“Let me start with the good news,” announced Christine Lagarde of the International Monetary Fund (IMF) at the Egypt Economic Development Conference in 2015 that outlined President Abdel Fattah Al-Sisi’s plan for economic reform. “The journey to higher growth has already begun.”
Anyone would think otherwise when, in March this year, hundreds of Egyptians took to the streets across the country in protest at a change in the distribution of bread rations. “We are suffering from high prices,” Samia Darwish, a 50-year-old homemaker from Alexandria told Reuters. “We have nothing left to live on but bread and now the government wants to deprive us of it.”
Such protests were indicative of the unsteady nature of Egypt’s economy, following the country’s $12 billion loan agreement with the IMF signed in September 2015, the first $4 billion tranche of which was received last month. As the country’s currency flails and inflation soars, many looked forward to the arrival of funds that promised to help stabilise Egypt’s finances.
In anticipation of the deal in 2015, Lagarde said that the IMF recognised “the sacrifices made and the difficulties faced by many Egyptian citizens” and spoke positively about the fund’s involvement in tackling extreme poverty.
Perhaps her words may have warranted greater hope, had the promise of future prosperity not been one made repeatedly by the IMF and World Bank, with no visible progress made. Such statements have become common in the rhetoric of global financial institutions, yet they remain reluctant to admit that their prescriptions are the root cause of the economic challenges that Egypt faces today.
A tale of two creditors
The extent to which Egypt’s present situation mirrors that of the late 1970s is startling. Just as today, economic liberalisation policies as part of then President Anwar Sadat’s infitah programme, which had resulted in high debts, were followed by cuts in subsidies to basic foodstuffs in an attempt to reduce state expenditure and appease the World Bank. As prices rose by 50 per cent, riots gripped the country; 79 people were killed in clashes on the streets and more than 1,000 were arrested. Sadat was forced to go back on the decision, yet recession followed less than a decade later, further debilitating the country’s economy.
It was not until the Mubarak era dawned in the 1980s that the IMF and World Bank, having written off numerous debts owed, stepped forward and claimed to show Egypt the light at the end of the tunnel of its economic woes. Promising aid and prosperity, they signed loan agreements with conditional economic policies attached, a programme termed “structural adjustment”. In 1991 Egypt’s ERSAP (Economic Reform and Structural Adjustment Programme) arrangement was signed and the country has since ridden subsequent waves of financial liberalisation policy, tied to the demands of its global creditors.
Motivated by a neoliberal vision of economic prosperity termed the “Washington Consensus”, the institutions prescribed a number of policies that were supposed to liberalise the economy in a sustainable manner. As such, the agreement forced Egypt and other developing states to devalue their currencies to increase the competitiveness of its exports, deregulate its financial systems to attract foreign capital, privatise state owned corporations to generate new revenue, reduce tariffs to liberalise trade and cut public expenditure to reduce the budget deficit.
It is important to note that the aforementioned prescriptions are not inherently flawed. The idea that private corporations are more efficient than the state at allocating resources and that private investment is more productive than public, are theories grounded in evidence. A low budget deficit and a high export record are also useful in maintaining strong and stable state finances.
However, in the 1980s and 90s, it was the scale, speed and intensity of the policies implemented that were unsuited to developing countries long used to the overarching presence of the state, as President Gamal Abdel Nasser had nursed in Egypt. Prominent economists such as Nobel Prize winner Joseph Stiglitz have long critiqued the “one size fits all” approach of the policies prescribed, which do not assess the particulars of the countries to which they are applied. Meanwhile, the singular pursuit of profit over other social objectives left welfare programmes neglected, as emphasis was given to reducing price controls and subsidies.
On paper, Egypt is recorded as a success story. It was credited with starting active capital markets, and for privatising more than one third of its public sector portfolio between 1996 and 1997. By the mid-2000s it was recording consistently high levels of growth at 7 per cent, and reaching new heights of foreign investment.
Yet, inside Egypt, there was little sign of growth translating into prosperity for ordinary citizens. Foreign investment had largely been concentrated in sectors like finance and gas, which did not create employment. In 1996, following extensive privatisations, conditions for workers deteriorated, as unemployment rose and real wages fell. From 2004 many Egyptians took part in widespread strikes across the country lasting for years on end. The percentage of the population living below $2 a day — the official poverty line — rose from 21 per cent in 1990, to 44 per cent almost two decades later. In a classic example of capitalist development, the poor got poorer whilst the rich got richer.
Dirty politics also prevented ordinary citizens from benefitting from their country’s potential. From the US positioning neoliberal, free-market friendly Kamal Ganzouri to be Prime Minister in the 90s, to Egypt’s sales of gas to Israel at below market rates from 2005 that cost the country over $700 million in lost revenue, examples of such corruption are rife.
Such inequality was only exacerbated by the 2008 financial crisis as growth and investment rates slowed and national debt rose. Food prices spiked by a third in August 2008 and the government was forced to reckon with even harsher living conditions and a burgeoning, young population.
2011 Revolution: Enough was enough
By 2011 the country was at boiling point. After years of waiting for promised prosperity, it was little surprise that when Muhammad Bouazizi set himself alight in Tunisia out of helplessness at being unable to provide for his family, the echoes of his protest were heard in Egypt. People took to the streets calling not only for freedom from the autocrat who had dominated them for over 30 years, but also for “Bread, Freedom and Social Equality”.
Since the ousting of Muslim Brotherhood President Mohamed Morsi in 2013, the country has only seen a worsening of its economic situation as political strife deters tourists and foreign investment alike. Today, Egypt’s public debt stands at 98 per cent of GDP, with a budget deficit of $11 billion. Its claims of reserves amounting to some $36 billion are in fact nothing more than grants on the part of Saudi Arabia and the UAE. An estimated 27.8 per cent of people are living below the poverty line.
Last November, in an effort to appease financial institutions, Sisi’s government floated the country’s currency resulting in its depreciation to half its value, causing inflation to reach its highest level since 1986, at a staggering 33 per cent. The government also introduced VAT for the first time, increasing the cost of countless goods; it simultaneously cut state subsidies on fuel and electricity.
A cycle of stagnation
One can see from this history that Egypt has almost come full circle; its situation today is dangerously close to what it was following the bread riots of the 1970s. The years of economic liberalisation did not protect Egypt during the years of supposed prosperity, nor did it prevent it from falling harder than ever when confronted with financial and political change.
Yet as Egypt turns to the IMF once again, what are the policies that are recommended in this agreement? Unsurprisingly, they follow the same formula that has contributed to Egypt’s fragility for over three decades: devaluing the pound, privatisation, liberalisation and state welfare cuts.
In response to allegations that such policies have failed, the IMF and World Bank claim this is due to insufficient liberalisation. They argue that the government’s reluctance to liberalise at the fast pace recommended has had an impact on the effectiveness of the policies, despite Egypt adhering to the prescriptions at the expense of its citizens. Whilst IMF authors stress the importance of human capital for future economic growth, their own statistics show a dearth of such investment.
Egypt’s policymakers would do well to look to the past when considering how to secure the future. It is time they recognised that the recommendations of the global financial institutions are rarely to their betterment, and are more often than not based upon a flawed and binding understanding of progress within a capitalist economy.
The Egyptian people deserve better than a system that requires them to wait passively for the promise of wealth trickling down while it remains in the fists of tycoons and autocrats. They should look to the alternative development strategies posited by East Asia and elsewhere, rather than condemning themselves to economic slavery.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.