By: Allison Renton
February 2011 was monumental for the Egyptian people as an eighteen-day protest against decades of rule by a brutal regime ended in the announcement of President Hosni Mubarak’s resignation. The spotlight was on Egypt and the world was excited to see where this new path would lead. Unfortunately, one year after Mubarak resigned, the Egyptian people had returned to the streets demanding that the Supreme Council of the Armed Forces (SCAF) step down. SCAF was given power by Mubarak until a legitimate government could be formed; however, many claim that SCAF has failed to act in the people’s best interest. The country is still plagued with stunted economic growth and widespread unemployment. Last spring’s optimism has been replaced with the reality that change doesn’t come without challenges.
A healthy economy is essential for a smooth transition that Egypt needs. Currently, Egypt is saddled with over $35 billion in external debt accumulated during Mubarak’s regime, and foreign reserves are rapidly dwindling in attempts to avoid currency devaluation.
After turning down a loan last June due to domestic opposition, the interim government asked the IMF for a $3.2 billion loan in January, citing a need for economic assistance and foreign reserves. The government has also asked for $1 billion in loans from the World Bank, which recently approved a $240 million loan to finance a power plant originally planned under Mubarak.[1] Many Egyptians recognize that these loans could lead them back into a cycle of unsustainable debt, and have called these loans illegitimate.[2]
Last week at the IMF Spring Meetings, the Popular Campaign to Drop Egypt’s Debt delivered a letter to the IMF requesting that it initiate transparency in its proceedings regarding an economic reform plan and new loans to Egypt’s interim government. They claim that the secrecy surrounding these talks goes against the intentions of the revolution, and returns to Mubarak-era norms. The campaign even called for a cessation of the negotiations, reasoning that the current government is unelected and has not consulted the Egyptian public, who will bear the burden of these loans.
The immediate ability of loans to fill Egypt’s $11 billion financing gap is certainly attractive to a government strapped of cash and options. However, adding more loans to an already enormous external debt burden cannot be the answer. Egypt is currently the largest debtor country in the region and needs to break with a past that has plagued it with unjust and unsustainable debts. A report recently released by the Peterson Institute for International Economics said:
Without a measure of debt relief in the package, debt would likely increase to explosive levels given the expected financing needs of Egypt over the next few years. Therefore, some measure of debt relief is needed to diminish this danger.
Another solution for generating a healthy economy in Egypt is debt cancellation. Debt relief is being considered due to the extenuating circumstances of the democratic revolution. Egypt is in the midst of a huge transition, which will require all of the country’s resources to be successful. Also, the debt acquired under Mubarak’s regime has not served the best interests of the Egyptian people and should be declared odious and dismissed.[3] Mubarak left office with a family fortune reaching upwards of $70 billion.[4] Loans allegedly financed luxurious lifestyles for the political elite, widened state control, and solidified Mubarak’s repressive power. Many western governments also lent military support to Egypt, despite known human rights violations committed by the Mubarak regime.[5]
Most compelling of all, debt relief has already proven successful in Egypt. After assuming a leadership role in the Gulf War, Egypt was granted nearly $20 billion in debt relief by external creditors. This decrease in debt servicing freed up 4% of GDP to be directed to social and economic development.[6] However, an IMF agreement was a condition of this debt forgiveness, and Egypt was forced to take on more loans from the international financial institutions, which has contributed to today’s precarious situation. [7]
Debt relief is integral in Egypt’s economic recovery plan. It will lower debt service payments, enabling growth and creating an environment in which stability can be fostered. Resources can be diverted to social services, infrastructure and job creation, which will be essential to recovery.
President Obama said last year, "We do not want a democratic Egypt to be saddled by the debts of its past" as he offered Egypt an aid package which included $1 billion in debt forgiveness and $1 billion in debt swaps. The international financial institutions and other countries should follow suit to gain more widespread relief. The IMF especially should be more transparent with regard to any future loans to Egypt, and should be careful to avoid the hazard of loaning money to a regime not supported by its people. With few real changes being made in the way of economic development since last year’s protests, the incoming Egyptian government and the global community will have some defining challenges ahead.
Photo Credit: MSNBC http://photoblog.msnbc.msn.com/_news/2011/02/11/6032219-friday-prayers-in-tahrir-square-draw-massive-crowd
For Further Reading:
http://www.piie.com/publications/pb/pb11-17.pdf
http://www.reuters.com/article/2012/04/05/imf-egypt-idUSL2E8F547R20120405
http://www.nytimes.com/2012/03/01/world/middleeast/01iht-m01-egypt-aid.html?pagewanted=all
http://www.middle-east-online.com/english/?id=51548
http://www.ducoht.org/1/post/2012/01/odious-debt-holding-egypt-back.html#.T321_vXDvIc
[1] Reuters: http://www.reuters.com/article/2012/02/15/worldbank-egypt-idUSL2E8DF08L20120215
[2] http://english.ahram.org.eg/NewsContent/3/12/32191/Business/Economy/New-IMF-loan-would-be-odious-and-illegitimate,-say.aspx
[3] CNN: http://globalpublicsquare.blogs.cnn.com/2011/10/11/mubaraks-odious-debts/?iref=allsearch
[4] Guardian: http://www.guardian.co.uk/world/2011/feb/04/hosni-mubarak-family-fortune
[5] IPS: http://ipsnews.net/news.asp?idnews=54459
[6] Peterson Institute for International Economics: http://www.iie.com/publications/papers/williamsonkhan20120210ppt.pdf
[7] New York Times: http://www.nytimes.com/1991/04/10/business/egypt-s-reward-forgiven-debt.html?pagewanted=2&src=pm
Comments