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The Government of Egypt (GOE) announced in August 2016 that negotiations over a loan with the International Monetary Fund (IMF) were successfully concluded, yet still pending the IMF board’s approval. The loan amounts to US dollar 12 billion to be disbursed over a three-year period. As to be expected, opinions in Egypt have been divided. Some see the loan as the last resort to save Egypt, expecting it to help lift its economy out of the crisis in light of dwindling Arab sources of finance and the deepening economic crisis, featured by the widening budget deficit, limited foreign exchange availability and rising public debt as a percentage of GDP. Others view the IMF in the more conventional dogma – as an unpopular institution whose programs didn’t bring any prosperity to its clients. This op-ed will not delve into such debate, but will rather throw light on some of the externalities of such a loan when concluded and the associated reform program when it is implemented. The aspects discussed are of socio political and socio economic nature.

The reform program accompanying the loan will entail harsh economic conditions, including inter alia, the introduction of a 13% value-added tax (VAT), which has been adopted, another round of currency devaluation, together with the adoption of a more flexible exchange rate regime, and further reduction of fuel and public utility subsidies. These steps aim to bring down the huge budget deficit (currently at around 12% of GDP) and control the skyrocketing public debt (which exceeded 100% of GDP). In other words, the typical IMF prescription of reform will be adopted. Three issues arise here. Firstly, such reform measures were already adopted by the GOE, even before the negotiations with the IMF were initiated. Although they haven’t all been fully implemented, at least signals of them were already carried out. This simply implies that the GOE does not need the IMF to act as a scapegoat for undertaking the reforms. This is often a neglected issue when critics argue against the loan, as the loan simply implies additional sources of finance and not a burden of carrying the associated conditions. Moreover, the IMF comes with transparent economic conditions, which is often better than the hidden political implications that accompany other sources of financing.

Secondly, the governing regime is aware of the unpopularity of signing an agreement with the IMF and how this can affect its backing. In fact, this has been the case before. It’s an issue which should be appraised as the other governing regimes in the aftermath of the 25^th of January revolution have been afraid of embarking on this step. This implies that political will is determined in spite of the negative political externalities associated with the sign-off. In other words, this implies that the GOE is in need of a source of foreign aid irrespective of its implications.  

Thirdly, the IMF itself is fully aware of the challenges arising from concluding such deals, especially in light of its recent unpopular experience with Greece. Hence, for a country that has great political influence such as Egypt, the IMF will try to prove through this loan that it has been paying due attention to the social safety net that accompany its programs. It’s a trend that has been recently initiated by the IMF and will try to ensure that it is capable of introducing and implementing it.

Those three aspects, often neglected in current debates, highlight a strong will to ensure the success of this initiative for reputational reasons. Political will and capability are not the sole determinants to secure the reform program’s success, but also the ability to handle negative socio-economic and political externalities. The enhancement of the social safety net, whether through strengthening existing pension schemes or creating new ones or the adoption of new schemes for transfers to the poor, is a necessary but insufficient condition to guarantee this initiative works.

There are several aspects that seem to have been overlooked by the governing regime as well as the IMF that are necessary and sufficient conditions for the success of the IMF program. Firstly, the reform measures will entail substantial costs not only for the poor (which are taken care of via the social safety net system) but also for the middle class. According to recent national statistics, around 1.5 million households dropped below the poverty line in 2015 indicating the gradual descent from poverty to extreme poverty levels. Additionally, the middle class, which is considered the backbone of society, is suffering from the overwhelming wave of price increases arising from the devaluation of the Egyptian pound, the reduction of subsidies, and the unprecedented increase in the price of public utilities. If the middle class is significantly affected by the reform program, which seems to be the case, the popularity of the regime will be harshly affected, which means serious political implications. Secondly, over the last period the governing regime has been depending heavily on the military to enhance the social safety net (outreach, spread of network, provision of goods and services) and to overcome proliferated corruption in the country. While this role can help to absorb the negative effects of the reform in the short run and control corruption to an extent, it implies a loss of trust in the governmental institutions and marginalization of their duties which should be strengthened not weakened as is depicted by current actions. Thirdly, neither the GOE nor the IMF have paid any attention to improving the investment and business environment and strengthening the role of small and medium enterprises (SMEs). So far the actions undertaken to initiate a new investment law or establish a ministry concerned with SMEs did not succeed. If these three aspects are not tackled in a prudent manner by the GOE, the success of any reform program is likely to be undermined.

Finally, the governing regime as well as the IMF needs to be aware that good governance and social justice might not be an essential condition for initiating the reform program, but it is surely an important pillar for the consolidation and sustainability of any reform measures undertaken. In this regard, there is a need to approach economic reforms in general in a more inclusive way by opening channels of active engagement with the different stakeholders and by communicating to the public the costs and expected payoffs of such reforms. Otherwise, a backslide on reforms is likely to happen, and if does, this will largely be due to how reforms have been communicated and handled rather than a result of the actual reform package. Though unlikely if this happens the blame should not be put on the reform measures, but rather on how they were communicated and handled.