IMF’s Egypt loan shows risks of its Mideast role

Kuwait Times - - BUSINESS -


A $12 bil­lion loan by the In­ter­na­tional Mon­e­tary Fund to Egypt high­lights the ex­tent of the mul­ti­lat­eral len­der’s re-en­gage­ment with the Mid­dle East and the risks of a back­lash against gov­ern­ments car­ry­ing out painful re­forms re­turn for the aid. From the late 1980s through the Arab Spring up­ris­ings in 2011, the IMF was vil­i­fied in the re­gion as an agent of Western big busi­ness pres­sur­ing coun­tries into aus­ter­ity poli­cies that im­pov­er­ished their pop­u­la­tions while ben­e­fit­ing for­eign bankers.

Af­ter IMF-in­spired spend­ing cuts trig­gered ri­ots in Al­ge­ria, Jor­dan and Su­dan, many gov­ern­ments shunned co­op­er­a­tion with the Fund. At least one Egyp­tian min­is­ter pri­vately com­pared it to Bri­tish im­pe­ri­al­ists who seized the Suez canal. The loan to Egypt, ap­proved on Fri­day, shows how much has changed. The IMF, tout­ing a new, softer im­age, is now a key part of ef­forts to shore up many Mid­dle East economies; as well as Egypt, it is pro­vid­ing bil­lions of dol­lars of sup­port to Iraq, Jor­dan, Morocco and Tu­nisia, and ad­vis­ing Al­ge­ria on re­forms.

For the first time, it is also giv­ing de­tailed ad­vice on a large scale to rich oil ex­porters in the Gulf such as the United Arab Emi­rates and Kuwait, on is­sues in­clud­ing the in­tro­duc­tion of value-added tax to boost non-oil rev­enues. That is good news for in­vestors, who are re­luc­tant to put money into the re­gion with­out the IMF’s seal of ap­proval. But it ex­poses the IMF and its part­ner gov­ern­ments to pub­lic anger if they fail to solve deep-rooted eco­nomic prob­lems.

Mohsin Khan, who headed the IMF’s Mid­dle East depart­ment from 2004 to 2008, said its re-en­gage­ment with the re­gion was tricky be­cause while the Fund knew how to fix state fi­nances and ex­ter­nal deficits, it was like econ­o­mists in gen­eral - less ex­pert at re­duc­ing in­equal­ity and cre­at­ing mil­lions of jobs.

“Gov­ern­ments are un­der­tak­ing dif­fi­cult eco­nomic re­forms. If af­ter a few years they haven’t suc­ceeded in im­prov­ing liv­ing stan­dards, peo­ple will point fin­gers,” said Khan, now se­nior fel­low at the Rafik Hariri Cen­ter for The Mid­dle East at the At­lantic Coun­cil in Wash­ing­ton.


The shift towards the IMF is partly due to huge eco­nomic pres­sure: the turmoil of the Arab Spring slashed in­vest­ment in poorer coun­tries while the plunge of oil prices from mid-2014 squeezed the Gulf’s en­ergy ex­porters. In the past, poorer coun­tries pre­ferred loans, aid and mi­grant work­ers’ re­mit­tances from the Gulf, which at­tached po­lit­i­cal con­di­tions to its aid, to money from the IMF, which de­manded tough eco­nomic re­forms. By hurt­ing the Gulf’s fi­nances, cheap oil has made that model un­sus­tain­able.

But the IMF it­self has also changed. It is less in­sis­tent on dogma such as free­ing cur­rency rates, and more fo­cused on re­duc­ing poverty and in­equal­ity, said Bessma Mo­mani, se­nior fel­low at Canada’s Cen­tre for In­ter­na­tional Gover­nance In­no­va­tion, who is writ­ing a book about the Fund.

For ex­am­ple, last week Cairo floated its cur­rency and hiked fuel prices clas­sic IMF poli­cies. But to limit the pain for poorer cit­i­zens, it plans - with IMF ac­qui­es­cence - to boost spend­ing on a con­sumer sub­sidy scheme and keep the price of bread flat, which will slow the drive to cut its bud­get deficit.

“I think we’ve learned,” Ma­sood Ahmed, who ran the IMF’s Mid­dle East depart­ment from 2008 un­til last month, said of its role in the Mid­dle East. In the past, the IMF some­times fo­cused solely on macroe­co­nomic num­bers such as deficits and growth rates; it now looks more at other is­sues which can af­fect the macro pic­ture, such as poverty, he said.

Af­ter the Arab Spring, Ahmed mounted a pub­lic re­la­tions cam­paign to im­prove the IMF’s im­age in the re­gion, launch­ing an Ara­bic-lan­guage blog to ex­plain its poli­cies and meet­ing fre­quently with politi­cians and jour­nal­ists. Re­ham El De­soki, se­nior econ­o­mist at re­gional in­vest­ment bank Arqaam Cap­i­tal, said that partly as a re­sult of such ef­forts, the IMF’s ties with Egypt had changed since the 1990s.

“The re­la­tion­ship has de­vel­oped. It’s more of a part­ner­ship than a car­rot and stick re­la­tion­ship,” she said. Khan said the IMF had changed be­cause it was shocked by the fragility of economies dur­ing the Arab Spring, as rapid growth rates evap­o­rated and in­vest­ment dried up overnight. “The Arab Spring had a hum­bling ef­fect on the staff of the Fund.”

So far, the IMF ap­pears to have suc­ceeded in avoid­ing the pub­lic out­rage that marked many of its past for­ays into the re­gion. Or­di­nary Egyp­tians are com­plain­ing about the fuel price hikes but few are blam­ing the Fund, and many say they un­der­stand the need for aus­ter­ity. Com­ing years may test that suc­cess, how­ever. The three­year Egyp­tian loan may just be the start of a long-term fi­nan­cial bur­den; many econ­o­mists think it will have to be re­newed. Syria and Ye­men will need aid when con­flicts there even­tu­ally end.

Mean­while, the IMF will be caught in the mid­dle as gov­ern­ments in both oil im­porters and ex­porters cut back wel­fare ben­e­fits. Fuel prices are ex­pected to rise fur­ther and new taxes to be im­posed in many coun­tries. “This means the IMF can’t avoid po­lit­i­cal en­gage­ment in coun­tries, ex­pos­ing it to a back­lash if eco­nomic tran­si­tions prove painful,” said Mo­mani. —Reuters

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