The International Monetary Fund (IMF) is stepping up lending in a region where economic reformers haven’t exactly had the most success.
Hoping to restore the confidence of foreign investors, Egypt announced an initial agreement Thursday to borrow $12 billion over three years from the IMF, joining Iraq, Tunisia, and Jordan in taking money from the Washington-based fund. Egypt’s programme is likely to see the government of President Abdel Fattah al-Sisi move toward a more flexible exchange rate, rebuild foreign-currency reserves, and cut spending.
The influx of capital offers an opportunity to restore economic stability in a region beset by political turmoil, terrorism, and the collapse in the price of oil, its most important export. While all the IMF borrowers except Iraq are fuel importers, they’ve received flows of aid and remittances from wealthy producers such as Saudi Arabia, which are now drying up.
The fund faces many of the challenges it encountered when it lent to Egypt and other countries decades ago, such as poor governance and public resistance to belt-tightening.
“The IMF is fighting an uphill battle,” said Jon Alterman, a former State Department official who’s now director of the Middle East programme at the Center for Strategic and International Studies in Washington. “The events of the last five years didn’t convince Mideast leaders that the Washington Consensus was right. It deepened their suspicions of opening up systems, for fear that if you open up, you invite political instability.”
The Washington Consensus, a term coined in 1989, refers to a mix of policies espoused by Washington-based institutions such as the IMF and World Bank that emphasizes budget cuts, open trade, and capital flows, and deregulation. The IMF, now under the leadership of Christine Lagarde, has softened its position on the need for budget cuts and conceded that capital controls can be useful in some situations.
“Egypt is a strong country with great potential but it has some problems that need to be fixed urgently,” Chris Jarvis, IMF mission chief for Egypt, said in a statement after the deal was announced. The new loan programme will support the “comprehensive” reforms approved by the nation’s parliament, he said.
If endorsed by the fund’s executive board and Egyptian lawmakers, the agreement will be the IMF’s second-biggest active traditional loan programme after Ukraine. Jordan signed a letter of intent last month for a $700 million credit facility, while Iraq in July received a three-year stand-by arrangement for about $5.3 billion.
The loan to Egypt conjures memories of the country’s experience with the IMF in the 1990s. At the time, then-President Hosni Mubarak implemented many of the policies recommended by the fund, including budget cuts and privatization, and the IMF held up the country as an economic success story. But in the Arab Spring uprising that broke out in Tunisia in 2010, and spread to Egypt and other nations the following year, protesters argued the reforms didn’t improve poverty and inequality.
“The IMF has a historical problem of advocating one-size-fits-all policies,” said Wael Gamal, a prominent Egyptian economic commentator and a critic of past agreements with the fund. “It still does.”
Ahmed Kamaly, economics professor at the American University in Cairo, said that the “autocratic nature of most Arab countries means that governments can impose tough economic measures to dodge the bullet with relative ease.”
“But once the urgency fades, officials turn away from undertaking reforms, either to appease the public or to protect the interests of cronies,” Kamaly said.
Egypt’s experience with IMF programmes in the 1990s are a clear example, he said. The reform momentum that started in 1991 faded by the end of the decade as the economy stabilized, Kamaly said.
The risk that the new IMF money would be spent without real reforms is a “big concern,” former Deputy Prime Minister Ziad Bahaa el-Din said in a phone interview to Bloomberg.
“It’s extremely important for parliament, the society, the media to monitor carefully whether the programme is implemented in the right way to ensure positive impact,” he said. “It’s extremely important to have a dialogue on who bears the cost because everybody knows that there will be some level of pain with this.”