure, reduce borrowing and associated risks, drive local markets for long-term funding, grow the economy, create jobs and improve public services.
From 1990 to 2008, the private sector invested US$16.6 billion in 23 PPPs in telecommunications, transportation, water and sewage, according to the Ministry of Investment.
With the government’s diminished ability to foot the bill of future development projects on its own, leaders are looking to continue to make heavy use of the model in the coming years in electricity production and other important public services.
It also comes heavily recommended by the US and other world powers. During the visit of a 100-person delegation from the United States last week, Egyptian and American officials called PPPs “a top priority,” announcing the launch of wastewater plant collaboration and an industrial development project in Port Said to modernize the port technology.
“We have a government that acknowledges the importance of the private sector,” Minister of Investment Osama Saleh told the delegation members and press at a lunch at the Four Seasons Hotel on 10 September.
The alternative: Keeping public works public
The offspring of public-private cooperation are not always economically sound and productive projects.
In the past, public-private partnerships and privatization policy have been criticized for resulting in corrupt and wasteful contracts delivered to companies close to the Mubarak regime. President Mohamed Morsy’s fledgling government has yet to prove itself free of the same cronyism.
Abroad, some countries have had similar experiences. The EBRD was inaugurated after the fall of the USSR, with the intention of helping former Soviet economies restructure and privatize industries. The bank promoted and facilitated public-private development agreements as the first step towards handing entire services and industries to private companies, not always to great success.
In Eastern and parts of Southern Europe, bidding contracts for the process were often not transparent, and the deals became notorious as a way for some governments to hide national debt off the budget, since private companies initially took on costs.
Originating in Britain, the model is seen by many there as a failure. The UK infamously arranged a PPP to help renovate its metro system, but a series of private companies only ran up costs and failed to maintain the infrastructure. In 2010, the metro’s rehabilitation and maintenance was re-nationalized and the government took on the companies’ negative balance sheets.
Anders Lustgarten, a researcher with CounterBalance, a European coalition that challenges the policies of the European Investment Bank and the EBRD, believes the main goal of PPP policy by the EBRD and other banks and governments is that it represents “a fantastic opportunity to make money.”
The EBRD, and the US delegation’s encouragement of Egypt’s adoption of the PPP model, is just a good way for the banks “to fund an elite of private companies,” he says. The essential flaw with the model, he said, is that in many contracts, private companies have little reason to keep production costs down, because they can always pass the bill on to the government at the end of the day.
“They are not designing policies to suit your needs, but rather their own ideologies,” Lustgarten said. “Do not be fooled by the word ‘partnership’.”
Paving a new road
Egypt is choosing its economic direction at an auspicious time. Across the Mediterranean, countries such as Greece, Portugal and Spain are struggling to cope with financial disasters brought on by their governments’ polices of bailing out private banks, governments which were then backed by IMF loans.
Just a few years ago, some of the world’s largest financial institutions were brought to their knees by a domestic lending crisis brought on by private banks. The US recession sparked a worldwide slowdown that has left many people questioning whether un-checked free-market policies have served their populations well.
Popular movements in Europe and the US have risen up to criticize their governments’ policies that allowed profit-focused companies and banks to drive their economies into the ground, and then be bailed out at the citizens’ cost.
If Egypt chooses its own financial path, it will be paving the way for other Arab countries that have experienced uprisings in the past two years. Whatever the path taken, it is clear that Egyptians — from farmers to taxi drivers — would do well to keep tabs on the policies chosen by the government.
Egyptians’ proven and recently demonstrated ability to mobilize, say many who oppose the current policies, means that if they read up on the policies and get off the couch, they could affect real change.
“This is a good time for Egypt to take the lead,” says Samer Attalah.
This piece was originally published in Egypt Independent’s weekly print edition.
