Playing hard to get with the IMF
Egypt has kept many on their toes over the past year, but perhaps none more so than the International Monetary Fund. Egypt requested funding, got it approved, and then changed its mind, only to subsequently announce that it was reconsidering, then that it wanted to but couldn’t, then finally that it might agree. It’s staggering ...
Egypt has kept many on their toes over the past year, but perhaps none more so than the International Monetary Fund. Egypt requested funding, got it approved, and then changed its mind, only to subsequently announce that it was reconsidering, then that it wanted to but couldn’t, then finally that it might agree.
It’s staggering how international financial diplomacy sometimes resembles a soap opera. It’s all worth keeping in mind when you read about the IMF delegation that’s set to arrive in Cairo next week.
Episode one: April 2011. Meetings between the Ministry of Finance and the IMF in Cairo take place in an optimistic climate of successful post-revolutionary transition. The IMF delegation is more than forthcoming, assuring the Egyptian government and public that no conditions will be attached to the loan besides the government’s own benchmarks. In fact, when Egypt reportedly sought a loan in the vicinity of $2 billion, the IMF approved $3.2 billion.
When, in late June, Egypt suddenly pulled the plug on the agreement, the IMF fumbled to produce a somewhat flummoxed response that can be summed up as "umm, okay, we’ll be hanging around here anyway, let us know."
The official reason was that Egypt had revised its 2011-2012 budget and succeeded in shrinking the forecasted budget deficit to 8.6 percent instead of 11 percent. But it soon turned out the real reason for the decision was not economic but military.
The ruling Supreme Council of the Armed Forces (SCAF) decided to overturn the call of some of the country’s foremost economists (because, as we know, DAKB: "the Dictator Always Knows Better") and decline the loan. A coincidental state media campaign hyped up the whole thing up as an act of sovereignty and national pride, even though it meant that Egypt would have to keep borrowing on the local market at significantly higher interest rates. It was clear then, and it still is now. Despite a staggering yield of over 15 percent, sale targets of treasury bills by the central bank were unmet in late December.
It was, in all likelihood, a populist impulse that drove the SCAF to make its decision. The IMF (and international institutions in general) have always been closely associated in the popular mind with the Mubarak regime’s corruption, especially when it comes to standard Washington Consensus recommendations on matters like privatization, which was carried out in Egypt very opaquely. The stinging memory of the IMF Economic Reform and Structural Adjustment Programs that Egyptians had to endure in the early 1990s to redress the country’s financial standing also remains vivid. Painting themselves as the defenders of sovereignty against the neocolonial IMF, then, was too good a chance for the SCAF to miss, even if it came at the expense of the economy.
The subsequent finance minister, Hazem El-Biblawi, quickly realized that the funding gap would necessitate international borrowing, and declared he was reconsidering the loan previously rejected, as well as seeking the help of international organizations and lenders. The decision was not an easy one and required the blessing of the ruling military junta. In a private meeting with a group of young activists and economists (including me), El-Biblawi acknowledged that he was hardly capable of going up against the SCAF to implement the policies that he and his team saw as necessary. He was, he said, subject to severe pressure.
Like his predecessor, El-Biblawi was also removed a few months after his appointment.
Army-appointed prime minister Kamal El-Ganzoury put the subject back on the table by forming an economic ministerial committee composed of the governor of the central bank plus ministers of finance, planning, industry and supply (a group too large to be off-handedly dismissed by the army). This new body announced, lo and behold, that borrowing $10 to $12 billion was "inevitable and unavoidable."
Days later, International Cooperation Minister Fayza Aboul Naga, a Mubarak-era leftover who is widely believed to have maintained her job only with the army’s backing, announced that the military junta will issue a statement allowing foreign borrowing, and specifying that this concerned a set of loans from the European Investment Bank, the French Development Agency, and the World Bank.
Let us not mark this down to Ganzoury or the people who appointed him, however.
Such change of heart from the military leadership can be explained only by a realization that domestic borrowing was unsustainable and that other sources of funding would be insufficient. (It would also mean that it took the military junta a good six months to finally comprehend why economists said the loan was necessary. This actually sounds like a likely scenario.)
And so, earlier this month, the IMF was invited over for a new round of discussions — only to hear that the invitation had been put on hold. "The fund will be informed of a new date for their visit," Aboul Naga was quoted in the Egyptian press earlier this week, citing the government’s "busy agenda."
Inevitably, the music will stop and Egypt will obtain the loan it should have taken long ago, seven months and four credit rating cuts later. Let’s hope it won’t be too little, too late.