Amid renewed calls for negotiation between Egypt and the International Monetary Fund (IMF), a recent report by the Egyptian Center for Economic and Social Rights (ECESR) has said the fund’s strategies in the Middle East are falling short of properly engaging the challenges facing the region.
The report, released at the end of February and produced in collaboration with the Arab NGO Network for Development and the New America’s Middle East task force, comes as “an effort to reexamine” IMF economic policy recommendations to Middle Eastern governments in the wake of the Arab Spring, with particular focus given to the cutting of subsidies and implementation of austerity measures.
Such recommendations have formed the backbone of the IMF’s policy in the region for decades as part of its Structural Adjustment Programmes. However, the subsidy removal prescription has shown “little success” historically in the region, the report says, “mostly owing to inadequate measures to mitigate the increased financial burden on the poor and middle class.”
To balance out the loss of subsidies, the fund has often urged regional governments towards refocusing on “social safety nets” – advice the report criticises for being ambiguous and out of touch with current capabilities of regional governments, many of which are in a state of political transition.
Obstacles to reform
“Theoretically, the phased removal of energy subsidies combined with the implementation of broad and targeted social protection measures would reconfigure public spending in a way that favours the majority of citizens,” the report reads. “In practice, however, existing social protection schemes in Arab countries are inadequately funded, poorly constituted, and lack the institutional capacity to reach broad segments of society.”
In response, the IMF has often suggested implementing a direct cash transfer system as a means of balancing out near-term subsidy withdrawal, but the report called such a system incapable of “meeting the needs of Egypt’s poorest and most vulnerable groups.”
This is partly because the needs are great. In a 2012 population survey, as many as 86% of Egyptians said their current income was “insufficient for covering total monthly needs”, the report says, adding that previous amounts of cash transfers proposed by the IMF and World Bank still fell well short of making up the gap.
However, according to the report, one of the largest challenges to any reform is the lack of effective research infrastructure. It points to a current combination of poor population data and “administrative and technical difficulties”, which hinder the kind of efficient targeting necessary for any such “social safety nets” in the region, and endemic corruption further sapping the ability for the funds to reach the right people.
The ECESR’s Mahinour El-Badrawi highlighted such problems in Egypt, expressing doubts over the potential success of an April 2013 agreement with the World Bank to restructure the country’s energy subsidies. “In addition to the absence of transparency,” she cautioned, “the efficacy of the Bank’s plan to dismantle subsidies in Egypt is doubtful, for it aims at creating a data-network to target the poor based on consolidating the already existing data systems, criticised for corruption and bureaucratic inefficiency; a main reason for considering subsidy reform to start with.”
This in mind, the report asserts that “prior to the implementation of subsidy reforms, and alongside the development of comprehensive and sustainable social safety nets, the region’s structural and institutional challenges must be addressed.”
Perils of premature cuts
Prematurely cutting subsidies before an alternative system is in place, the report stresses, would have serious consequences. “Given the region’s difficult economic circumstances,” it warns, “the elimination of subsidies would also increase the pressure on middle class households and individuals, limiting their ability to achieve a basic standard of living and pushing many to the brink of poverty.”
In Egypt, many more would be pushed over the brink, the ECESR said. According to the latest reports by the World Food Programme, doing away with food subsidies now would boost poverty rates in the country from 25% to 35%.
The report points out that even removing energy subsidies on regional businesses could hurt the broader population, “as the industrial units unable to bear the additional costs of price increases would shut down or cut production.” This would, in turn, “slow economic growth and increase national unemployment,” which, in Egypt, stood at 13.4% as of February.
Given these ill effects, the report also highlights the “overwhelming” opposition among local populations to the removal of subsidies in a 2012 Gallup poll, and the consequent political sensitivity to them.
In April 2013, protests erupted during the IMF’s visit to Egypt, “whereby a broad array of social movements, trade unions, and political parties demonstrated against the IMF’s proposed subsidy reform policies,” with similar protests held in November 2011, the report notes. In December 2012, attempts by former president Mohamed Morsi to implement subsidy cuts “were reversed in the face of popular opposition” only days after their announcement.
The fund’s response to such popular dissent and the broader conditions of the Arab Spring, the report says, has been detrimentally rigid and blunt. The IMF has still provided governments “with the same basic set of policy recommendations, centred on fiscal consolidation and subsidy reform, despite the massive changes introduced by the peoples’ uprisings and ensuing transitions.”
“These popular movements have espoused a democratic, participatory approach to decision-making as a core demand,” the report points out. “In all countries of the region, economic reform policies need to be publicly debated among various stakeholders, including governments, labour unions, and civil society organisations. Yet the IMF’s policy advice to Arab countries has lacked popular participation and the effective representation of citizens’ voices.”
Recommendations to the fund
What is needed, the report asserts, is a more inclusive and targeted approach.
“The IMF should adapt its recommendations to country-specific conditions, taking into account the need for viable and effective social protection schemes,” that would “aim toward greater social, economic and political inclusivity”.
The report added that the fund should “refrain from recommending major subsidy reform during times of unrest,” while “taking into account wages, purchasing power, participation in domestic markets, and poverty levels”, as well as the limitations of available research infrastructure.
In order to create the fiscal space necessary for comprehensive reforms and social protection, the report suggests “working with national governments to develop short-term alternatives to subsidy reform, such as debt relief, progressive taxation systems, or reducing military expenditure – measures that would create the fiscal space necessary for comprehensive reforms and sustainable social protection policies.”
It also advocated greater engagement between governments and “civil society organisations – including labour unions, NGOs, and municipal authorities – before undertaking economic reform agendas or national development plans. The IMF should mandate such multi-stakeholder consultations before concluding loan agreements.”
Finally, the report urged a more open and robust dialogue over IMF engagement with Arab government, saying that “greater transparency surrounding the IMF’s bilateral meetings will increase public awareness of economic reforms and generate broader societal consensus over reform agendas.”
In Egypt, the conversation has been a long one.
Consecutive governments have been in negotiations with the IMF over a $4.8bn loan since 2011 amid falling foreign investment and international reserve levels in the wake of the 25 January Revolution.
Discussions with the fund were put on hold following the ouster of former president Mohamed Morsi on 3 July, with Ahmed Galal’s finance ministry seeking to avoid austerity measures and downplaying the importance of resuming talks in light of an influx of $12bn in aid from the Gulf.
However, Hany Kadry Dimian, who replaced Ahmed Galal as Minister of Finance during February’s cabinet reshuffle, had previously worked for the IMF and is believed to be more receptive to negotiating the loan. Dimian had served as first deputy finance minister under Morsi’s government, during which he was a prime negotiator with the fund. He later resigned in April 2013 for unknown reasons.
There are indeed signs that a public discourse is taking place. In February, the interim government said it would begin taking action to address energy subsidies by increasing public awareness of the negative effect of the current system. Public expenditure on energy exceeds total spending on education, health and scientific research, according to Minister of Planning Ashraf El-Araby.
Energy subsidies account for approximately EGP 128bn of the state’s budget, with around 80% of them reaching the rich “so it doesn’t benefit the needy,” according to the Ministry of Planning.
On 8 March, however, Prime Minister Ibrahim Mehleb announced the government would not suspend its commodities and services subsidies; instead it is working on “redistributing and offering it to those who deserve help.”
The redistribution policy, Mehleb said, is expected to be implemented within three months.