Several years ago while pursuing my Ph.D. at the University of California, Irvine, I had the chance to attend my first TEDX talk in Orange County, California. One of the keynote speakers was Mohamed El-Erian, Chief Economic Advisor at Allianz, a leading German financial services company. During his talk, El-Erian emphasized how companies cope with structural changes, such as globalization. Since then, the idea of asking “how to do” something rather than “what to do” has haunted me.
This insight seems particularly relevant to addressing the many challenges facing the Egyptian economy. Since the 2011 revolution that ousted Hosni Mubarak and the 2013 military coup that overthrew Mohamed Morsi, Egypt has been in a dire economic state. Foreign direct investment (FDI) and tourism, two major generators of foreign currency, have dropped significantly in recent years. FDI for instance decreased from record-high figures of $13.2 billion dollars in 2007/08 to $6.4 billion in 2014/15. Unemployment rates have also increased during the same time period, reaching highs of 13.2% in 2014.
As a condition of receiving a $12 billion loan from the International Monetary Fund (IMF), Egypt was required to restructure its economic policies. On November 3, 2016, the Egyptian government took two steps to fulfill this obligation. First, it floated the Egyptian pound, which was an important milestone in its monetary policy; the government had kept previous exchange rates lower than prevailing prices on the black market. Second, it decreased energy subsidies, which increased energy prices by up to 45%.
With a ballooning budget deficit, alarming external debt, and a stark drop in foreign reserves, it might seem logical for the Egyptian government to adopt these measures. But, addressing such challenges using the IMF’s approach will adversely affect the middle and lower economic classes. These measures will continue to raise prices for consumers and place inflationary pressure on the economy. Inflation rates for November 2016 already indicate a 19.4% increase from the previous year.
This is why “how to do” is just as important as “what to do” for Egypt’s ailing economy.
Reimaging the “How”
In lieu of accepting the IMF loan, Egypt could have adopted an alternative measure to raise the money it needed. One solution was to levy a tax on people with wealth exceeding $10 million (including both cash and assets), a proposition made by Hassan Heikal, former Executive Managing Director of EFG Hermes, one of the leading investment banks in the Middle East and North Africa. Writing in Al-Masry Al-Youm in 2013, Mr. Heikal estimated that the collective wealth of these ultra-rich Egyptians was around $50 billion.
The scheme would also include taxing capital gains on stock market shares. Taxing this wealth would generate close to $10 billion in revenue, an amount very close to the IMF loan. The Egyptian government has historically refused to adopt a capital gains tax, believing it would decrease investment and initial public offerings.
Unlike the IMF loan, these tax schemes would not require repayment, which only burden future generations. They also would not involve interference in domestic policies by international organizations. Nevertheless, these plans hold little appeal for the Egyptian government, since they threaten wealthy capitalists and their foreign allies. So, instead, the government has decided to shift the burden onto the poor and impoverished segments of society in an effort to avoid conflict with Egypt’s elite, preserve its international reputation, and protect foreign investment in the country.
Misguided Hopes for the IMF’s Loan
In addition to taking a less confrontational approach to addressing Egypt’s economic problems, the IMF loan could potentially attract new foreign investment to the country and, therefore, boost President Abdel Fattah El-Sisi’s popularity, which has recently declined due to price hikes, as well as his failure to follow through on nearly all his campaign promises.
The IMF loan may give the Egyptian government greater credibility with Western countries, which might be enticed to (re)invest in Egypt once they see the IMF pumping money into the country’s economy. Foreign investors might be very hesitant to embark on any new projects given unstable domestic conditions. But, as international donors—and in particular the IMF—start to boost Egypt’s economy, other investors might follow suit. The hope is that this will project a sense of security and stability, thus attracting foreign investment and tourists to the country once again.
Realistically, however, it is unlikely the IMF loan will be able to accomplish these goals. The drop in both foreign investment and tourism has more to do with Egypt’s stability problems, which will not be materially improved by the IMF loan, than with economic factors. In 2015, tourism revenue was 15% lower than in 2014, thanks to instability and violence, especially in the Sinai. Quite clearly, a loan from the IMF is not going to stop violence from breaking out in Egypt.
The Poor Continue to Lose in Egypt
The IMF has been implementing similar policies in Egypt since the late 1980s. Faced with mushrooming external debt in 1980, the Mubarak regime chose to implement the IMF’s structural adjustment policies in order to decrease its budget deficit and liberalize the economy. Egypt’s current economic reform efforts are in line with previous ones. Floating the Egyptian pound and decreasing subsidies are typical measures promoted by the IMF to keep developing economies afloat and reduce budget deficits.
But, the IMF has frequently overlooked the numerous negative effects resulting from the policies it recommends. Poorer segments of society are severely harmed by inevitable price hikes and a lack of buffers to weather the transition.
If the Egyptian government was serious in its endeavor to assist impoverished segments of society, it could have implemented other solutions to improve the economy. Instead, it preferred to side with the country’s corporate and elite classes, demonstrating that what you do in Egypt is, unfortunately, more important than how you do it.