As Naomi Klein could have predicted, the IMF has swooped in on Egypt in its vulnerable post-revolutionary state, capitalising on its need for financial support by forcing an unpopular structural reform program down the country's throat, slashing spending, cutting tariffs and implementing new consumption taxes.
Announcing a new 1-year, $3bn financing package for Egypt on Sunday, the IMF said reforming Egypt's subsidy system and introducing a value-added tax should be important mid-term priorities for the government, but doing them now is not feasible. Instead, it praised monetary and economic policies that will maintain macro-level stability, particularly in keeping the country's foreign exchange reserves well-stocked (that's where IMF financing steps in). The IMF also described current economic policy as a "first step to laying the foundation for a more inclusive, private-sector-led economic growth".
It has seemed clear since last week, when the Egyptian government announced an expansionary budget that boosted spending on subsidies and social programs and raised new taxes on the wealthy, that the IMF was not planning to enforce austerity or rapid liberalisation in exchange for support. A day after the budget announcement, Ratna Sahay, the head of the IMF mission to Egypt, said the organisation shared the government's "overarching goal aimed at promoting social justice."
"The measures go in the right direction of supporting economic recovery, generating jobs and assisting low income households, while maintaining macroeconomic stability," she said.
That's all well and good, but will the measures see the light of day? As many have pointed out, the budget announcement remains a proposal to be ratified by the ruling military council (although it is fair to assume there was some prior co-ordination). And even once approved, that council plans on returning to its army barracks by the end of the year, after overseeing the election of a new parliament and president. There is almost zero visibility on what the economic policy of those new elected leaders will be. In fact, there is no visibility on who those leaders will be at all, as outlined in a new Egyptian public opinion poll released by the International Republican Institute on Sunday:
As was the case back in February, "Don't know" is streets ahead in the polls, which also showed 71 per cent of Egyptians saying their first ever experience with voting was in the constitutional referendum held in March. It is that kind of political uncertainty that has RBS worried. In a strategy note sent last Thursday, the bank said that aside from its optimism regarding a quick return to growth, the budget has a deeper weakness:
In sum, while markets and broader media have welcomed the interim government's commitment to increase taxes in an effort to meet a higher fiscal deficit, we remain cautious. Details and assumptions remain unclear/lacking, while the increase in subsidies is worrying. Lastly, and most importantly, it is important to remember that this budget has been prepared by an interim administration whose tenure will end shortly after parliamentary elections in September 2011, 3 months from now. It is also likely that the new government that will take office thereafter will be Egypt's first fully democratically elected one in decades, and hence would that would be keen to set its own policy priorities and agendas. Clearly, they may well want public spending to reflect their policy priorities and direction which could mean revisions to current plans.
See also:
Egypt's new budget has more of everything - FT Tilt
Who wins and loses from Egypt's big budget? - FT Tilt
MENA 'Marshall' plan to boost Egyptian markets - FT Tilt
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