IMF Policies and Impact in Egypt and the Arab Countries

This article written by Dr. Sherif Masry, the President of PSI affiliate the Independent Syndicate of Bibliotheca Alexandrina Workers, explains the negative impacts of IMF Policies on the Arab region, and on Egypt in particular. IMF’s loans are one of the most important means of violating the sovereignty of states that borrow from it.

By Dr. Sherif Masry*

Since the foundation of the International Monetary Fund (IMF) in July 1944, its aim has been to re-engineer the international economic and financial system to avoid further economic crises, such as those that had ravaged the world over the first half of the 20th century and created a fertile climate for deadly all-out wars. However, it evolved into an authority that monitors and controls economic and financial policies of many states, particularly those in the developing world. Instead of leading to the development and prosperity of developing countries, the IMF’s policies and programs have failed miserably to lift them out of economic underdevelopment and social misery, leading them into severe crises and debt problems.

Being burdened with harsh conditions under the name of structural adjustment these loans are seen as an instrument of imperialist domination and a hidden means of seizing control over economic and foreign policies in developing countries

IMF’s loans are one of the most important means of violating the sovereignty of states that borrow from it. Being burdened with harsh conditions under the name of structural adjustment these loans are seen as an instrument of imperialist domination and a hidden means of seizing control over economic and foreign policies in developing countries. Indebtedness in the global South has become a political economic investment by the major powers, particularly in the Arab countries that have become an arena for international and regional conflicts, as loans are an investment for containing decision, political capacity and anti-imperialist political action in the region.

We can discern a clear continuity between the historical policies of colonial powers and the practices of modern international financial institutions by taking Egypt's experience in the 19th century as a significant example. The Egyptian State's borrowing from European countries at the time and then defaulted on debt led to European dominance over its treasury decisions. Eventually Egypt had to exchange "debt forgiveness" for waiving the right to control the Suez Canal, to be followed by military occupation under the pretext of preserving European properties. Borrowing thus plays a key role in restricting the political-economic choices of apparently sovereign states and paves the way for their submission to an international financial and economic system subordinate to the interests of the major powers.

The IMF has thus had a strong impact on economic and social policymaking in several Arab countries, clearly highlighting these policies austerity nature with its attendant negative implications for the social issue in general, social protection and support for basic goods in particular. The IMF exercises direct control over broad government policies, making it a supranational institution dominating many states, particularly those that have fallen into the debt trap. In order to take control from an early stage, the IMF promoted with the World Bank in the 1980s what it termed as the "Washington Consensus" based on three pillars: economic liberalization, privatization, and austerity measures.

The intervention of international financial institutions, particularly the IMF, in the Arab region is of a special nature, given the entanglement of what is economic with what is strategic and political. Indeed, empirical studies show that the granting of loans and subsidies is subject to economic determinants that are greatly influenced by political and strategic interests such as: the degree of proximity to and friendship with Western countries, the position on the Arab-Israeli conflict, the supply of oil to the West, the problems of migration and terrorism ... etc. The economic need thus alone does not really explain the timing of IMF’s loans.

Suffice it to know that USA alone has a veto, as the general distribution of SDR allocations requires the approval of the Board of Governors with a majority of 85% of the total voting power, and that the US has 16.5% of the total vote on the Board of Directors, ensuring that it can control IMF’s overall approach.

We note that the most common austerity measures in the Arab world are to reduce subsidies for basic goods, reduce or freeze the public sector wage bloc, increase consumption taxes, as well as reform retirement systems and social safety nets. This has had negative consequences on human development in many Arab countries, which suffer from a significant shortage of human capacity from teachers, doctors, nurses and social workers. The freezing and non-adjustment of wages to match the rate of inflation has also affected the purchasing power of public sector workers, particularly in vital social sectors, resulting in increased absence from work, growth of the informal sector and brain drain problem, all of which led to a marked decline in public services, particularly in popular districts in urban and rural areas.

One of the most obvious examples of the failure of IMF policies was the experience of East Asian countries in the late 1990s, when they were hit by a financial crisis in 1997 and often referred to as the best evidence of the risks of recourse to the IMF. Another example is what has been taking place in Lebanon, which continued after the end of the bloody civil war by pursuing the same liberal economic policy. From 1993 to the present, its debt has jumped from about $7 billion to $89 billion. All IMF’s terms in Lebanon[1] have been focused on privatization, reducing the public sector, reducing government spending, and handcuffing the State in terms of caring for society and securing the rights of all its groups in favor of enshrining the interests of the private sector, leading to the collapse of the social safety system. This scenario is almost identical in many Arab countries that have resorted to and borrowed from the IMF. It may be fitting now to revisit the Egyptian case in more details.

As previously stated, the Egyptian State's borrowing from European countries in the 19th century led to their control of Egypt’s monetary decisions and eventually to its colonization on the pretext of protecting their interests. Until the international financial crisis in 2008 and the Egyptian revolution in 2011, Egypt implemented major structural reforms to facilitate economic growth. Although these reforms have been successful in relatively improving economic growth, the government has failed to directly address issues of poverty, high unemployment (particularly among women and young people), inequality and corruption. These issues were part of the key factors that led to opposition of Hosni Mubarak's government in 2011.

On November 11, 2016, the IMF and Egypt signed a $12 billion loan agreement aimed at addressing macroeconomic weaknesses and promoting inclusive growth and job creation. Key points in the IMF's program included the liberalization of the exchange rate system (i.e., the Egyptian pound floating), fiscal consolidation to reduce budget expenditures, taxes increase, deep structural reforms and the elimination of business-related regulations to stimulate economic growth. The value of the Egyptian pound has fallen further than the IMF itself has predicted, and the devaluation has certainly raised the prices of basic consumer goods and drugs.

In addition to curbing total spending on price support, Egypt also reduced public sector expenditures under its agreement with the IMF in August 2016. As a result of wage cost reforms, total public sector wages have seen a steady annual decline from 8.1 percent of GDP in 2014/15 to 5.3 percent of GDP in 2017/18. Meanwhile, in order to increase revenues, the government imposed a vat and sold land and licenses to the telecommunications sector. The vat was 14% on most goods and services in 2018. The latest expansion of the tax was days ago, when it was also applied to delivery services. Some studies suggest that vat policy will increase the proportion of Egypt's poor population (living on less than $26 a month) from 27.8% in 2015 to at least 35%. Egypt introduced the policy after it reduced the tax rate on the upper-income population from 25 percent to 22.5 percent in 2015, which was seen as an easing of tax burdens on Egypt's wealthy.

Only $14 million of the IMF's $12 billion loan has been allocated to improve the infrastructure of Egyptian women, an amount that appears unlikely to significantly improve the current situation. Access to essential medicines for less fortunate Egyptians is also a major concern across the country since drug prices have risen significantly due to the depreciation of the Egyptian pound.

Furthermore, the government has passed a range of laws such as the Insurance and Pensions Act (148/2019), which detracts from the rights of those referred to a natural pension or early pension. The current draft of new labor law has severe shortcomings in protecting the rights of irregular workers, including domestic workers. So is the Universal Health Insurance Act, which requires everyone to pay an insurance share to the whole family, which is a burden on workers, especially informal employment.

Many large state-owned companies have also been liquidated and sold and laid off, most recently was the Iron and Steel Company (an edifice and symbol of Egypt's industrial sovereignty).

In the health sector, the pandemic revealed (in addition to the high prices of medicine and the medical service in general) the weakness of the health system and its infrastructure. This is manifested in the performance of public hospitals and lack of related medical and health equipment and kits, which has led to a rise in the number of martyrs from the lack of PPE, especially frontline doctors and paramedics (the latter have been excluded from the dispensation of medical professions allowance). This was confirmed by the reports of the Doctors' Union, the Health Professionals' Trade Union and the Egyptian Ambulance Workers Syndicate (the latter two are affiliated members of PSI). Many domestic workers have also been laid off for fear of coronavirus transmission, have become incomeless and have no health and social protection for most of them.

Needless to say, the IMF’s facilitation program in Egypt will not address the problems of poverty, inequality and corruption that continue to place a heavy burden on the State. Therefore, a national strategy is needed to effectively mitigate the negative impact of the IMF’s program to prevent the poor in Egypt from further suffering.

The IMF has announced that in response to the pandemic, it has made a temporary increase in the utilization of its resources under emergency financing instruments and the planned annual limit on the total utilization of the IMF’s normally provided resources. It has also established the Short-Term Liquidity Plan (SLL) to provide reserve financing to member countries with strong economic policies and fundamentals. It has also significantly increased lending resources available to low-income countries (LICs) from March 2020 in response to the unprecedented demand for concessional financing as a result of the Covid-19 pandemic.

Annual benefit limits through the Poverty Reduction and Growth Trust (PRGT) were temporarily increased in response to the Covid-19 pandemic until April 6, 2021. In addition, zero interest rates on concessional loans were extended until the end of June 2021, keeping the interest rate on emergency financing permanently stable at zero. The Disaster Containment and Debt Relief Trust Fund (CCRT) has been amended to help easing debt service payments to poorer and weaker member countries. Finance ministers and central bank governors of the G20 countries recently agreed to increase the IMF’s resources by $650 billion so that it can better help the most affected countries until the end of 2021. Finally, additional actual resources for lending of 16.9 billion SDR units have been secured, in response to the high demand for concessional financing as a result of the pandemic and subsequent economic shocks. With previously available resources, lending resources deposited in PRGT are expected to cover commitments made under current policies until 2024.

The IMF’s programs are underpinned by conditions that restrict states’ policies and ultimately violate their sovereignty in many ways

However, these are all temporary, conditional remedies that are linked to the interests of US and the major powers. They add new loans and burdens, and the IMF’s policies will remain the same in terms of dominance, while debt and its interests will be postponed only some time until the pandemic is ridded. Though it is safe to say, IMF’s actions have not lived up to the duties that it should have adhered to, particularly towards poor countries.

In conclusion, the IMF’s programs are underpinned by conditions that restrict states’ policies and ultimately violate their sovereignty in many ways. There are also legitimate questions about the IMF’s dependence on the interests of major powers, particularly considering the US veto and the influence of major financial institutions. The IMF will not therefore in any case play the role of the supreme savior claimed by some. The path of internal radical reform in the Arab States must be pursued instead of depending on misleading hopes of external salvation.

The Role of Trade Union Organizations in Addressing IMF’s Policies

Given all the above, trade union organizations in Egypt and the Arab world must address these policies and mitigate their serious negative effects on workers, their families and society as a whole by taking some measures, including:

  1. Coordinating between different trade union organizations in the Arab countries to raise awareness of the dangers of IMF’s policies, and the need to break its dominance and stay away from the risk of borrowing.

  2. Activating the role of trade unions and adopting clear national strategies to counter and reduce the IMF’s interventions, as well as to address the problems arising from its colonial policies in the region.

  3. Playing an active role in helping informal workers overcome their problems, help them form effective unions that represent them, protect their rights and ensure a decent life.

  4. Opening an effective social dialog with the government and the general public to find national alternatives other than borrowing.

  5. Conducting thorough legal studies relating to workers, social protection, occupational safety and health, to seek in every way to modify their disadvantages, to come up with other better proposals, and even to introduce alternative legislations.

  6. Working to protect the rights of workers after they reach retirement age and to obtain public pensions and establishing retirement systems that ensure security and solidarity.

  7. Lobbying with NGOs to create pressures.

  8. Coordinating with PSI to secure technical support and training for affiliated unions and support them in educating and mobilizing their members.

  9. Coordinating between trade union organizations to achieve some of the ideas approved in PSI’s Congress in Geneva in 2017, namely:

    1. Fighting for the inclusion of basic ILO conventions in the World Bank's labor guarantees.

    2. Lobbying to influence the policies and actions of global financial institutions, particularly those related to privatization and are gender bias.

    3. Demanding transparency at the level of financial markets and all parties concerned and impose binding regulations.

    4. Demanding restrictions on risky and speculative investments, for example through the adoption of a global financial tax on financial operations; and to allow fair taxes.

    5. Demanding that the financial burden of proposed solutions to solve the global financial crisis fall on those who generated the crisis, for example through increased business and asset taxes, and taxes on the transfer of assets, capital gains and financial operations.

    6. Warning at the first threat of privatization and informing public opinion when possible.

    7. Contributing to the PSI’s electronic platform against privatization and dissemination of information at the union, allies and members’ level.

    8. Putting pressure on global institutions, directly and through their governments and national development agencies, even when their members are not directly in danger.

[1] Other Arab countries such as Tunisia, which is currently seeking its largest loan of $4 billion, is committed, in return, to carry out painful reforms, relating to removing subsidies on basic goods, and reducing the wage bloc by 15%.

* About the Author: Sherif Masry has a Ph.D. in Logic and Philosophy of Science from Faculty of Arts, Alexandria University, Egypt. He is the Head of the Cataloging of Manuscripts Unit, Manuscripts Center, the Bibliotheca Alexandrina. He is currently the President of PSI affiliate the Independent Syndicate of Bibliotheca Alexandrina Workers.