My reply to Wael Gamal’s Latest Column on the IMF Loan: Al-Radd al-Mu`tamad `ala Dalil al-Mu`tarid `ala Hijaj al-Muqtarid
I read Wael Gamal regularly, and while I agree with some of his positions, I disagree with others. With respect to his latest column, the cleverly titled “Dalil al-Mu`tarid `ala Hijaj al-Muqtarid,” I have penned in this post a short reply, with the equally cleverly titled “al-Radd al-Mu`tamad `ala Dalil al-Mu`tarid `ala Hijaj al-Muqtarid”.
First, there are substantial points of agreement. For example, I agree completely with his argument that Egypt desperately needs to broaden its tax base and strive for greater progressivity through a combination of increased taxes on the assets of the well-off and reduced subsidies that benefit the rich. I disagree, however, with his argument that Egypt’s budget is not a big deal, as evidenced, he claims, by the US’s deficit. It should be obvious that Egypt can’t be compared to the US, but here are some reasons why not: first, the US budget deficit, while massive in nominal terms, is really quite small when compared to US aggregate household wealth. This means that the US, if it had the political will, could easily raise taxes and reduce its debt. (Of course, that is a big “if,” which is what led S&P to downgrade the US, making the US more like Egypt in that political risk is really more important than economic risk.). Second, the US, while its debt is extremely large in nominal terms, also has foreign investments that are almost the same size as its debt. See this and this by Krugman, for example, showing not only that US foreign investments are substantially equally to US debt, but that the US earns a significant margin on its overseas investments relative to the interest it pays on foreign borrowing. Finally, the biggest difference between Egyptian indebtedness and US indebtedness is the relative difference between the US dollar and the Egyptian pound in the international financial system. While both Egypt and the US owe most of their debt to themselves, that is their own nationals, the US is able to get foreigners to accept payment in USD, while Egypt cannot convince foreigners to accept payment in Egyptian pounds. This makes Egypt vulnerable to shocks arising out of imbalances in its current account (if it cannot finance those deficits) in a way that the US can never be. Accordingly, as Egypt’s terms of trade continue to deteriorate, the only way Egypt can repay its external debt is to further depreciate its currency (i.e., trade more of its current and future output for less and less foreign output), something it has been doing more or less continuously since the mid-80s. Accordingly, Egypt’s debt is a very serious problem, and although I agree that Egypt is not Greece (I like to say Egypt has a liquidity problem, not a solvency problem), a liquidity problem will eventually become a problem of solvency, if the structural reasons giving rise to chronic imbalances in its current accounts are not solved.
I also agree with Gamal that increased borrowing will do nothing on its own to enhance Egypt’s long-term productivity or reverse the slow but steady depreciation of its trading position relative to the rest of the world. But that is no reason to reject the IMF loan. It seems to me the only reason to reject it is if one believes there is no hope that any Egyptian government will implement need macroeconomic changes. Structural reform, including providing financing for long-term investments in public goods, is not the primary mission of the IMF, which is instead to ensure international monetary stability by assuring that member states have sufficient liquidity to pay their current obligations. It is not the role of the IMF, in other words, to finance long-term investments; that is the job, ironically, of the World Bank. (The names of the two institutions ought to be reversed, because the latter does not act like a bank, but rather an investment fund, while the former provides liquidity, but not investment funds.).
I also agree with Gamal that the biggest villain here is the SCAF and its horrible management of the transition, but we should also not forget the role of the Supreme Constitutional Court’s decision to disband the parliament and the failure of the civilian political parties to reach some conclusion on the constitution. In the absence of a strong post-revolutionary government, it is hard to imagine any transitional government proceeding with the kind of structural changes to the economy (particularly in the field of taxation) that Gamal advocates. One advantage of having an Islamist-dominated government is that they would have had “ownership” of Egypt’s economic problems. Right now, there is no institution in Egypt that can claim broad legitimacy to speak on behalf of the public. If one wishes to be cynical, it seems that the Islamists and Morsi, having concluded that the most organized opposition in Egypt comes from the old regime, has decided on the policy of “keep your friends close, but your enemies closer,” so that when things go wrong, they can say, “Hey, we just continued already existing policies.”
Unlike Gamal, however, I am not concerned at the prospect that the interest rate on the IMF loan might rise substantially after the expiration of the initial grace period. If interest rates do rise, that implies a substantial improvement in the global economy, something which should help the Egyptian economy recover, again, unless continued political gridlock prevents economic reforms from being implemented. If the world economy, and the Egyptian economy along with it, improves, however, that means that Egypt should be able to refinance that debt – or pay it off from domestic sources – without much difficulty. If the world economy does not recover, well, then the low interest remains in place. The only deadly scenario would be if the world economy improves and Egypt remains mired in political chaos.
Finally, I am most in agreement with Gamal regarding the need for transparency and an insistence that the government make clear what its plans for structural reform are. Until and unless there is a broad national consensus on the need for economic reforms and broad-based social investments, the status quo will remain in place and these changes will not happen. Too many Egyptians – on the left, right and middle – continue to believe that there are magical solutions to Egypt’s economic woes, so his calls for more open debate on these matters is most welcome and appreciated.