Criticism of the Proposed IMF Loan to Egypt, reprise

Nov 12

Civil society groups in Egypt have released a letter addressed simultaneously to Hisham Qindil, Egypt’s prime minister, and Christina La Garde, executive director of the International Monetary Fund (the “IMF”), expressing their opposition to the proposed loan.  

To the extent that the letter expresses objections to the process by which this loan is being negotiated, I am quite sympathetic; however, it also appears to me that there is a basic misunderstanding of the role of the IMF. The IMF does not lend money to a country to finance its development program; its role is to provide countries with financing when they cannot meet their current obligations.  In other words, the IMF acts as the lender of last resort to countries when countries are no longer able to pay bills that are due.  The IMF would not be willing to lend money to Egypt if Egypt were not sitting at the precipice of an economic catastrophe.

Egypt’s current obligations cannot be deferred until such time as Egypt completes a democratic transition and holds elections for a parliament. Who knows, maybe a miracle will happen, an agreement will be reached, elections are held, and then the judges decide to strike down the constitution because it doesn’t give them the role they think they deserve?  Egypt’s balance of payments obligations are not conditional on the election of a parliament, and although the future of economic reform in Egypt will depend on re-establishing a legitimate domestic order that enjoys enough public backing to institute the painful economic reforms Egypt needs, right now the current government, despite enjoying only a partial mandate, must begin to institute some steps in the direction of restoring fiscal sanity to the Egyptian state.  This entails reducing the scandalous energy subsidizes that go largely to the benefit of the well off.

In the long run, however, Egyptians have to face the reality that only a revolution in Egypt’s productive capacity — so that Egypt can become competitive in international markets — can prevent future rounds of IMF financings.  I continue to await a serious discussion of how Egypt will become more economically competitive while preserving some kind of social safety net.  Unless this problem is solved, Egyptians will be sentenced to ever increasing poverty, repression and an ever present risk of reversion to authoritarian rule.  So, Egyptians are right to be concerned that this latest agreement with the IMF lacks sufficient transparency, but our economic discourse also needs a strong dose of reality.  The IMF is not responsible for the non-competitiveness of the Egyptian economy; Egyptians are responsible for laying out an economic future that will generate enough growth to provide a dignified future for its citizens.

This means that the Egyptian opposition groups must propose serious plans to solve Egypt’s economic challenges; criticism of the IMF is not sufficient to solve Egypt’s economic ills.  More than 2/3rds of Egypt’s indebtedness is denominated in local currency and accrues interest at a rate of 13%, if not more.  The IMF loan would reduce Egypt’s interest obligations, at least in the short term.  Without a plan to resume rapid economic growth, however, these burdens will only increase, and ultimately destroy the revolution.  This is not a time for economic dogmatism; all political groups in Egypt must be willing to accept good ideas from whatever source they may come, even if that is the hated IMF.  I never thought I would live to see the day that non-Islamists are critical of the Islamists for being insufficiently Islamic when it comes to matters of public finance!

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