How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
Egyptians have a lot to be upset about these days, and they are showing it. The one-year anniversary of Egyptian President Mohamed Morsi’s inauguration has brought with it major protests and counter protests, raising fears of renewed political violence. Underneath all the anger lies a basic fact: The Egyptian economy is in deep trouble.
Since former President Hosni Mubarak was ousted in 2011, the state’s revenue has decreased sharply. The business sector is in the doldrums, and investments have dried up as both domestic and foreign investors bide their time waiting for the political fog to lift. At the same time, the government’s expenditures are mounting. The climb is partly a result of salary increases that were granted to government workers since the uprising in an attempt to quell the unrest. More fundamentally, though, the costs of subsidies on food prices and, above all, energy continue to mount as oil prices increase on the world market but Egyptian consumers are charged the same prices as before. Energy subsidies now amount to more than $16 billion a year, with an additional $4 billion devoted to food.
A country in such dire straits would usually turn to the International Monetary Fund (IMF) for support, accepting painful and even politically dangerous reforms to secure a much-needed loan. But after two years of negotiations, which started with the first post-Mubarak transitional government under the Supreme Council of the Armed Forces (SCAF), Egypt has yet to reach an agreement with the IMF. Talks are now on the back burner until after Egypt’s parliamentary elections, which will take place sometime this fall or in 2014. In the meantime, the country’s foreign currency reserves have dwindled from $36 billion before the uprising to $16 billion in May 2013, having reached a low of $13.4 billion in March. Also in May, the country’s Standard & Poor long-term credit rating was downgraded from B- to CCC+, and the budget deficit reached over 11 percent of GDP, up from 8.3 percent before the uprising.
Many factors explain the failure of negotiations between Egypt and the IMF. National pride, for one, has certainly played a role. In June 2011, after the two sides reached a draft deal for a 12-month $3 billion loan that required Egypt to enact some demanding economic reforms, the SCAF-led government pulled back. The leadership announced that Egypt did not need a loan after all and would pursue its own homegrown reforms instead of those imposed by the IMF. In this case, Egyptian national pride trumped economic need.
Fear of the consequences of reform has also been a deterrent, particularly because no government since 2011 has enjoyed much legitimacy. Many Egyptians saw successive governments formed under the SCAF as tainted by the military and, in any case, provisional. And even though the election that brought Morsi to power was fair, his legitimacy (and that of his entire government) is contested nearly every day by the opposition. No wonder, then, that no government has had much desire to enact tough reforms. Even Mubarak, who had much more confidence in his government’s staying power, never dared to reform the country’s unsustainable and indiscriminate food and energy subsidies.
Whatever successive Egyptian governments’ precise reasons for refusing to sign an IMF agreement, their behavior was made possible only by generous support from countries in the region, mostly oil- and gas-rich states in the Gulf.
For its part, Qatar provided Egypt with $5 billion after Morsi was elected in June 2012. Some of that came as direct deposits in the central bank, the rest as low-interest loans. The small emirate pledged an additional $3 billion in April 2013, which was released in the form of a low-interest loan the following month. Saudi Arabia announced a $4 billion aid package in mid-2011 and, by December 2012, had paid out about $1.75 billion of that, much of it as direct deposits. The rest will supposedly be doled out as loans for development projects and financing for small and medium enterprises.
Turkey, meanwhile, announced a $2 billion loan in September 2012. By the end of 2012, half of that amount had been deposited in the Egyptian Central Bank, with the rest earmarked for financing development projects. The United Arab Emirates also pledged $3 billion in aid to Egypt as early as 2011, but by June 2013 no part of that had been delivered. UAE officials have promised that the pledge will be honored but that it will take time to do it “the right way.” Finally, even war-torn but oil-rich Libya has opened its pockets. In April 2013, it announced and promptly delivered an interest-free $2 billion loan.
Despite the wide discrepancy between pledges and actual payments, Egypt has received close to $10 billion to date, much more than it would get from the IMF or Western donors who have been waiting to follow the IMF’s lead. The European Union, for example, pledged a paltry $900 million to be paid after Egypt signs the IMF agreement. The U.S. Congress, meanwhile, is threatening to suspend the meager $250 million economic aid package promised to Egypt (the much larger $1.3 billion in military aid was quietly released in May after U.S. Secretary of State John Kerry certified that it would help protect U.S. interests).
Accepting aid from the Gulf countries Libya and Turkey has two major advantages for Egypt. First, the fact that the some of the money is directly deposited, which the IMF would never even consider, allows Egypt’s central bank to shore up its dwindling reserves immediately. Second, none of the regional aid requires the Egyptian government to implement difficult economic reforms. But there are political costs: Egypt, which still sees itself as the most important and influential country in the Arab world, has turned into a charge of wealthy oil producers.
Arguably, it is not in Egypt’s best long-term interest to postpone reforms. It is clear, though, that the fragile government welcomed the aid from its neighbors as an opportunity to do so. Egypt’s decision in June 2011 to stop pursuing the IMF loan followed Saudi Arabia’s announcement one month earlier of a $4 billion aid package and the delivery of the first tranche of it shortly after. A similar sequence of events occurred in late 2012. In September, Turkey announced a $2 billion loan, and in December, Saudi Arabia and Qatar handed over more money. Shortly thereafter, Egypt halted talks with the IMF once more. Negotiations resumed but were cut off again in April, when Libya sent its $2 billion and Qatar announced an additional $3 billion.
Egypt’s ability to avoid finalizing any agreement with the IMF may be a harbinger of things to come. Increasingly, international financial institutions in different parts of the world are meeting with competition from new donors.
Bilateral aid has always been an important feature of the international system and a source of influence for countries that can provide it. But until recently, the major bilateral aid donors have been Western countries that belong to the Organization for Economic Cooperation and Development (OECD). These countries’ political goals and approach to economic development -- namely, their emphasis on democracy -- have aligned neatly with those of the IMF and its sister institution, the World Bank.
But now many more countries are able to provide bilateral aid. The array is remarkable. Some are large -- the BRIC countries -- and have rapidly growing economies that could turn them into dominant powers in the future. Others, such as Qatar, are far too small to ever become world-class economic powerhouses but are endowed with natural resources that give them an extraordinary amount of walking-around money. As the case of Egypt shows, these states can come up with billions in bilateral economic assistance when the United States has trouble scraping together much of anything. And almost on a whim, they can announce aid packages that the IMF would take months to negotiate.
That cuts against what has been one the main goals of international financial institutions for the last few decades. Particularly since the 1980s, the IMF, the World Bank, and OECD donors have been trying to coordinate their approaches to aid and the rules they impose on recipients -- in an attempt to promote economic policies that will lead to development. In the 1990s, it seemed that the task was nearly complete and the so-called Washington consensus, which enshrined pro-market reforms, ruled the day. True consensus was still a ways off, and ideas about the specific policies recipient countries needed to implement changed with disquieting frequency. Yet donors were at least attempting to coordinate their efforts. The old donors still do. The new ones have their own rules and agendas.
It is clear that the OECD and other international financial institutions no longer have a monopoly on support for countries in distress. But the institutions are not necessarily dead. Not all countries attract the interest of the new donors, and not all countries in need of aid want to become indebted to regional players. Many more countries were competing to buoy Egypt than to support Tunisia, for example. (Tunisia negotiated for, and received, IMF funds.) And although Morocco looks to Gulf countries as a source of investment, it has still received IMF assistance to help stabilize its economy. Furthermore, the IMF and the World Bank are in a much better position than new donors to provide the technical assistance and advice that struggling countries most need.
Many recipient countries undoubtedly welcome the new diversity of donors, having long resented the strict conditions on aid. But when those countries face glaring systemic problems -- ones that they know they need to address -- the availability of aid that allows them to put off reforms is not necessarily an advantage.
Egypt needs the discipline as well as the technical support and advice that the IMF and the World Bank can provide but that the Gulf countries cannot. Egypt also needs more aid than the international financial institutions and the traditional bilateral donors can generate. The challenge ahead is thus to ensure that, at the very least, the different donors do not undermine one another and that the Western donors do not pull out, thinking that Egypt’s needs have been met.