Egypt’s debt trap: The neoliberal roots of the problem

5 June by Mohammed Mossallem

Table of Contents

I. Introduction

II. The Causes Behind the Debt Crisis in the 1980s

III. Post Debt Crisis: The Golden Opportunity Squandered

Debt Implications of The Policies Adopted

IV. Falling back into the debt trap: 2000-2011

Debt Implications of Policies Adopted

V. January 2011: Another missed opportunity

VI. Post 2011-A continuation of the Mubarak era policies without the relative stability enjoyed by the outgoing regime

Debt Implications of Policies Adopted

VII. Does IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
Provide the Solution?

VIII. Assessing Alternatives that Do Not Entail Accumulating More Debt

IX. Conclusion


I. Introduction

This chapter traces the roots of Egypt’s existing debt crisis to the adoption of neoliberal policies since the launch of the Open Door Policy in the mid 1970s. We first demonstrate how these policies had led to the 1987 and 1990 debt crises before illustrating how remaining loyal to this approach has kept Egypt in a vicious cycle of debt over the past three to four decades, only managing to temporarily escape the debt trap for a few years following the massive bailout in 1990. The chapter argues that the debt entrapment Egypt has been suffering from is a symptom of the structural trade and fiscal deficits that have plagued the Egyptian economy throughout this period. Despite two main opportunities in 1990 and 2011 to break with the neoliberal policies that have played a significant role in maintaining these deficits, the successive governments/regimes have chosen to remain loyal to the neoliberal approach. The decision to remain loyal was also strongly influenced by the role of the Bretton Woods Institutions (particularly the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
) in the Egyptian economy as they have been actively involved in the economic policy making process particularly since 1990. Furthermore, throughout the whole period being studied, the accumulating debt that has been incurred (both domestic and external) has been spent in the absence of both transparency and a clear economic strategy in which debt would be a tool to promote inclusive economic growth. Instead of contributing to financing productive investments with the aim of solving the economy’s structural problems, debt raised has been consistently used to finance current expenditure with no potential returns. Consequently, Egypt reached the inevitable situation of recycling its debt, as a significant portion of the debt raised every year is spent on servicing the existing debt.

After analyzing Egypt’s previous encounters with the IMF post 2011 as well as the main components of the reform program proposed for the current crisis, the chapter concludes that the solutions on offer are only a replica of the very same policies that have driven the economy into this crisis and will only prolong Egypt’s debt suffering as the structural causes will remain unsolved. With no debt relief on the table, the short term solutions proposed by the authorities and IMF will only extend the bleeding process. Moreover, the lack of long term solutions draws a very bleak picture of the future of the economy and the fate of its population the majority of which are vulnerable.


II. The Causes Behind the Debt Crisis in the 1980s

Towards the end of the 20th century, Egypt experienced two major debt crises in 1987 and 1990. By the early 1990s, the debt crisis had reached its peak as total external debt stood at 49 USD billion, which was the equivalent of 150 percent of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
and was the highest debt burden Egypt had witnessed since the debt crises of 1880. After reaching a point where it could no longer finance its imports (which included food), Egypt was handed a lifeline when the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

http://clubdeparis.org
agreed to reschedule its foreign debt in exchange for committing to an IMF reform agreement that obliged Egypt to undergo a series of Washington Consensus policies. |1| However, Egypt failed to implement the program and continued to sink in debt until it was on the verge of bankruptcy and required divine intervention in the form of debt forgiveness in return for its participation in the Gulf War.

The roots of Egypt’s external debt problem go back to the adoption of the Open Door (liberalization) economic policy in 1974. The new model replaced the import substitution industrialisation strategy and aimed to reintegrate the economy into the liberal international economic system. |2| Despite the enactment of a new investment law to attract FDI , the Open Door policy failed to attract a credible amount of foreign direct investment. From 1974 to 1982, total investments committed under Law 43 of 1974 did not exceed 5 EGP billion. |3| Furthermore by the 1980s the economy was transformed into a rentier economy, relying on external sources of income while neglecting its productive sectors: agriculture and manufacturing. The share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of manufacturing in total investments by both the private and the public sector dropped from 40 percent in 1967–73 to just 19 percent in 1981–91. The economic liberalization measures were not geared to a strategy of export-oriented industrialization on the East Asian model, but to a relatively open economy that was quickly de-industrializing. |4|By the late 1980s major structural imbalances in the Egyptian economy were hindering growth. These included imbalance between government revenue and spending, between savings and investment, imports and exports. |5| Several policies served as key factors in leading to these imbalances, which included:

(i) Rapid economic liberalisation: The decision to implement trade and investment liberalization was made despite the fact that Egypt had not safeguarded its domestic industries and hence could not compete in the global market. Furthermore, this new model interrupted the import substitution strategy before having fully functioning industrial sectors, which meant that Egypt failed to promote the growth of non-oil manufactured exports and thus lost the benefits of the expansion of international trade. |6| In addition to the surge in imports of manufactured products, Egypt was also importing large quantities of food and agricultural items as a result of limited agricultural expansion. |7| Consequently, a growing current account deficit had to be financed through external credits. From 1975 to 1980, external debt increased from 6.3 USD billion to 19 USD billion, rising to almost 90 percent of GDP and 207 percent of exports of goods and services in the latter year. |8| A feature of Egypt’s borrowing between 1970 and mid-1977 was the use of short-term correspondent bank facilities, in the form of trade-related lines of credit, for the opening and confirmation of letters of credit and acceptance of drafts arising out of export–import transactions |9|

(ii) Increased reliance on external and highly volatile sources of revenue: Fluctuations in government revenues were primarily the product of developments affecting rentier sources of the national income. |10| External revenues as a share of total government revenue increased from less than 5 percent in 1975 to over 30 percent by 1982, and consisted primarily of Suez Canal revenues, oil exports, workers’ remittances, and revenues from tourism. |11| The extent of the volatility was evident in the period between 1976-86 which witnessed a series of fluctuations from the steep rise in oil revenues of 1973, and 1979 to the slowing down of the international economy towards the end of 1981 with a consequent decline in oil prices and in Suez Canal traffic, and then a sharp drop in oil prices in 1986. |12| While the booms generated unprecedented external flows, the busts had severe detrimental impacts in light of the growing bill for debt servicing. The worsening foreign exchange situation due to the decline in rents from 1985-87 led to a steady build-up of arrears on debt repayments. |13| The situation had deteriorated to the extent that in 1986 assuming Egypt had actually paid all its obligations, the payment would have amounted to 114 percent of the country’s earnings from the export of goods and services in that year. |14|

(iii) Absence of economic strategy/vision in borrowing process: Debt was used to fund current expenditure and hence was not invested in any productive activities that could generate returns to repay these loans and generate economic growth. In fact, it reached a point when it was generating more debt to cover existing debt. The debt crisis of 1987 was not brought about by a sudden or unexpected jolt, rather, it resulted from a circle of gradually increasing indebtedness, growing debt service Debt service The sum of the interests and the amortization of the capital borrowed. obligations, and an inability of the economy to generate sufficient foreign exchange earnings. |15| A vicious cycle was in place as a reduction in the new debt commitments resulted in a substantial portion of the foreign resource inflow being diverted to service existing debt. |16| In 1979, foreign debt service obligations used up about 60 percent of the gross disbursement of foreign loans. |17|With a sharp increase in debt service payments and the continuing decline in disbursements from external borrowing, by 1982 debt service had reached almost 100 percent of gross new borrowings. |18|Even when the Egyptian economy experienced a influx of revenues, the regime was still inclined to borrow and to demand more aid from abroad. While receiving unprecedented external flows, Egypt also increased its foreign debt from 3 billion USD in 1974, to 19 billion USD in 1981, to 37 billion USD in 1986. |19| This spiralling foreign debt was the result of soaring imports and the decline of traditional exports. The trade deficit increased from around 5 billion USD in 1985–86 to around 8.3 billion USD in 1988–90. |20|

(iv) Fiscal deficit: Mubarak came to power at a time of a considerable surge in state revenues, |21| however several years into his rule the volatile revenue sources started to dry up. The collapse in oil prices played a principle role in this process. |22| The prices of oil and energy did not only affect oil and natural gas exports; they also affected the yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. from Suez Canal and the remittances. |23|.Tax revenues also declined as more than a third of the government’s yield from capital gains taxes comes from the General Petroleum Organization, the Suez Canal Company, and the Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
. |24| Lower income should lead to lower government spending. While such an adjustment makes fiscal sense, it is as Samer Soliman described it a ‘political tinderbox’. |25| He elaborates that reducing government expenditures means reducing or even cutting off the flow of funds to groups that have come to expect them. |26|An authoritarian regime such as Egypt’s that depends on handouts to secure its control over society has little flexibility when it comes to tightening the purse strings. |27| As a consequence, the national deficit began to soar. Egypt soon had one of the highest deficits in the world at the time. Domestic debt made a quantum leap during the 1980s, when it increased from c.15.7 billion USD in 1981 to c. 32.6 billion USD in 1991. |28|

In 1987, Egypt reached a rescheduling agreement with the Paris Club, whereby outstanding arrears of 6.9 billion USD were rescheduled, together with all interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. and amortization payments on public medium and long-term loans falling due until June 1988; this amounted to 4.4 billion USD. |29| The Paris Club creditors also agreed, in principle, to meet again with the Egyptian authorities to consider debt service payments falling due after June 1988, provided that Egypt was in compliance with a number of conditions. |30| These conditions included maintaining an arrangement with the IMF, signing bilateral agreements with Paris Club creditors in accordance with the Paris Club agreement, and securing comparable treatment from other creditors. |31| However, most of these conditions were not fulfilled and the next round of successful negotiations on the debt issue did not take place until four years later. |32|

As Khaled Ikram points out, the crisis that culminated in 1991 was quite predictable. |33| As deficits in Egypt’s budget and in its balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. accumulated beyond the available sources of funding the debt crisis and default became inevitable. Fortunately, the 1991 economic crisis occurred at a time when the donors, because of Egypt’s support in the Gulf war, provided a generous bail out deal that rescued the Egyptian economy from an impending default and provided it with a rare clean slate to start over.


III. Post Debt Crisis: The Golden Opportunity Squandered

As Samer Soliman points out, the Egyptian regime did not weather its debt crisis without some political costs. Since the mid-1980s, Egypt’s fiscal policy has not been a purely domestic issue. |34| Foreign governments and international financial institutions had a growing influence on the policies adopted, a development that culminated in 1990 when the Egyptian government was forced to sign economic reform agreements with international agencies like the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
and the IMF |35| This loss of independence in economic policy making has been a key feature of the Egyptian economy ever since.

At this crucial moment in Egypt’s history the debt relief and inflow of aid provided the regime with fiscal space for the first time in recent history. This space would have allowed Egypt to undergo structural transformation and fix the problems that have plagued the economy in the last few decades without the constraint of debt servicing. However, under the strong influence of IFIs like the IMF, Egypt wasted this opportunity by adhering to the same neoliberal policies based on the Washington Consensus principles. Consequently, Egypt enjoyed a brief honeymoon period before experiencing the same structural weaknesses and accumulation of debt.

By 1991, Egypt signed a Structural Adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
Loan with the IMF and the Economic Reform and Structural Adjustment Program (ERSAP) was launched. The main targets of ERSAP were to improve the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of payments position, reduce inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. rates, and reduce public debt. This required the lifting of price controls reduction in government expenditures and in public investments, the imposition of new taxes such as the sales tax, and a freezing of wage rates. At the same time, the government had to privatise public enterprises and liberalize foreign trade. |36| Neglecting the lessons from the previous decade, the IMF and Egyptian government placed their trust in the same neoliberal policies. Accordingly, after a temporary growth spurt during the first half of the decade the very same structural deficiencies resurfaced. A combination of factors that included a rise in rents, significant reduction of debt servicing obligations and a surge of capital flows allowed for a healthier budget and balance of payment positions during the first half of this decade. However in the face of persisting structural deficiencies, these cushions were exhausted by the end of the decade, the budget deficit was rising |37| and the balance of payments position was gradually deteriorating. Although Egypt followed the IMF recommendations by embarking on trade liberalization and privatization, the growth materialized in the 1990s was based on domestic demand, not export-led growth as prescribed by the Bretton Woods Institutions. |38|

ERSAP concentrated on reducing macro imbalances and inflation rather than creating growth and employment, |39| and hence structural problems remained unsolved. The implementation of ERSAP resulted in a sharp decline in public investment, and private investment did not compensate for that drop. Cuts in public investment which constituted 64 percent of expenditure cutbacks |40| meant that Egypt could not develop its productive sectors to create more sustainable sources of revenue nor create more employment opportunities. Moreover, the manufacturing share of total investment fell from 18.7 percent in 1981–91 to 12.2 percent in 1997–2002 further weakening the ability to promote non oil manufacture exports. |41| FDI flows which were a key component of the strategy to promote growth through developing new sectors and making exports more competitive actually declined by 50 percent during the period 1991/92–1996/97. |42| Despite successive investment laws and incentives offered to potential investors, Egypt was still incapable of attracting large foreign direct investment. |43| Further trade liberalization in the absence of competitiveness of Egyptian exports led to a decline in exports as a percentage of GDP and imports continued to grow outstripping exports and maintaining a trade and current account deficit. Revenues from trade taxes also declined due to tariff removal and the slow growth of exports. The only fiscal adjustment introduced to increase revenues was a regressive sales tax, which failed to generate revenue growth in the face of a growing public expenditure re-enforcing the structural deficiencies in the fiscal position.

It was claimed that ERSAP led to the turn-around in the fiscal position: this, however, is highly debatable. Between 1987 and 1996 the budget deficit declined from around 15 percent of GDP to 2 percent and the government became a net saver. |44| Despite the government’s insistence on gradualism, the bulk of this ‘remarkable adjustment effort’ |45| according to Jane Harrigan took place in just one year between fiscal year 1991 and 1992. |46| Furthermore, Harrigan reveals that much of the improvement in both the expenditure and revenue performances can be explained by factors that cannot be attributed to fiscal adjustment. On the revenue side, the largest single element of improvement came about as a result of exchange rate change in early 1991 which raised government revenue in domestic currency terms from oil, the Suez Canal and international trade. |47| Whereas, in terms of expenditure debt relief and rescheduling enabled the government to cutback on debt serving expenditure. |48|

In addition the program brought problems of its own, especially in the form of capital inflows that were not invested in productive sectors and the associated real exchange rate appreciation leading to Dutch Disease type effects in the economy. |49| Consequently, the growth that followed the stabilisation experience was geared towards the domestic market (concentrated in the non-tradables sector) failing to generate export-led growth, |50| which was one of the main objectives of the program.


Debt Implications of the Policies Adopted

Pre 1990 external debt, rather than domestic debt, was the major concern of Egyptian policy makers However, since the launch of ERSAP, domestic debt has become the main source of debt. Domestic debt rose sharply under ERSAP, surpassing external debt both in terms of stock ratios to GDP as well as flows of debt-service expenditure. |51|

Initially, in response to the massive capital flows as a result of the liberalization of capital flows under the ERSAP, the government responded with a sterilization program. |52| Between 1991-1994 the Central Bank acquired foreign currency in return for the sale of domestic securities, particularly Treasury Bills. Therefore, in addition to exchange rate problems, capital inflows caused a domestic debt problem. |53|

The other factor contributing to the rise in domestic debt was the decline in state revenues and gradually rising deficits. The early 1990s was a grace period in the decline of state revenues. |54| By the second half of the decade, the downward trajectory of the 1980s resumed, primarily due to the fall in rentier incomes and Egypt’s reliance on regressive sales tax policies that were not generating enough income in addition to its limited administrative capacity to tax. State revenue steadily declined from around 30 percent of Egypt’s GDP in the late 1980s to 20 percent of GDP by the year 2000, while expenditure stagnated at around 30–32 percent of GDP. |55| While public investment declined affecting the prospects and quality of growth, expenditures proved more difficult to cut as two-thirds of the total expenditure was spent on interest payments, wages, and politically sensitive subsidies. Consequently, the government turned again to debt in order to finance the gap between income and expenditures. The government thus found itself almost in the same predicament it had faced in the 1980s: and economic liberalization had failed to secure additional revenue sources to finance the fundamental activities of the state. |56|The main difference was that the government borrowed from domestic sources as external options were limited. |57|

The share of domestic debt over total debt climbed from 40 percent in the early 1990s to about 65 percent in 2000/2001. |58| This high ratio of domestic public debt reflects a shift in deficit financing from foreign borrowing and inflationary financing to domestic debt. This, and the use of treasury bills to sterilize capital inflows, has led to a significant change in the composition of total public debt. |59|

Domestic public debt is composed of three main components according to the Central Bank of Egypt (CBE): government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. , debt of National Economic Authorities, and debt of the National Investment Bank (NIB). By the new millennium, government debt represented more than 70 percent of domestic public debt, consisting of debt from the central and local government, as well as nonfinancial public entities known as service corporations. The government borrows from the public (including the financial sector) directly by issuing securities, and indirectly through NIB resources. |60|

The government was initially successful in lengthening the maturity of its domestic debt to avoid maturity mismatch. It started to issue 5-year domestic currency bonds in 1995. |61|However, most of the debt was held by domestic banks as more than 85 percent of the outstanding stock of TBs during 1996 to 2005 were held by banks. |62| Accordingly, if these bonds are financed with demand deposits, the fact that the government was able to place long-term bonds did not reduce the aggregate maturity mismatch, but it only transfers it to the banks’ balance sheets. |63|

This new trend of rising domestic debt in Egypt has resulted in important implications for growth, equality and poverty reduction |64|, which started in the 1990s and are still valid to date. The rise in domestic interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
has crowded out public and private investment, hence constraining growth. |65| It also affects bank behaviour in favour of investing in government securities and against extending credit to productive investment. Furthermore, Egypt’s domestic public debt has ramifications on income distribution due to the significant contribution of the NIB, which has resulted in redistributing income from the poor (stakeholders in Social Insurance Funds- SIFs) to the rich (banks and beneficiaries of domestic debt-financed expenditure). |66| The accumulations of debt-service payments have also had negative implications for social expenditure and human development. This is evident when comparing the evolution of interest payments on domestic debt with relevant items in the government budget as total current expenditure: wage payments, subsidies, and expenditure on education and health. In 1995 for instance , interest payments on domestic debt reached four times current non-wage expenditure on education and health combined. |67|

On the external debt front, Egypt enjoyed a temporary respite during this decade. Egypt took advantage of the relief and held down fresh external borrowing for the period 1991–2000 as a whole, Egypt’s net borrowing averaged 339 million USD a year. |68| With the restrictions on new loans, from 1996 Egypt’s repayments exceeded disbursements. The regime also put greater emphasis on securing external funds in the form of grants and soft loans. |69|The share of concessional debt increased sharply from about 37 percent of total debt in 1990 to nearly 73 percent by 2000. The combination of generous debt arrangements and Egypt’s restricted approach towards new borrowing ensured that the pressure of external subsided. |70|

Moreover, there was an improvement in the health of the balance of payments as a result of buoyant service exports especially tourism -receipts from services grew by 29 per cent between 1992 and 1997-, debt forgiveness and rescheduling -which improved the balance of payments by 15.5 million USD in the same period-. |71|Between 1991 and 1997 foreign reserves in months of import cover increased from 4.84 to 10.51. |72|Indeed, these positive influences on the balance of payments explain why Egypt has been able to maintain a stable nominal exchange rate and avoid exchange rate crisis despite a very weak export performance. |73|

Nevertheless, there was several indicators that these respite would be temporary. These indicators included the decline in exports as a share of GDP, while import figures increased in absolute terms, outstripping growth in exports. |74| Consequently, the trade deficit worsened from 7.3million USD in 1994 to 11.5 million USD in 2000. |75| The failure to boost exports and close the trade deficit has meant that the current account deficit as a percentage of GDP increased during much of the 1990s despite the reform effort. |76|

The Asian crisis of 1997 led to a reduction in portfolio flows and foreign direct investment and to a deterioration of terms of trade that affected Egypt’s external account both directly –Egypt’s oil exports- and indirectly -through the remittances of Egypt’s expatriates who work in Gulf countries-. |77|

Overall, the growing deficits in balance of trade and the foreign capital shortage, have led to mounting foreign debts that reached approximately 29 billion USD in 2000.Reviewing the structure and composition of external debt during this decade, we find In terms of creditors, official creditors -mostly bilateral-hold about 90 percent of medium and long-term external debt and approximately 70 percent of long-term debt is granted on concessional terms. |78| Most of the public external debt is long and medium-term, but during the period 1995 to 2002 the share of short-term debt almost doubled from 4 to 7.5 percent. |79| This should not be a major concern considering the fact that only a small share of external debt was short-term. |80|In fact, one would assume based on this structure and maturity of external debt, that sudden halts in capital flows or large jumps in country risk due to international contagion are unlikely to have a large negative effect on Egypt’s external balance and fiscal accounts. |81|However, during 1997-1999, three components of the balance of payment (oil, tourism revenues, and portfolio flows) were responsible for a drop in foreign currency revenues equivalent to 6 percent of GDP. |82| Such a sudden halt in foreign revenue under the current economic model could lead to a currency depreciation that may have serious devaluation Devaluation A lowering of the exchange rate of one currency as regards others. effects. |83|According to the Central Bank of Egypt, the jump in external debt observed in 2001-2002 from 28 to 32 percent of GDP was mostly due to the depreciation of the Egyptian pound. At the time Egypt’s foreign currency reserves ensured it was in a safe position but the decline of these reserves from 18 billion USD in 1999 to 14 billion USD in the year 2000 should have served as a warning signal that the external sector performance was unsustainable.

Finally, despite their reduction since 1991, domestic and foreign debts and their annual servicing costs continued to be a burden on the economy. |84| By 2000, debt-servicing expenditure accounted for about 25 per cent of total budget expenditures.


IV. Falling Back into the Debt Trap: 2000-2011

The economic trends in the new millennium followed that of the previous decade. External shocks continued to have a detrimental effect on the economy due to the dependence on external sources of income. In addition, fiscal problems persisted as current expenditures continued to outstrip revenue generation. Hence, the first half of the decade was marked by a significant decline in economic growth. The rate of increase in GDP per capita declined to 1.6 percent during 2001–2005. |85| Balance-of-payments difficulties exacerbated due to a series of external shocks, which included the East Asian crisis, falling tourism revenues attributed to the insecurity generated by the attacks of September 11 in 2001, and the slowdown of world trade in 2001. |86| Chronic shortages of foreign currencies forced the government to announce 13 successive devaluations of the pound between 2000 and 2003 until it suddenly announced in January 2003 the free float of the Egyptian currency, |87| which in addition to increasing the price of imports, led to a significant rise in external debt which reached 42 percent of GDP. |88| Furthermore, the slowdown was accompanied by rising inflation, high unemployment rate, widening fiscal deficit and growing domestic debt. |89| Economic activity was constrained by high real interest rates, poor levels of productivity and competitiveness, a shortage of foreign currencies, and a depressed regional and global environment. |90| The trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. deteriorated over the same period as export performance showed no signs of improvement, despite the state loyally adhering to an open market strategy. Knowledge-based exports were minimal, hardly reaching one percentage of manufactured exports. |91| Main imports were still composed of machinery, equipment, and means of transport, in addition to food products. |92|

Two of the most notable indicators that depict the situation in the first half of the decade were the fiscal deficit peaking at 10.5 percent of GDP in 2003 and total government debt reaching approximately 103 percent of GDP. |93|The deficit in 2003 as a percentage of GDP surpassed that of 1989–90 i.e. before the implementation of the economic reform program. Hence, declaring that the most significant ‘achievement’ of the program was history. |94| The debt position displayed a different structure with domestic debt occupying the majority of the total debt and hence did not pose the same threat of solvency or default. However, with debt servicing reaching almost 30 percent of total expenditures |95| it was obviously constraining the ability of the government in directing spending towards social and productive sectors.

The second half of the decade witnessed the historical introduction of the businessmen cabinet, which decided the solution to Egypt’s economic struggles was more aggressive neoliberal reforms, despite the obvious failure of the already adopted neoliberal policies. Amongst the key neoliberal reforms were significant tariff reductions in September 2004 and in June 2005 a new tax code was passed that

reduced personal and corporate taxes by 50 percent.

There was a visible improvement in both the budget deficit and external sector performance for a brief period from 2004-2007 which was commonly attributed to the neoliberal reforms that increased revenues through the new tax law and improved the balance of payments position through capital inflows as a result of further liberalisation. However, a deeper look reveals a different picture. Firstly, concerning the improvement in the budget performance there are two important points that refute the positive role played by the neoliberal reforms. The first of which is the role of tax reform in boosting revenue generation. Two years after the new tax law went into force, the Ministry of Finance boasted that it has been highly successful. The evidence used to support this this claim was that revenues rose from 7.1 percent of the GDP in 2005 to 9 percent in 2007. However, reviewing the breakdown of the tax revenues we find that the rise in income tax revenues derived primarily from the gas tax and the Suez Canal Company. |96|Meanwhile, tax revenues from private sector companies actually dropped in the first year from 1.7 percent to 1.4 percent of the GDP and then returned to 1.7 percent of the GDP the following year. |97| It wasn’t until 2008/2009 that it increased to reach 2 percent of the GDP. |98| Accordingly, it was safe to argue that the new tax law had not as successful as they claimed, in generating an important increase in tax revenues. |99| Overall tax revenue performance has been particularly poor, remaining at around 15 percent of GDP since 1999. |100| To compensate for the low revenues generated taxes, the state reliance on non-tax revenue increased which was mainly based on Suez Canal receipts and mineral (natural gas) rents. |101| In fact it was exceptional circumstances that played a significant role in easing Egypt’s financial troubles, specifically, the U.S. invasion of Iraq and the subsequent skyrocketing of petroleum prices, as well as the consequent rise in Suez Canal revenues. |102|

Focusing on curbing expenditure instead of raising revenue and adopting a contractionary policy when it came to public investment only served to maintain the structural fiscal deficit. Looking more closely at Egypt’s expenditure performance from 1990 to 2010 it is evident that government expenditure has largely stagnated over time, although it rose temporarily in 2009 to cope with the global crisis. |103| Compensation of state employees has remained low, and the payment for goods and services has shrunk. |104| Social benefits, which were counted separately in the late 1990s, were initially significant at around 2 percent of all spending in the early 2000s but have been eroded to 0.4 percent in 2011. |105|

Concerning the external sector performance, the claims of success of the new cabinet’s liberalisation policy was backed up through the surge in Egypt’s foreign currency reserves. However, again a more thorough review of different components of the balance of payments reveal a high level of vulnerability and a risky external position. The surplus generated was due to volatile unstable sources of foreign currency. |106|The current account surplus was only due to a surplus in the services balance (tourism revenues and Suez Canal receipts) and private transfers in the form of workers’ remittances, which were the major sources of foreign currency for the Egyptian economy. |107| Additionally, as a result of trade liberalisation the receipts from trade-related taxes have reduced their share significantly since 1990. According to the IMF itself Egyptian authorities failed to recover the lost revenues from trade taxes. |108| This proved the neoliberal reforms only served to deepen the reliance on external and volatile rents maintaining the same rentier model economy. Consequently, it was no surprise that the external shocks that took place towards the end of the decade had detrimental effects on Egypt’s economy. The global financial crisis affected the major sources of foreign currency, namely, tourism revenues, Suez Canal receipts and workers’ remittances. As a result, the current account recorded a deficit of 4.4 billion USD in 2009. Portfolio outflows reached 9.2 billion USD leading to a deficit in the balance of payments and a decline in the foreign currency reserves figure to 31.3 billion USD in 2009 compared to 34.6 billion USD in 2008. |109| While the reserves were still at a healthy position the vulnerability caused by the trade and more specifically capital account liberalisation should have served as a serious warning of what happen in the after math of the January 2011 revolution.

Furthermore, when analysing the growth Egypt was experiencing, several observations should be considered. Firstly, although the Washington Consensus projected that macro-stability and deregulation would stimulate exported growth, Egyptian growth was in fact largely driven by domestic demand and mainly private consumption that constitutes more than 70 percent of GDP. |110| The high dependence of the GDP upon private consumption reflects an unsustainable growth as it depends on consumer’s spending activity rather than capital formulation and investment. |111| Secondly, the growth of export, particularly job-creating manufactured export, was unimpressive. |112| Private investment remained around 10 percent of GDP, and exports stayed flat at about 21 percent of GDP, job creation continued to lag behind additions to the labour force, while employment became increasingly ‘informalised.’ |113| Thirdly, the balance of payments remained dependent on the Suez Canal revenues and workers’ remittances. with the average annual GDP growth reaching 6.4 percent during the period 2004-2008.

Finally, a fair description of the key economic policies adopted throughout the decade would be a combination of regressive fiscal policies coupled with further trade and investment liberalisation, both of which failed to generate enough income nor sustainable growth and hence maintained the very same structural problems that have been a permanent feature of the economy over the last few decades.


Debt Implications of Policies Adopted

Government Debt to GDP in Egypt averaged approximately 89 percent from 2002 until 2010, peaking at approximately almost 103 percent in 2003 and reaching its lowest at 73.3 percent in 2009. |114| Debt servicing as a percentage of total expenditure averaged 27 percent with interest payments alone constituting the third highest expenditure item after wages and subsidies. These indicators reflect how the fiscal space that was gained through the debt relief in the 1990s was lost only a decade later. To make things worse debt continued to be used to fund current expenditure and imports as has been the case over the past few decades and hence there was no return being generated but an inflating debt servicing bill instead
.

Egypt returned to square one, as fiscal vulnerabilities became the main macroeconomic risk. Gross public debt was high by emerging market standards and fiscal financing requirements had averaged around 25 percent of GDP in the last few years of the decade. |115| Continued fiscal deficits of the current nature would certainly lead to higher inflation rates, curtail the scope for future countercyclical fiscal policy, increase rollover risks, and put upward pressure on financing cost amongst other negative repercussions. |116| Domestic debt occupied 82 percent of the total debt by 2010 |117|, the heavy reliance on domestic bank financing was impeding financial sector development, raising the cost of financial intermediation, and limiting private sector access to financing. |118|Furthermore, the debt structure became even more vulnerable to adverse shocks than it was in the beginning of the decade as external debt has increased and represents almost 20 percent of the total public debt. Any potential currency devaluation would have a significant effect on the size of debt as demonstrated in 2003 when the devaluation of the local currency lead to surge in the debt to GDP ratio.

During this decade, the government has continued to rely mainly on treasury bonds and bills to finance the deficit as it reached 88 percent of gross domestic debt in 2010. |119|The structure of domestic debt has undergone significant changes since 2001. The short-term component of domestic debt more than doubled, exceeding 25 percent of total domestic debt in 2005. This is the result of the fast increase in Treasury Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. and Bill issuance in the first half of the decade. |120| Post the global financial crisis the government took advantage of the banks’ appetite for T-bills and continued to rely on shorter term domestic securities to finance the deficit. |121| This trend led to a substantial and rising short-term rollover requirement (above 20 percent of GDP), which posed a source of potential risk, especially if Egypt’s financing conditions deteriorate. |122| Banks remained the main purchaser of government securities as Treasury Bills and Government Bonds constituted 43 and 35 percent of the Banks’ portfolio of investment in 2010. |123|

According to reports by the IMF as well as the Central Bank and Ministry of Finance, external public debt posed less of a direct threat as it amounted to a low percentage of GDP and was safeguarded by a solid cushion in the form of a relatively high level of foreign currency reserves. They also referred to the facts that the private component of external debt was as low as 8.8 percent, |124| the percentage of long term debt was 91 percent, and the variable-rate debt stock Debt stock The total amount of debt had tripled to reach 12 percent.1 |125|

While these indicators may have lowered the risk of a financial crisis, it should not overshadow the fact that by the end of the decade the debt incurred by the Mubarak regime had reached around 35 billion USD, hence returning to the levels that preceded the 1990 crisis. From 2000 to 2009, Egypt’s level of debt increased by around 15 percent, despite the fact that the country paid a total of 24.6 billion USD in debt repayments over the same period. |126| The main increase came from IFIs whose projects had questionable development impact and lacked any proper monitoring mechanisms to trace how the money was used. The latter point in addition to the fact that Egypt’s net transfers on long-term debt between 2000 and 2009 (the total difference between received loans and repayments) was an outflow of 3.4 billion USD |127| illustrate the ‘debt trap’ that Egypt has fallen into or in another description the apparent ‘self-reinforcing cycle of dependency’. This dependency involves redistribution of billions of dollars from Egypt’s economy to IFIs and Paris Club debtors, and provides these institutions with significant leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. over Egypt’s government. |128| Debt servicing payments had averaged 3 billion USD over the past decade and these payments were set to continue for a long time. With the amount of debt owed, it was clear that the debt hangover will add to Egypt’s development struggles and inequality issues for decades to come.


V. January 2011: Another Missed Opportunity

The January 2011 revolution signalled the end of the Mubarak regime and another failure of the neoliberal policies that have been adopted since the 1970s. One of the main triggers of the revolution was the increasing inequality in the Egyptian society and the creation of limited enclaves of wealth concentrated in the hands of a small minority of businessmen, industrialists and tycoons in control of vast sectors of the economy. |129| Prior to the revolution, rapid deregulation, liberalization and privatisation efforts aimed at increasing FDI inflows, also paved the way for rampant corruption, significantly reducing the potential contribution of FDI inflows in achieving economic development. |130| Government officials regularly undervalued state-owned assets and then sold the assets to foreign investors for a fraction of their market values as the court rulings post 2011 revealed. |131| In the first few years after the Egyptian courts have issued at least 11 rulings in the few years since the revolution that toppled Mubarak. These court decisions ordered the state to reverse deals signed by the former president’s administration. |132| After squandering the chance to radically restructure the economy post-1990, Egypt was facing its second opportunity to reclaim its policy and fiscal space. While there was no offer to write off any debt, the strong evidence available on how public funds and resources were corruptly managed presented the post revolution governments with a rare opportunity to review and audit the inherited debt obligations from the deposed regime

The post-Mubarak Egypt, like many developing countries in a transitional phase and succeeding authoritarian regimes was left with a difficult economic legacy. In recent history a lot of authoritarian regimes operated as agents of transnationalization, |133| opening the economy to foreign trade and investment as well incurring high levels of debt, increasing its vulnerability to externally generated impacts, and mortgaging future earnings to outside creditors. |134| This is precisely what happened in Egypt over the course of the last few decades.

One of the main purposes of debt contracts and investment treaties is to ensure that investors and creditors are protected. This is typically done through clauses and conditions that guarantee host states refrain from making certain types of legal changes that would undermine the viability of foreign investments. |135|There are, however, circumstances in which a revision of the inherited financial and legal obligations and substantial change to a state’s legal system might be considered unavoidable and desirable. |136| One such circumstance could be when there is evidence of corruption and misuse of public funds for personal enrichment of the regime and its cronies as was the case with the Mubarak regime. It becomes even more pertinent to review these obligations when they are curtailing the ability of post-transitional governments to enact social and economic reforms after replacing regimes that failed to achieve inclusive economic growth and led to the impoverishment of the majority of the population.

Post-revolution Egypt had inherited almost 37 billion USD of external debt that were incurred in circumstances that lacked transparency and in the absence of any monitoring mechanism of how these funds were used. Considering that debt servicing payments were consuming a significant part of the state budget and with the mounting evidence on the scale of corruption within the outgoing regime as proved through the judicial verdicts shortly after the regime was ousted, there was a strong case for a debt audit. Immediately after the January 2011 revolution there were calls from the civil society for an odious debt assessment, a call that was also supported by international law experts like Robert Howse and Ruti Tetel. |137|The assessment demanded, would reveal how much of Egypt’s billions in external debt went to meritorious development projects and how much went to propping up the country’s regime and lining its leaders’ pockets. |138| They also called for lenders to also be liable especially as they were aware their funds might be used for corrupt or oppressive ends, “at least for relieving taxpayers of the burden of debt contracted against, or with indifference towards, their interests.” |139| The World Bank, for instance, were well aware of the extent of corruption in Egypt, yet continued to lend to Mubarak’s governments.

Despite being a nascent civil society, it took less than a year for an organised movement to emerge in the form of “Popular Campaign to drop Egypt’s Debt”. The movement campaigned and mobilized along with activists and politicians for a debt audit to be conducted since October 2011. The campaign was inspired by the successful Ecuadorian experience |140| and soon a debt audit became an official demand adopted by the Union of Independent Syndicates, the Socialist Coalition Party, as well as an important component of several presidential campaign plans |141|. Furthermore, the campaign also approached the then first democratically elected parliament, discussing the concept with the members of the Planning and Budget Committees. |142| The MPs, many of which were leading figures in the Freedom and Justice Party (FJP), were receptive to the idea and agreed in principle to form the debt audit committee under a body they were considering to establish at the time under the name of the Anti-Corruption Body |143|. The campaign also publicly denounced the government’s plans to finance the budget and current account deficits through more debt (foreign and domestic) and suggested several alternative short-term solutions. These solutions included: (i) applying an exceptional one time 10 percent wealth tax; (ii) reforming energy subsidies with a particular focus on reducing subsidies to energy intensive sectors and use the funds for developing social safety nets; and (iii) revising gas export contracts signed in the Mubarak era that were priced below the market value representing one of the many corruption cases of the deposed regime.

Eventually, the parliament was dissolved and the FJP candidate won the first presidential elections, however their stance over the debt audit changed since as successive regimes lacked the political will to seek transitional justice and instead continued to saddle the country’s debt obligations with more debt from Gulf countries and the continued pursuance of an IMF funding program. The decision to succumb to external pressure and fulfil the debt obligation regardless of its legitimacy, meant Egypt wasted another rare opportunity to escape the debt and dependency trap.


VI. Post 2011-A Continuation of the Mubarak Era Policies Without the Relative Stability Enjoyed by the Outgoing Regime

The post revolution economic strategy has focused on financing an expanding budget deficit and stabilizing the Egyptian pound in the face of a growing balance of payment deficit. The successive regimes that took office have all adopted the very same economic policies of the Mubarak era i.e. resorting to short term measures to circumvent having to address the structural fiscal and balance of payment deficits. Borrowing money was favoured to focusing on more structural changes such as reforming energy subsidies, developing productive sectors and creating employment. |144|Moreover, policymakers have continuously refrained from taking basic steps to restructure the budget by reallocating expenses and raising tax revenues to be able to upgrade public investment in public services such as education, vocational training and health. Unlike Mubarak’s regime, which was able to adapt to a chronic fiscal crisis for a significant period, the post-2011 regimes did not have the luxury of a generous bail out as it lacks the relative political stability of Mubarak’s initial years in power. Moreover, instead of developing a long-term economic plan or an industrial policy, regimes continued to present the same short sighted and ill-advised economic prescriptions through the economic reform plans presented to the IMF.

Alarmingly, the successive governments that have taken charge since the revolution have all elected to seek and accumulate more loans on both the domestic and external fronts. The lack of transparency over the continuous borrowing process coupled with the lack of any comprehensive economic plan or strategy have placed the economy on a seemingly fast track ride to default. In this section we first review the economic conditions and policies that led to the accumulation of public debt before analysing the changes in volume and structure of the debt. Considering the government is hinging its escape from the current debt and economic crisis on an IMF sponsored program, we devote a section to analyse the previous two aborted attempts to find a solution through IMF sponsored reform programs.

The economic and political turmoil since 2011 have further exposed and exacerbated Egypt’s longstanding and deeply-rooted structural economic problems. These problems have been compounded by large fiscal deficits, rising public debt, fragility in the balance of payments and, hence, losses of foreign exchange reserves. Unsurprisingly, vulnerabilities have been increasing in the process. |145|These conditions have all led to a growing budget and current account deficit leading to a dangerously large public debt mainly internal, but also external—that reached over 107 percent of GDP by March 2016, according to the Central Bank of Egypt. |146|

On the external front During 2011 and 2012, Egypt experienced exodus of capital outflows and used international reserves to ensure the repatriation of foreign capital service of its debt, partial settlement of foreign oil company arrears and the import of strategic goods. Capital flight reached 12.8 billion USD from the government’s treasury bill market, the stock market and the banking system. |147| This was mainly due to the government’s reluctance to adopt more stringent capital controls, which was mainly due to the fear of the possible negative message it would send to potential investors and international financial bodies. This was despite the fact that the government had the right to impose at least temporary restrictions on capital outflows and imports of non-strategic commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. at an earlier stage. |148| Furthermore, during that initial period outflows continued in the form of 8.5 billion USD which were spent on debt repayments and 9.3 billion USD which were allocated to the Egyptian General Petroleum Corporation (EGPC) for repayments to foreign oil companies and oil imports. Additionally, 5.4 billion USD were directed towards the General Authority for Supply Commodities (GASC) to ensure supply of strategic food commodities. As a result, net international reserves dropped to 15 billion USD by December 2012 (covering 3.1 months of imports). |149| As reserves were depleting at an average of 1.4 billion USD per month the CBE turned to dollar and euro-dominated debt securities’ sales, and received a total of 4 billion USD in deposits from Saudi Arabia, Qatar and Turkey. |150| Nevertheless, this approach failed to prevent reserves from falling to a level that can barely cover more than 2 months’ worth of imports. |151| Eventually, panic ensued when banks started to withdraw from their overseas accounts and the pound continued to drop at a significant pace and the CBE reacted by adopting a new auction mechanism to buy and sell dollars. |152| However, CBE’s desperate attempts to introduce restrictions on foreign capital outflows through restricting individual foreign currency transfers and corporate withdrawals were too little too late. Similarly, the belated decision to prioritize imports by making money more available to strategic and basic importers had little effect. |153|

Since mid 2012, the Egyptian government has been dependent on capital inflows in the form of aid and cheap credit from the Gulf countries to fill the ever-growing financing gap. However, these inflows were temporary stopgaps and failed to introduce a structural remedy to the country’s balance of payment deficit. |154|Despite these inflows foreign currency reserves have hovered at a level that would cover approximately 3 months of imports, reaching 15.5 billion USD in July 2016. |155| Over the past few years, Egypt’s main sources of income and foreign currency have stalled. Suez Canal revenues stagnated due to the recession in international trade especially the Chinese economic slowdown. |156| Tourism revenues have also contracted because of a series of internal and external shocks over the past few years. Furthermore, export earnings have declined because of lower oil prices (crude oil constitutes almost 40 percent of total exports) and the economic recession in the European Union, Egypt’s largest trading Market activities
trading
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
partner. |157| The central bank has used the reserves to finance the import of fuel and foods and to defend the value of the Egyptian pound. On the other hand, Egypt continued to import 60 percent of its food and 40 percent of its fuel |158| (Egypt became a net importer of gas in 2012 after becoming a net importer of oil in 2006). During the period between 2011 to 2015 the trade deficit declined from -11.5 percent of GDP to -11.7 percent of GDP and current account deficit reached -3.6 percent of GDP.

Funding from the Gulf countries over FY13/14 amounted to 20 billion USD, |159|in the form of deposits , grants and in kind aid, which helped absorb the political backlash of worsening economic conditions. |160| As mentioned above these inflows only kept the stabilised conditions temporarily keeping the state afloat from 2013-2015. |161| With the decline in international oil prices and increasing deficits in most Gulf countries, this form of support become unsustainable. |162| Consequently, in 2015 there was a halt in budget support according to statement by the Governor of the Central Bank. |163| Furthermore, despite of all these efforts the Egyptian pound has lost around 60 percent of its value between February 2011 and April 2016. |164|

Egypt’s poor external performance was coupled with the failure to attract FDI which has been a fundamental tenant of the strategy to achieve economic recovery. The overhyped May 2015 “Egypt the Future” investment conference in Sharm El Sheikh was expected to usher in a new era of FDI in Egypt after managing to bring together potential investors and stakeholders from all over the globe. By the end of the conference the Minister of Investment announced that Egypt had signed around 92 billion USD in Memoranda of Understanding (MOUs), in addition to around 38 billion USD in formal deals, financing, and loan agreements. |165| These investments failed to materialise due to a combination of unfavourable conditions in the global economy and the failure to acknowledge and then fix systemic problems with red tape, ineffective bureaucracy, and endemic corruption. |166| Nevertheless, that didn’t stop the government from taking desperate measures in vain to try to attract investment by amending the investment laws to suit the needs of these specific investors (such as giving investors greater legal immunity and deregulating public procurement), |167|reforms that are more likely to exacerbate corruption |168| while failing to attract the kind of FDI that creates value. |169|

Facing these successive failures, the regime sought about restoring confidence through projects that would add to the mounting debts without adding much value. Despite the dire economic situation and the accumulation of public debt to unsustainable levels, the regime sought to invest heavily not in productive or social sectors but on attempting to restore the image of the regime through what can best described as white elephant projects. The first being the New Suez Canal project which was launched in August 2015 and was clearly driven by the desire to bolster the rule of the current regime as economic benefits were unclear to say the least. |170| With the Suez Canal yet to fully recover since the global financial crisis caused shipping to plummet in 2009, this initiative to expand the Suez canal was a surprise from a shipping industry point of view as forecasts clearly depicted slower global trade growth. |171| The project aimed to double daily traffic and increase annual revenue to more than 13 billion USD by 2023. But monthly revenues have shown either declines or slow growth levels since the inauguration. |172|The most damaging aspect of this project has been the debt incurred to finance it. Public borrowing through the issuance of bonds financed the digging of the second canal, and more than 64 billion EGP (c.7.2 billion USD) was collected in one week. |173| Egypt’s treasury is the guarantor of these bonds, paying annual interest of 12 percent on a quarterly basis, plus the principal due in 2019. |174|

The second white elephant project is the new administrative capital. The c.45 billion USD new capital project presented in the Sharm Sheikh conference in 2015 is planned to be situated on a stretch of desert east of Cairo, halfway to the Suez Canal and past New Cairo is described in an article as ‘just the most recent in a string of failed satellite cities to pop up around Cairo since the late 1970s.’ |175| The project would supposedly include 21 residential neighbourhoods, 40,000 hotel rooms, 663 hospitals and clinics, 700 kindergartens, 1,250 mosques and churches, 1.5 square miles of theme parks, a park twice the size of Central Park, and 1.1 million homes for at least 5 million people. |176| David Sims, the renowned urban planner, who has devoted years cataloguing the failures of Egypt’s satellite cities, questions the feasibility of such a project arguing that the scale is huge and that there are no clear plans on basic issues like how the infrastructure will be built or how they will access water. |177| He also points out the other Egyptian attempts to build new towns on Cairo’s outskirts that have been mired by inefficiency and produced underwhelming returns. |178| While, there might be a need for a new capital, this project seemed more like an act of desperation to claim an achievement at a time when the stock regime is plunging due to political and economic failures. The project had stalled after the withdrawal of the Emirati real estate partner but has been revived by the President and in January 2016 an agreement was reached between Egyptian authorities and China State Construction Engineering Corporation giving the Chinese-state owned business a major role in the project. |179| Neither side announced details of the agreement and it remains unclear whether the Chinese construction company, one of the world’s largest, has made a major financial commitment. But state media in Egypt reported that the deal was worth 15 billion USD in loans, grants and memorandums of understanding. |180|

Meanwhile, on the fiscal front, criticizing the government’s policies has become repetitive with each administration refusing to develop a new approach to public financial management. Essentially, in spite of the revolution and the opportunities it afforded for a new economic strategy aimed at combating long-term ills of corruption and an ailing public sector, there has been little or any change. Critical aspects of economic and social reform, starting from budget planning and allocation, to genuine reform of Egypt’s subsidy policies have remained unaltered. In addition, there has been a continued reluctance towards adopting progressive taxation and other forms of measures that would raise more fiscal revenue and stimulate inclusive growth.

Since 2010, Egypt has been facing a growing fiscal deficit, which reached 11 percent of GDP in 2011, and around 13 percent of GDP in 2012. Deficits were rising as revenues were declining due to the economic recession that followed the revolution and officials of the successive transitional governments were reluctant to progressively raise income taxes or undergo expenditure reform (e.g. implement subsidy allocation reform) due to the political cost (almost 80 percent of the state budget allocated to wages, subsidies and debt services |181|). The governments in office instead relied extensively on domestic borrowing, causing domestic debt to rise from 76 percent of GDP by end of 2011 fiscal year to 80 percent by end of 2012. |182| The state of the economy in 2014 resembled that of the early 1990s. |183| The government deficit exceeded 13 percent of GDP, reserves had reached a record low of 13 billion USD, reflecting sustained efforts to defend the national currency, which was allowed to depreciate by 20 percent as foreign exchange earnings experienced a significant drop. |184| The government deficit had ballooned owing to low revenue generation coupled with increased public spending due to a rising energy subsidy bill (largely benefiting the well off) and wages. |185| As a result, public debt had risen to 80 percent of GDP, which was primarily financed by domestic banks, thus constraining the banks’ capacity to lend to the private sector. |186| Debt servicing payments of domestic debt alone had reached around 40 percent of total expenditures.

A major development came later that year when the recently elected President Sisi decided to implement ‘radical’ economic reform endorsed by the IMF in an attempt to start reducing the fiscal deficit. |187| President Sisi legislated cuts in petroleum subsidies by 30.4 billion EGP ( c.4.3 billion USD) in July 2014 |188|. Hikes in energy prices were announced days after the budget’s approval and were estimated to be in the range of 40 to 80 per cent. |189|These price increases include gasoline prices, diesel prices, fuel oil prices, natural gas prices and increases in electricity prices for households and commercial sectors. |190|These measures were the beginning of a plan by the government to completely liberalise energy prices by 2018/2019, however the second phase of subsidy cuts was halted in the 2015/2016 fiscal year because the government (even though the oil prices were still low), fearing the social consequences of the unpopular measure of raising energy prices. |191| These measures despite being considered radical only reduced the deficit to 11.5 percent of GDP in 2015. At that point domestic public debt had reached 86 percent of GDP and its service payments reached 50 percent of total expenditure.


Debt Implications of Policies Adopted

Egypt’s domestic debt has kept increasing in the last 5 years, reaching unprecedented levels in March 2016, where it reached about 2.5 trillion EGP compared to 888.7 billion EGP in June 2010. Similarly, the domestic debt to GDP ratio increased to 90.1 percent in March 2016, compared to 73.6 percent in June 2010. Interest payments on government debt was the largest expenditure item in 2016 constituting around 97 percent of the fiscal deficit. |192| Government debt, both external and domestic, stood at 2.5 trillion EGP for the same year. |193| Domestic debt, mainly treasury bills and bonds, represents 85 percent of total government debt and 88 percent of GDP, |194| clearly demonstrating the burden it has on the economy. Post 2011, government debt papers came under pressure due to the capital flight by foreign investors in the domestic debt market, increasing these papers’ supply and hence placing an upward pressure on yields. |195| Facing an increasing deficit the government increased its issuance of debt papers at unprecedented yield levels, |196| motivating domestic banks to increase their holdings of government securities. |197| Egyptian banks’ investments in T-bills have more than doubled since June 2011, reaching 1.3 trillion EGP ( c.170 billion USD ) by June 2015. |198| Government debt now accounts for almost two-thirds of total domestic credit on the balance sheet of Egypt’s commercial banks, compared with about one-third in 2010. |199|

Egyptian risk-free sovereign yields are exceptionally higher than lending rates, creating disincentives for riskier private lending. |200| Interest rates on T-Bills kept rising after 2011 reaching a peak of 16 percent in January 2012, reflecting high risk perceptions associated with government debt |201| before they started to decrease during 2013/14 after the inflow of Gulf aid to Egypt. |202| However, interest rates rose again in 2014/15, affected by increasing government’s need for debt and the devaluation of the Egyptian Pound. |203|The average yield on treasury bills reached 11.45 percent in 2015 compared to 10.3 percent in 2010, thus increasing the level of public spending and widening the fiscal deficit even further. |204|In addition to domestic debt reaching 90 percent of GDP, as a result of the government relying mainly on T-bills to finance the deficits since 2011 the short-term component of domestic debt reached 55percent in June 2015. With domestic debt service payments exceeding 50 percent of total expenditure it has become quite clear that escaping the debt vicious cycle will prove to be an overwhelming task.

Egypt’s external debt has jumped by almost 60 percent since 2010, rising from 33.7 billion USD in 2010 to 53.4 billion USD in March 2016. Between 2011 and 2015 external debt service payments averaged 3.5 billion USD on annual basis. The main source of external finance has been Gulf countries which according to the CBE have provided over 29 billion USD through deposits, grants and other forms of aid. Unlike domestic debt, with external debt there is much less transparency on the terms and exact amounts of debt incurred, making any attempt to determine the obligations of the state an investigative process. A review of the breakdown of external debt over the past five years reveals that the non-governmental share of external debt and particularly that of monetary authorities has witnessed the largest increase rising from 1.2 billion USD to 16.3 billion USD. This is increase is mainly due to the long and short-term deposits in the CBE by Gulf countries in addition to Libya and Turkey over the past five years.

The first major increase in external debt post 2011 was in 2013 when the debt stock reached 43.2 billion USD rising by 8.8 billion USD from 2012. As a result of capital flight, decline in foreign income from services and CBE consuming the reserves to defend the local currency, foreign reserves fell below the “critical level” set by CBE at 15 billion USD to reach 14.4 billion USD. |205| Egypt has hit a breaking point in its ability to pay for imports of oil, wheat and other basic commodities and there were serious doubts being raised over Egypt’s ability to sustain its basic needs of fuel and food in the summer of 2013. |206| Accordingly, as mentioned above the CBE resorted to dollar and euro-dominated debt securities as well as deposits from Saudi Arabia, Qatar and Turkey to salvage the situation. Debt raised by monetary authorities represented the largest component of external debt increasing by 6.5 billion USD.

External debt increased again the following year by approximately 3 billion USD reaching 46.1 billion USD in June 2014. The main source of this increase was again due to non-government external debt during FY13/14 which can be traced through the incurrence of an extra 4 billion USD in external debt by monetary authorities compared to FY12/13. |207|This 4 billion USD balance was a result of the net change of deposits inflows and the redemption of other deposits. According to the Macro Fiscal Policy Unit in the Ministry of Finance, the breakdown of inflows was: 2 billion USD from UAE, 2 billion USD from Saudi Arabia and 3 billion USD from Kuwait. Meanwhile, while Egypt returned a total of 3 billion USD deposits (2 billion USD if which were the Qatari deposit). |208| By June 2015 Egypt’s foreign debt reached 48 billion USD exceeding the debt levels in the early 1990s. The bulk of the rise in debt in 2015 came in the fourth quarter of the fiscal year. At the end of March, external debt stood at c.40 billion USD, compared to more than 48 billion USD by the end of June. |209| Debt rose across almost all categories, but most of the increase appears to be due to a combined 6 billion USD worth of Central Bank deposits in April by Kuwait, Saudi Arabia and the United Arab Emirates. |210| This corresponds with an increase in Egypt’s long-term deposit liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). , which jumped from 9 billion USD in March 2015 to 15 billion USD in June 2015. |211|

Despite spending more than 22 billion USD in debt service since 2011, Egypt’s indebtedness continues to rise reaching 53.4 billion USD in March 2016. The majority of the debt has consistently been medium and long term debt which avoids the risk of maturity mismatch. Nevertheless, external debt with the current maturity structure is still unsustainable as Egypt will continue to accumulate more debt over the foreseeable future to cover imports as well as keep reserves at a critical level (3.5 months imports) and repay its existing debts. Considering that the financing gap over the next three years is expected to amount to 25 billion USD |212| the current IMF sponsored debt plan will barely plug the gap.

The picture becomes a lot bleaker when we realise that the lack of transparency is not only limited to the terms and usage of debt incurred, but also in terms of the actual magnitude of the debt is understated. Several debt obligations that are covered by the CBE or Ministry of Finance are not reflected in the debt balance disclosed in reports published by both entities. These include the debt owed by EGPC to international Oil Companies which was initially around 6 billion USD and is currently down to 3.4 billion USD |213| and the 3.5 billion Euro debt guaranteed by the Ministry of Finance to fund the 6 billion Euros (c. 8.9 billion USD) Siemens electricity project. |214| The 25 billion USD Russian loan to finance the building of a nuclear plant is another type of debt that will not be reflected in the official debt figures disclosed by the CBE and Ministry of Finance. Needless to say, with all sources of foreign currency income experiencing a decline, the existing debts (disclosed and undisclosed) in addition the new debt Egypt plans to incur will plunge the country deeper into the debt trap rather than allow it the government to solve its structure problems and invest in economic recovery.


VII. Does IMF Provide the Solution?

Egypt is struggling to keep its economy afloat, The country’s main foreign exchange earners continued to collapse in the first quarter of this year, or barely hold their own, according to the balance of central bank payments data released in July. |215| Moreover, the economy continues to suffer from large budget and current-account deficits (almost 12 percent and 4 percent of GDP, respectively), as foreign reserves run perilously low. With inflation exceeding 14 percent and unemployment reaching 12 percent (official figure) the bleak picture is complete. Egypt’s survival hinges on its imports of not just food and fuel but industrial components and raw materials to keep its already small scale non-primary sectors functioning. Until recently the government had been relying on Gulf aid, borrowing from banks and pure monetary creation to finance the deficit, but these options seem to have run their course. |216| With no debt relief in sight, Egypt has decided to turn to the IMF for the 3rd time since 2011 to rescue the ailing economy. An initial agreement pending board approval has been reached with the aim to secure a 12 billion USD loan over 3 years, in addition to securing another 9 billion USD over the same period (conditioned on closing the IMF deal). In return for this deal, Egypt has presented an austerity program which is fairly similar to the previous they had presented in 2012 and 2013, with the main difference being that they have actually gone a step further by passing a new VAT law, civil service wage reform legislation and stated willingness to proceed with the dangerous devaluation of the pound. In the next section we review Egypt’s engagements with the IMF since 2011 and focus on the previous two ‘economic reform’ programs that formed the conditionalities of the IMF deal, before reflecting on the latest round and the possible repercussions.

Almost immediately after the revolution, the Deauville Partnership launched at the G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. summit in May 2011 provided Egypt with a framework and strategy for economic transformation to be led by

IFIs like the IMF, World Bank, European Bank for Reconstruction and Development (EBRD) and the European Bank of Investment (EIB). The IMF had initially provided grounds for optimism regarding their new role in Egypt in the early days post the 2011 revolution. |217| The IMF recognised that their policy advice and praise of Egyptian performance in the past was misplaced and their statements seemed to indicate a very different point of departure for the future. |218| For instance Adnan Mazarei, deputy director of the Middle East and Central Asia Department, argued that Egypt’s fuel subsidies were regressive and should be replaced by well-targeted transfers to benefit the poor. Mazarei said that replacing fuel subsidies, which primarily benefit the rich, with strong social safety nets for the poor would result in a redistribution of wealth that would in turn help to mitigate potential social unrest resulting from subsidy. |219| The IMF also seemed to advocate education and health spending as antecedents to economic growth. |220| In fact, the IMF staff actually recommended “shifting budgetary resources to infrastructure investment, education, and health” to improve growth prospects and social outcomes for Egypt. |221|

When the IMF eventually engaged with the Egyptian government the policies promoted showed little if any consistency with the claims made above. Negotiations for a new IMF loan to Egypt began in mid 2011 during IMF mission visits to the country. A staff level agreement between the government and the IMF for a 3 billion USD loan was initially concluded on 5 June 2011, but was met with a protesting civil society and a divided public opinion over the economic consequences of an IMF loan. |222| The leaked details of the agreed economic plan was met with increased dissent and eventually the Egyptian authorities announced that plans to accept the loan had been dropped, |223| with one of the advisors noting that this was a result of the “pressure of public opinion”. |224|

The measures that were negotiated with the IMF and agreed upon in the preliminary agreement reached were mainly austerity measures. This was clearly illustrated through the decrees that were passed by the government to prove to the IMF that it was serious about adopting the ‘required’ reforms stipulated by the IMF. These decrees included consecutive price increases in electricity, butane gas cylinders and both natural gas and heating oil supplied to electricity stations. |225| According to the IMF approved reform plan the budget cut targets included a 20 per cent reduction in budget deficit in the following fiscal year and a deficit/GDP bench mark of 5 per cent in 2016/2017, which clearly signified that the austerity measures will be aggressive to the say least. In the absence of social safety nets, these measures, coupled with the classic IMF requirement of devaluation, were expected to have severe detrimental effects on the cost of living for the majority of Egyptians. |226| Considering that Egypt imported around 40 percent of its food and over 60 per cent of its wheat and that Egyptians spend around 40 per cent of their income on food, the effects of the expected hike in prices due to inflationary pressures could be clearly drawn. |227| The shelving of the IMF loan proposal along with the social unrest caused by it meant these reform measures were postponed.

In June 2012, the Egyptian government went back to the IMF with a formal application to resume negotiations on a loan, this time for a new amount of 4.8 billion USD. An initial agreement was signed

in November 2012 and a set of austerity measures approved by the IMF was again presented as an economic reform plan. |228| The plan again had unrealistic targets to drastically reduce the budget deficit from an expected 12 per cent of GDP to 10.9 per cent in the current fiscal year and 7.7 per cent by 2014/2015. |229| The more contentious issue in the package was that of fuel subsidies, which the government planned to start rationing in July 2013. This was suggested in a context where according to the minister of petroleum at the time, the first three months of 2013 saw the commencement of the diesel crisis with fuel shortages reaching a peak in March, the harvest season. |230| This shortage resulted in a surge in the prices of food commodities with increases ranging from 7 per cent to 30 per cent. |231|Such deprivation had already resulted in violent clashes in several governorates with long queues of citizens struggling to get their share of the limited quantities available. These circumstances were expected to have drastic socioeconomic consequences considering the absence of any price controls or social protection. With regards to income tax, minor changes were made to abandon the neoclassical tax policy adopted in the new IMF sponsored plan, as they aimed to reduce the number of income brackets and impose a similar tax rate across a segment despite the significant disparity in income levels. |232| Instead of applying progressive taxation on higher income groups, the rate remained at only 25 per cent for individuals while the unified rate for all firms is set at 25 per cent. Thus, the plan itself was very indicative of IMF policy prescriptions of the past consisting of a set of austerity measures aimed solely at bringing the deficit down and replenishing the reserves. |233|

This IMF program was postponed again this time due to the political instability sparked by the constitutional declaration by President Morsy in November 2012. Nonetheless, despite this postponement, many of the economic measures linked to the IMF agreement remained in place, provoking a record number of protests and strikes in the following months. |234| For instance, the CBE acceded to IMF’s pressure and resorted to currency devaluation. This resulted in the Egyptian pound losing almost 10 per cent of its value since early January, and subsequently reflected in a sudden increase in the prices of basic commodities. Whereas the CBE quoted inflation at 8.7 per cent at the time, officials from the Department of Food in the Chamber of Commerce indicated that 17 per cent was a more accurate figure. Considering that savings have reached as low as 6.1 per cent of GDP and that 57.5 per cent of the Egyptians do not earn enough to cover their basic needs, a socioeconomic crisis was brewing. |235|

Significant political developments followed in Egypt over the following six months that eventually witnessed the return of military rule. IMF commitment remained strong as illustrated in the IMF’s report to the October 2013 Deauville Partnership Ministerial Meeting, the medium-term strategy necessitated: promoting the role of the private sector to unleash Egypt’s underexploited economic potential and regaining control of public expenditures, including reforming energy subsidies and containing the wage bill. |236|The next major development came in 2014 when the recently elected president Sisi decided to take the unprecedented step of reducing energy subsidies which led to a significant hike in fuel and electricity prices as described earlier in this chapter. The immediate effect of these subsidy cuts was to increase the operational costs for small-scale farmers and the cost of public transportation used mainly by Egyptians from lower socioeconomic groups. |237| The Central Agency for Public Mobilisation and Statistics announced that vegetable prices increased by 7.4 per cent and transportation costs rose 11.2

per cent in July, when the energy price hikes went into effect. |238| Moreover, diesel is the most consumed oil product, and 80–85 per cent is used by the goods and services sector. |239| Compensation measures to offset the impact of the subsidy cuts put in place were limited, essentially ad hoc measures, not enough to protect wages and mitigate price inflation. |240|

The IMF lauded these developments with Masood Ahmed commenting in May 2015 that the government efforts to cut the budget deficit and spur economic growth were now bearing fruit, though more needed to be done. |241| Looking at the IMF’s press release for their latest Article IV report on Egypt in February 2015, it becomes quite clear that the same policy advice and approach of the pre 2011 era was being adopted. According to the IMF, “Fiscal consolidation will bring the budget deficit below 8 per cent of GDP by 2018/19 and set government debt on a downward path. The adjustment is designed to preserve growth and inclusiveness.” |242|This statement could have easily been an extract from any of the Article IV reports in 2008, 2009 or 2010. Indeed it is striking that measures proposed in order to achieve ‘inclusion’ are largely framed around private sector growth, fiscal austerity, regressive taxation and liberalisation of trade. |243|

Despite the praise which is reminiscent of IMF’s glowing review shortly before the revolution in 2011, Egypt has continued to struggle to stimulate an ailing economy which has become completely dependent on debt (domestic and external) for survival. With aid and loans from the Gulf drying up, Egypt has turned once again to the IMF, but this time in a much more desperate position. While, the previous governments stopped short of implementing the measures required by the IMF in the first two attempts, this time around the Egyptian government has already passed the VAT and civil service reform laws |244| before the staff level agreement for an three-year Extended Fund Facility (EFF) in the amount of 12 billion USD has even been approved by the board.

The deal is considered as a ‘lifeline’ the current regime and is part of a larger 21 billion USD financing program supplemented by organizations such as the World Bank and the African Development Bank, as well as bilateral loans and a bond sale. The fiscal policy program the IMF approved includes the introduction of value-added taxation, cuts in fuel and electricity subsidies, curbing public wages, devaluation of the Egyptian pound and partial privatization of public entities. Almost a replica of the austerity and regressive policies prescribed since the launch of the ERSAP in the early nineties, policies that have failed to promote sustainable growth nor solve the chronic fiscal and trade deficits that have driven the economy back into the debt trap as demonstrated in this chapter. Despite acknowledging that they had previously misjudged the problems and necessary solutions pre 2011, the IMF returns with a one size fits all package again disregarding the structure of the Egyptian economy and the roots of its current indebtedness. The stated objectives of the IMF sponsored program are to bring down budget deficit and debt, raise growth and includes strengthening the social safety net to protect the poor and vulnerable groups. |245| However, a quick review of the expected impact of each of the key policies outlined in the plan reveals how questionable these objectives are.

Firstly, there is a continued emphasis or obsession with austerity rather than increasing revenue generation which has been a major obstacle for growth even when expenditure was significantly reduced in the early 1990s. The only measure to increase revenue is the regressive VAT whereas, more progressive taxation measure like higher progressive income taxation and capital gains tax have remained on hold. Considering Egypt’s tax revenues are a meagre 13 percent of GDP |246| it is quite clear that the state has made a political decision to sacrifice generating more revenue to avoid placing more of the burden on the wealthy. Since 2011 there have been several proposals for more progressive taxation policies that would have significantly raised tax revenues and provided a fairer distribution of the costs of fiscal restructuring. However, the state has backtracked on all these proposals (which included higher progressive income taxation, capital gains tax, dividend tax and property taxes) under the pretext of encouraging investment.

Secondly, it is quite unclear how these measures will stimulate growth as the application of the VAT will negatively affect the purchasing power and consumption of a broad segment of the population. This is bound to have a detrimental effect on growth as household consumption is by far the main driver of GDP growth constituting more than 80 percent of GDP. Furthermore, several measures are expected to have an inflationary impact that will add to the already significantly high inflation rate which reached 16.4 percent in August 2016. The VAT is expected to lead to 0.2 percent to 2.5 percent increase in inflation, whereas the devaluation of the pound will certainly increase the price of food and fuel imports and the reduction of subsidies will further heighten the costs of energy. Most importantly at a time when public investment is at its lowest levels, further cuts in public expenditure and investment will only serve to reduce aggregate demand and job creation. All these factors combined will certainly constrain growth.

Thirdly, the stated objective behind devaluation is to reduce the burden on the currency reserves to defend the pound, attract investors and make exports more competitive. However, considering that Egypt has an imports-based economy, which relies heavily on food, intermediate inputs for machinery and foodstuffs the cost of imports is bound to increase significantly as a result of devaluation. On the other hand, with exports showing no prospects of increasing (mainly petroleum products and crude oil) and obstacles to FDI constituting a lot more than just an overvalued currency, external account deficits are expected to exacerbate.

Fourthly, there are already serious doubts with regards to the deficit reduction targets. A recent report by Moody’s rating agency Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness.  This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security.  Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due.  Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc.  A rating of BB or below is considered a ‘junk bond’ because it is likely to default.  Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness.  The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
has recently forecasted that the deficit for the 2016/2017 fiscal year will reach 12 per cent of GDP as opposed to the 9.9 percent target set by the government. |247| The report cites doubts on the ability of the government to raise enough revenue to reach the target set. The two main factors the report claims will prevent the government from reaching its revenue target are: |248| (i) their forecast of a lower rate of economic growth which they expect to reach 3.5 percent compared to the government’s forecast of 5.5 percent; (ii) the reduction in revenue generated from VAT as a result of lowering the rate from 14 percent to 13 percent. That one percent drop is expected to decrease revenues by 12 billion EGP which is more than a third of the originally expected 30 billion EGP. |249| Other factors not mentioned by the report but worth considering: are the lack of clarity on the extent to which the civil service wage law and the fuel subsidy cuts will reduce expenditure.

The fifth and final point is the objective of reducing debt. If the current plan is successfully implemented then Egypt is expected to add 21 billion USD in external debt over the next three years. This does not include the pending 25 billion USD Russian loan for the nuclear plant nor the other debt obligations that which are not included in the external debt stock disclosed as illustrated earlier. Hence, a simple back of the envelope calculation reveals that the government would be incurring an amount of debt that is almost equivalent to the current total balance of 53.4 billion USD. Moreover, the 21 billion USD raised over the next three years will be utilised to fund the estimated financing gap of 7 billion USD per year. This means that debt raised, again will not be invested in productive sectors or in activities that will generate any return to help repay the debt. Even if we assume that fiscal deficits do eventually decrease because of subsidy reduction and increased tax revenue, the limited efforts to boost revenue generation in order to exceed expenditure means the government will still rely on more public debt to finance the fiscal deficits. Not to mention that the expectation that FDI will flow in because of the IMF agreement and the devaluation of the currency is a naïve assumption that neglects the fact that the lack of absorptive capacity, attractive opportunities and regulatory problems are the main reasons why FDI levels have always been so low. As debt service obligations already account for almost 50 percent of total expenditure (before the addition of new debt), it is difficult to see how this expansion in debt will help the government free up funds to increase public investment in social and productive sectors as the IMF objectives have claimed.

Finally, it becomes clear that while this IMF intervention will buy the current regime some time it will not help solve the roots of the problem which is overcoming the fiscal and trade deficits. What these measures actually do is simply delay the inevitable doom while entrenching the economy further into the debt trap.


VIII. Assessing Alternatives that Do Not Entail Accumulating More Debt

(i) Financial repression: Financial repression can take place when public banks/financial institutions buy significant amounts of government securities, T-bills and bonds, keeping interest rates at low levels. |250| In this approach captive buyers are forced to hold government debt at interest rates below market yields allowing the government to cut interest costs and reduce the recorded public deficit. |251|While, this approach can be potentially useful, in Egypt’s case this method has been adopted to attempt to contain public domestic debt, but in a rather regressive manner (as explained below) through ensuring that the National Investment Bank (one of the biggest actors in the Egyptian capital markets) buys a significant amount of government bonds and bills. |252|The NIB has been significantly increasing its holdings of government bills and bonds over the past decade or more, as the state has used its control over a big actor in the financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. to support demand for government bonds. |253| While this approach allows the government to borrow at cheaper rates it has failed to contain the domestic debt that has been growing at an exponential rates and more importantly it has ‘legally’ siphoned citizen’s savings transferred through the post office savings as well as the social contributions of Egyptian workers to fund state-owned enterprises, economic authorities and to satisfy the government’s borrowing need. This use of these funds instead of spending them on productive investments that generate returns for their savings can be considered as a sort of indirect tax on citizens’ savings and pension.

ii. Wealth taxes and inflation: Two alternative and less regressive measures that have proposed by Picketty in his ground breaking publication Capital in the Twenty First Century are wealth taxes and inflation. According to Picketty the worst solution in terms of both justice and efficiency would be a prolonged dose of austerity which is precisely the solution Egypt is undertaking. He explains that an exceptional tax on private capital is the most just and efficient solution. Failing that, inflation can play a useful role. |254| Since a government bond is a nominal asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). rather than a real asset, a small increase in the inflation rate is enough to significantly reduce the real value of the public debt. |255| Furthermore, as Picketty notes, the inflation tool has been utilised historically to reduce large public debts, particularly in Europe during the twentieth century. |256| In fact, inflation in France and Germany averaged 13 and 17 percent a year, respectively, from 1913 to 1950. |257| Higher Inflation allowed both countries to embark on reconstruction efforts in the 1950s with a very small burden of public debt dealt with. |258| For a sudden increase in inflation to work there are several factors that need to be taken into consideration including the existing levels of inflation and the maturity structure of debt. Considering that at least 50 percent of domestic debt is short term and that inflation is already 16.4 percent a surge in inflation rates to further reduce the value of debt owed would have negative implications on the economy. |259| Financial repression and excessive government borrowing have already led to higher inflation and lower saving ratios. Initially, inflation helped to limit the growth of the government debt, mainly because of the negative real interest rates and the large base of the inflation tax. However, with the impending depreciation of the pound bound to significantly increase inflation rates the CBE is already expected to increase interest rates to counter these effects. Not to mention that the private agents will demand a proportionately higher nominal interest rate to compensate for the effect of inflation on the value of their investment once they realise the government’s plan to use this approach. According to Picketty a much more satisfactory way of reducing the public debt is to levy an exceptional tax on private capital. |260| Shortly after the revolution in 2011, a proposal for one time wealth tax of 10-20 percent came ironically from a chief executive of one of the biggest investment banks in the region. The idea behind what he called the “Tahrir Square tax” was to impose a one-off global wealth tax of ten to 20 per cent on individuals with a net worth in excess of $10m, with tax receipts going to their country of citizenship. |261| While his major objective was to save capitalism, the immediate purpose of the tax was to enable governments including his own (Egypt) to reduce government debt and invest the surplus funds in infrastructure, research and enhancing labour markets. |262| The wealth tax solution was also one of the main proposals advocated by the Popular Campaign to Drop Egypt’s debt as an alternative to accumulating more debt. By issuing a lump-sum tax on the stock of wealth, governments can deleverage at a far faster rate than by taxing the flow of income. The IMF themselves have discussed the idea of implementing a 10% wealth tax in Europe as a mechanism for dealing with Europe’s overleveraged economies. |263| Hence, a flat tax rate on private wealth could go a long way in significantly diminishing the amount of debt and interest payments owed and hence would provide the state with the much needed fiscal space to restructure its economy and deal with its structural deficits. However, such a move would require both political will and the administrative capacity as well as access to information on the size of the wealth of private agents. |264| Those three factors are the main obstacles facing the implementation of this solution in Egypt.

iii. External debt solutions: In terms of external debts the options are considerably more limited. A key solution in Egypt’s case would have been a debt audit, while it is still possible the complex and long term nature of the process combined with the lack of political will means it will not be a feasible option in the short term future. Other possible solutions include the inflow of significant amounts of foreign currency income, which in Egypt’s case would have to coincide with inflow of FDI and rents. However, the internal and external obstacles discussed earlier which are some of primary causes of Egypt’s accumulation of external debt are the same reasons that it will not be able to escape its debt through inflows of capital. The option of rescheduling or haircuts from some of the existing debts is also a tricky option as it could easily lead to just buying more time in the same way the accumulation of debts will if the structural problems facing the economy are not fixed (the recent Greek experience serves as a good example of that scenario). This leaves us with debt relief being the only current realistic option that would allow Egypt to regain some of its fiscal space which would be necessary to restructure its economy without plunging further into the debt trap and suffering from the devastating effects the current austerity program could have on an already fragile economy.


IX. Conclusion

It has been almost three decades since the last debt crisis and Egypt’s policy makers are still adopting policy prescriptions that are focusing on the symptoms of Egypt’s debt problems rather than treating the root causes of it. In this chapter we have demonstrated how the neoliberal policies adopted since the mid 1970s have played a significant role in triggering the debt crisis in 1990 and in leading the Egyptian economy back into the debt trap shortly after the massive bailout. As illustrated throughout the different sections of this chapter these policies have exacerbated Egypt’s structural trade and fiscal deficits which are the two main causes of debt accumulation. Facing the latest debt crisis, the Egyptian regime is following the same approach that has failed to yield results in the past through implementing a program prescribed by the very same institution that has openly admitted to getting its assessment of the Egyptian economy wrong pre 2011. The policy prescriptions that come with the IMF program include resorting to accumulating further debt along with a set of austerity measures, more liberalisation and the devaluation of the local currency. As we argue in this chapter all these policies will hardly contribute to reducing Egypt’s fiscal and trade deficits. Furthermore, incurring more debt will only temporary relief to the country’s perpetual domestic and external imbalances.

Finally, the lack of a long term strategy to structurally transform the current rentier economy to a productive economy that does not rely on external rents to survive, effectively means that even if another miracle were to occur wiping out a significant portion of Egypt’s existing debt obligations, the economy would still eventually drop back into the debt trap for the same reasons it did post 1990.


Footnotes

|1| which included: austerity measures, privatization and further liberalisation as well as devaluation of the local currency

|2| Farah, N.R., 2009. Egypt’s Political Economy: Power Relations in Development, American

University in Cairo Press Series. American University in Cairo Press.

|3| ibid

|4| ibid

|5| Harrigan, J., El-Said, H., 2009. Egypt’s Successful Stabilisation without Structural Reform, in:

Harrigan, J., El-Said, H. (Eds.), Aid and Power in the Arab World: World Bank and IMF Policy-Based

Lending in the Middle East and North Africa. Palgrave Macmillan UK, London, pp. 36–74.

|6| Ikram, K., 2007. The Egyptian Economy, 1952-2000: Performance Policies and Issues, Routledge Studies in Middle Eastern Economies. Taylor & Francis.

|7| ibid

|8| ibid

|9| ibid

|10| Soliman, S., 2011. The Autumn of Dictatorship: Fiscal Crisis and Political Change in Egypt under

Mubarak, Stanford Studies in Middle Eastern and I. Stanford University Press.

|11| Handoussa, H., 1991. A Characterisation of the Employment Problem in

Egypt, in: Handoussa ,H. and Potter. G. (Eds), Employment and Structural Adjustment,

Cairo.American University in Cairo Press.

|12| Ikram, K., 2007.

|13| ibid

|14| ibid

|15| ibid

|16| ibid

|17| ibid

|18| ibid

|19| World Bank: World Debt Tables. Debt and International Finance Division, Washington D.C., 1993

|20| ibid

|21| Soliman, S., 2011.

|22| ibid

|23| ibid

|24| ibid

|25| ibid

|26| ibid

|27| ibid

|28| Farah, N.R., 2009.

|29| Ikram, K., 2007.

|30| ibid

|31| ibid

|32| ibid

|33| ibid

|34| Soliman, S., 2011

|35| ibid

|36| Farah, N.R., 2009.

|37| not due to an increase in public investments in productive sectors but due to inability to raise enough revenues to cover public expenditure.

|38| Between 1987-1996, Egypt had signed 3 SBAs and an extended facility. However, they have only drawn from their 1987 and 1991 facilities, meaning it the policy prescriptions through the ERSAP where the most effective tool in imposing the IMF economic model.

|39| Harrigan, J., El-Said, H., 2009.

|40| ibid

|41| ibid

|42| Farah, N.R., 2009.

|43| ibid

|44| Harrigan, J., El-Said, H., 2009.

|45| ibid

|46| ibid

|47| ibid

|48| ibid

|49| ibid

|50| ibid

|51| Abdel-Khalek, G., 2007. MDG-based Debt Sustainability Analysis Egypt. Country Discussion Paper prepared for a joint UNDP/UNDESA initiative on defining a more MDG-consistent debt sustainability framework. UNDP. Available at:

http://www.undp.org/content/dam/aplaws/publication/en/publications/poverty-reduction/poverty-website/mdg-based-debt-sustainability-analysis-egypt/MDG-basedDebtSustainabilityEgypt.pdf

|52| As Gouda Abdel-Khalek explains in his UNDP report “MDG-based Debt Sustainability Analysis Egypt”, the policy response to high portfolio capital inflows was to sterilize such inflows in order to avoid unwarranted increase in

the monetary base. The end result was accumulation of international reserves in parallel with the accumulation of domestic public debt.

|53| Harrigan, J., El-Said, H., 2009.

|54| Soliman, S., 2011.

|55| Adly, A., 2014. The Economics of Egypt’s Rising Authoritarian Order, Carnegie Middle East Center. Available at: http://carnegieendowment.org/files/econ_egypt_authoritarian_order.pdf

|56| Soliman, S., 2011.

|57| ibid

|58| Izquierdo, A. and Panizza, U., 2003. Fiscal Sustainability: Issues for Emerging Market Countries, Working Paper No. 91, The Egyptian Center for Economic Studies.

|59| Abdel-Khalek, G., 2007.

|60| ibid

|61| Izquierdo, A. and Panizza, U., 2003.

|62| Abdel-Khalek, G., 2007.

|63| Izquierdo, A. and Panizza, U., 2003.

|64| Abdel-Khalek, G., 2007.

|65| ibid

|66| As Gouda Abdel Khalek (2007) explains: Through the conduit of the NIB, government borrowing from the Social Insurance

Funds (SIFs) was compulsory, with borrowing usually significantly below market interest rates. The interest rate on SIFs’ funds increased but remained below market interest rates.

|67| ibid

|68| Ikram, K., 2007.

|69| ibid

|70| ibid

|71| Harrigan, J., El-Said, H., 2009.

|72| ibid

|73| ibid

|74| ibid

|75| ibid

|76| ibid

|77| Izquierdo, A. and Panizza, U., 2003.

|78| ibid

|79| ibid

|80| ibid

|81| ibid

|82| ibid

|83| ibid

|84| El-Ghonemy, M.R., 2003. Egypt in the Twenty First Century: Challenges for Development,

Routledge Advances in Middle East and Islamic Studies. Taylor & Francis.

|85| Bargawi, H., 2014. Economic Policies, Structural Change and the Roots of the “Arab Spring” in Egypt, Review of Middle East Economics and Finance,10 (3), Available at: 10.1515/rmeef-2014-0034.

|86| Ikram, K., 2007.

|87| Khorshid, M., Kamaly, A., El-Laithy, H. and Abou El-Enien, S., 2011. Country Study: Assessing Development Strategies to Achieve the MDGS, The Arab Republic of Egypt, UN-DES. Available at: http://www.un.org/en/development/desa/policy/capacity/output_studies/roa87_study_egt.pdf

|88| Central Bank of Egypt annual report 2002/2003

|89| Khorshid, M. et al., 2011.

|90| (ERF, 2004).

|91| Khorshid, M., et al., 2011.

|92| ibid

|93| Data from Central Bank of Egypt and Ministry of Finance Reports

|94| Soliman, S., 2011

|95| Ministry of Finance monthly bulletins

|96| Soliman, S., 2011

|97| Ministry of Finance, Financial Monthly bulletins

|98| Ministry of Finance Financial Monthly bulletins

|99| Soliman, S., 2011

|100| Bargawi, H., 2014

|101| ibid

|102| Soliman, S., 2011

|103| Bargawi, H., 2014

|104| ibid

|105| ibid

|106| Emam, H., 2012. Monetary and Fiscal Policies Post 25th January Revolution: Fighters against Windmills, Paper presented at the Egypt in the Arab Spring: Perspectives from Economics and Democratisation Studies Conference in the London School of Economics, London, 28 September 2012. Available at: http://www.lse.ac.uk/middleEastCentre/research/Collaboration-Projects/collaboration-2011-2012/LSE-Collaboration-with-FEPS/Heba-Atef.pdf

|107| ibid

|108| Bargawi, H., 2014

|109| Emam, H., 2012.

|110| ibid

|111| ibid

|112| Cammett, M., Diwan, I., Richards, A. and Waterbury, J., 2015. A Political Economy of the Middle East, 4th edn,Westview Press, Boulder, Colorado.

|113| ibid

|114| Central Bank of Egypt Annual Reports

|115| IMF, 2010. Arab Republic of Egypt: 2010 Article IV Consultation, Country Report No. 10/94, Washington D.C., IMF.

|116| ibid

|117| Central Bank of Egypt Annual Report 2009/2010

|118| IMF, 2010.

|119| Central Bank Annual Report 2009/2010

|120| Abdel-Khalek, G., 2007.

|121| IMF, 2010.

|122| IMF,2010.

|123| Central Bank of Egypt Annual Report 2009/2010

|124| ibid

|125| World Bank, International Debt Statistics.

|126| Hanieh, A., 2011. Egypt’s ‘Orderly Transition? International Aid and the Rush to Structural Adjustment, Jadaliyya, May 29. Available at: http://www.jadaliyya.com/pages/inde...

|127| ibid

|128| Maher, S., 2011. The Political Economy of the Egyptian Uprising, Monthly Review, Volume 63, Issue 06, November 2011.

|129| El-Kady, H., 2012. Egypt’s Bilateral Investment Treaties: A Straitjacket in a New Era of Foreign Investment Re-regulations? Transnational Dispute Management Journal, Issue 3 2012.

|130| ibid

|131| ibid

|132| Fick, M., 2013. Egypt drags its feet in privatization tussle, Reuters, May 29, 2013. Weblog:

http://www.reuters.com/article/2013...

|133| Bonnitcha, J., 2013.Investment Treaties and Transition from Authoritarian Rule. Economic and Social Research Council.

|134| O’Donnell, G. and Schmitter, P., 1986. Transitions form Authoritarian Rule: Tentative Conclusions about Uncertain Democracies, John Hopkins University Press,46.

|135| Dolzer, R. and Schreuer, C., 2012. Principles of International Investment Law,2nd edition Oxford University Pres, 145.

|136| Bonnitcha, J.,2013.

|137| Howse, R. and Teitel, R., 2011. Debt, Dictatorship, and Democratization, Project Syndicate, April 4, 2011. Available at: https://www.project-syndicate.org/commentary/debt—dictatorship—and-democratization?barrier=true

|138| ibid

|139| ibid

|140| Ecuadorian debt audit experience under President Correa. In July 2007 Correa established a Debt Audit Commission to explore whether the debts incurred by the incumbent regimes had been acquired legitimately. The Commission reported in November 2008 and found that a series of Ecuadorian bonds were unlawful, and recommended that Ecuador should refuse to

make payments on them. President Correa responded by repudiating this debt on the basis that it was improperly authorized by previous administrations and involved onerous interest rates, commissions and prepayments. By the following April Ecuador had successfully renegotiated the bonds, reducing their value by 65%. 91% of the bondholders sold their debts back to Ecuador.

|141| Hussein, S., 2013. The Debt Audit and Debt Cancellation, the Messages for Egypt, The American University in Cairo.

|142| ibid

|143| ibid

|144| Mossallem, M., 2013. The Illusion Dispelled, Egypt’s Economic Crisis: Causes-Alternatives-Remedies, Egyptian Initiative for Personal Rights. Available at: http://eipr.org/sites/default/files...

|145| IMF, 2015. Egypt Steadfast Reforms Key for Economic Stability, Jobs and Growth, IMF Survey Magazine February 11, 2015. Available at: http://www.imf.org/external/pubs/ft/survey/so/2015/CAR021115A.htm?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+devj%2Fimf+(IMF

|146| Ministry of Finance, Financial Monthly Bulletin July 2016

|147| Egypt’s Five Year Macroeconomic Framework and Strategy FY14/15-FY18/19, presented in the Egypt Economic Development Conference, 13-15 March 2015, Sharm El Sheikh, Egypt. Available at: http://www.mof.gov.eg/MOFGallerySource/English/Strategy.pdf

|148| Countries suffering from widening balance of payments and financial crises are allowed, within the financial regulations of institutions such as the World Trade Organization (WTO) and more recently the IMF, to consider imposing temporary capital controls.

|149| Egypt’s Five Year Macroeconomic Framework and Strategy FY14/15-FY18/19

|150| Samhouri, M., 2013. Egypt’s Hard Economic Choices. Retrieved March 2013, Sada Middle East Analysis on Arab Reform. Available at : http://carnegieendowment.org/2013/01/31/egypt-s-hard-economic-choices/f7ib

|151| Foreign reserves dropped to 13.6 billion USD in the two years that followed the revolution before reaching 14.4 billion USD in April 2013

|152| Mossallem, M., 2013.

|153| ibid

|154| Adly, A., 2015. Analysis: Egypt economy ’entered a vicious circle’, Carnegie Middle East Center - Carnegie Endowment for International Peace. Available at: http://carnegieendowment.org/2015/12/10/analysis-egypt-economy-entered-vicious-circle-pub-62252

|155| Central Bank of Egypt

|156| Adly, A., 2016. Egypt’s Regime Faces an Authoritarian Catch-22, Carnegie Middle East Center - Carnegie Endowment for International Peace. Available at: http://carnegieendowment.org/2016/07/21/egypt-s-regime-faces-authoritarian-catch-22-pub-64135

|157| ibid

|158| Samhouri, M., 2013.

|159| Egypt’s Five Year Macroeconomic Framework and Strategy FY14/15-FY18/19

|160| Adly, A., 2016.

|161| ibid

|162| ibid

|163| ibid

|164| ibid

|165| Atlantic Council, 2015. What Was Pledged at Egypt’s Investment Conference, Atlantic Council MENA Source Blog. Available at: http://www.atlanticcouncil.org/blogs/menasource/what-was-pledged-at-egypt-s-investment-conference

|166| ElMeshad, M., 2016. Egypt’s Ad Hoc Economy, Sada Middle East Analysis. Available at: http://carnegieendowment.org/sada/64140

|167| ibid

|168| ibid

|169| ibid

|170| Feteha, A., 2015. Egypt Shows Off $ 8 Billion Suez Canal Expansion that the World May Not Need, Bloomberg. Available at: http://www.bloomberg.com/news/articles/2015-08-04/egypt-shows-off-8-billion-suez-canal-gift-world-may-not-need

|171| IMF, 2015. World Economic Outlook: Uneven Growth Short-Term and Long Term Factors. Available at: http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/text.pdf

|172| Al Arabiya English, 2016. Suez Canal Revenues Reach $ 3 Billion Since Start of 2016, Reuters, Cairo, August 6, 2015. Available at: http://english.alarabiya.net/en/business/2016/08/06/Egypt-Suez-Canal-revenue-drops-to-3-108-bln-EGP-in-Feb.html

|173| Adly, A., 2016.

|174| ibid

|175| Deknatel, F., 2015. White Elephants: As Governments Change in Egypt, the Commitment to Corrupt Grand Development Projects has Stayed the Same, The Nation, August 31-September 7, 2015 Issue. Available at: https://www.thenation.com/article/white-elephants/

|176| ibid

|177|

Kingsley, P., 2015. A new New Cairo: Egypt Plans £30bn Purpose-Built Capital in Desert, The Guardian, March 16, 2015. Available at: https://www.theguardian.com/cities/2015/mar/16/new-cairo-egypt-plans-capital-city-desert

|178| El-Ghobashy, T. and Fung, E., 2016. Soft Power: China Backs Egypt New $45 Billion Capital, The Wall Street Journal, May 3, 2016. Available at: http://www.wsj.com/articles/big-chinese-developer-pushes-overseas-ambitions-with-egypt-project-1462267802

|179| ibid

|180| ibid

|181| Ministry of Finance, Monthly Financial Bulletin July 2012.

|182| Samhouri, M., 2013.

|183| Cammett, M., et al, 2015.

|184| ibid

|185| ibid

|186| ibid

|187| Bearing in mind that there were no new serious attempts to introduce safeguards against the potential backlash caused by austerity measures which had forced the previous regimes to postpone such measures.

|188| Abdel Halim, R., 2014. Fiscal Statement of the State’s Public Budget for the Fiscal Year 2014/2015 Austerity Measures and a Rush to Counteract a Crisis at the Expense of Social Justice, Egyptian Initiative for Personal Rights. Available at: http://eipr.org/sites/default/files/pressreleases/pdf/fiscal_ statement.pdf.

|189| IMF, 2015. Arab Republic of Egypt: 2014 Article IV Consultation-Staff Report; Press Release and Statement by the Executive Director for the Arab Republic of Egypt. Available at: https://www.imf.org/ external/pubs/cat/longres.aspx?sk=42692.0.

|190| Ahram Online, 2014. Egypt’s Government Raises Fuel Prices, July 5, 2014. Available at: http://english.ahram.org.eg/NewsCon... Egypt

|191| Adly, A., 2016.

|192| Ministry of Finance, Monthly Financial Bulletin, July 2016.

|193| El-Ezaby, S., 2016. Does Financial Repression Help Reduct the Budget Deficit? Evidence from Egypt, Paper presented at the 2016 Applied Social Science Association (ASSA) Conference. Available at: https://aea-net.org/conference/2016/retrieve.php?pdfid=1273

|194| ibid

|195| ibid

|196| ibid

|197| Emam, H.,2012.

|198| Economic Intelligence Unit, 2015. Egypt: Banking Sector Risk, December 1, 2015.Available at: http://www.eiu.com/industry/article/1663743550/egypt-banking-sector-risk/2015-12-11

|199| ibid

|200| El-Ezaby, S., 2016.

|201| Economic Intelligence Unit, 2015.

|202| Bank of Alexandria, 2015. Flash Note: Reasons and Risks of Public Debt. Available at: https://www.alexbank.com/Cms_Data/Contents/AlexBank/Media/Publication/FlashNote/egypt_public_debt.pdf

|203| ibid

|204| El-Ezaby, S., 2016.

|205| Mossallem, M., 2013.

|206| Payne, J., McFarlane, S. and Saleh, Y., 2013.Egypt calls in favors as credit crunch hits key imports, Reuters, March 28, 2013. Available at: http://www.reuters.com/article/2013/03/28/usegypt-economy-imports-idUSBRE92R0NW20130328

|207| The Macro Fiscal Policy Unit, 2015. Debt Flash Note, January 2015. Available at: http://www.egyptthefuture.com/wp-content/uploads/2014/12/Public-Debt-English.pdf

|208| ibid

|209| Central Bank of Egypt

|210| Mada Masr, 2015. Foreign Reserves Above US$ 20 Billion After Gulf Deposits, May 6, 2015. Available at: http://www.madamasr.com/news/economy/foreign-reserves-above-us20-billion-after-gulf-deposits

|211| Mada Masr, 2015. Egypt’s Foreign Debt Jumps in 2014/2015, Reaching Gulf War Levels, October 12, 2015. Available at: http://www.madamasr.com/news/economy/egypts-foreign-debt-jumps-201415-reaching-gulf-war-levels

|212| IMF, 2015.

|213| Egypt Oil and Gas Web Portal, 2016. El Molla: IOCs Invested $8.5B in Egypt, August, 8 2016. Available at: http://www.egyptoil-gas.com/news/el-molla-iocs-invested-8-5b-in-egypt/

|214| Deutsche Bank, 2016. Combined Cycle (COGAS) Power Plants for Egypt: Deutsche Bank, HSBC and KfW IPEX-Bank structure and arrange EUR 3.5 billion in financing, Press Release. Available at: https://www.db.com/newsroom_news/GuD-Kraftwerke_Aegypten_engl._12.4.2016.pdf

|215| Werr, P., 2016. Egypt’s Economy has Seen Better Days- And Worse, The National, July 30, 2016. Available at: http://www.thenational.ae/business/economy/patrick-werr-egypts-economy-has-seen-better-days—and-worse

|216| ibid

|217| Mossallem, M., 2015. The IMF in the Arab World: Lessons Unlearnt, Bretton Woods Project.

|218| ibid

|219| The New America Foundation, 2013. Revitalizing IMF Engagement in the Middle East. Available at:http://inthetank.newamerica.net/blo....

|220| Momani, B. and Lanz, D., 2014. Shifting IMF Policies Since the Arab Uprisings, Centre for International Governance Innovation, Policy Brief no. 34. Available at: https://www.cigionline.org/sites/ default/files/cigi_pb_34_0.pdf.

|221| IMF, 2012. Arab Countries in Transition: Economic Outlook and Key Challenges. Deauville Partner-ship Ministerial Meeting, Tokyo, available at: http://www.imf.org/external/np/pp/eng/2012/101212b.pdf .

|222| Mossallem, M., 2015.

|223| Hanieh, A., 2015. Shifting Priorities or Business as Usual? Continuity and Change in the post-2011 IMF and World Bank Engagement with Tunisia, Morocco and Egypt, British Journal of Middle Eastern Studies, 42 (1): pp. 119-134.

|224| BBC News, 2011. Egypt Drops Plans for IMF Loan Amid Popular Distrust, June 25, 2011. Available at: http://www.bbc. co.uk/news/world- middle-east-1391441.

|225| Decrees include: 1256, 1257 and 1258 for the year 2012.

|226| Mossallem, M., 2015.

|227| Mossallem, M., 2012. In the Absence of a Comprehensive Debt Strategy and Planning: Is Egypt’s Debt Policy a Recipe for Disaster? Egyptian Initiative for Personal Rights. Available at: http:// www.eipr.org/sites/default/files/pressreleases/pdf/policy_brief_on_debt_0.pdf.

|228| Hanieh, A., 2015.

|229| Mossallem, M., 2013.

|230| ibid

|231| ibid

|232| ibid

|233| Mossallem, M., 2015.

|234| Hanieh, A., 2015.

|235| Mossallem, M., 2013.

|236| IMF, 2013. Arab Countries in Transition: Economic Outlook and Key Challenges, Report to the Deauville Partnership Ministerial Meeting. Available at http:// www.imf.org/external/np/pp/eng/2013/101013.pdf

|237| Gad, M., 2014.Austerity without protection: Egypt’s 2014 Budget, Middle East Institute. Available at:http://www.mei.edu/content/at/auste....

|238| Aggour, S., 2014. Inflation Sees Biggest Monthly Surge since 2008, Daily News (Egypt), 10 August 2014, http://www.dailynewsegypt.com/2014/... inflation-sees-biggest-monthly-....

|239| Attalah, L., 2014. The cost of lifting fuel subsidies. Mada Masr, August 11, 2014. Available at: http://www.madamasr. com/sections/economy/cost-lifting-fuel-subsidies

|240| Mossallem, M., 2015.

|241| Reuters, 2015. Egypt economic policies starting to pay off, IMF Says, May 5, 2015. Available at: http:// www.reuters.com/article/2015/05/05/egypt-imfidUSL5N0XW07920150505.

|242| IMF, 2015.

|243| Mossallem, M., 2015.

|244| which are two of the main conditionalities of the IMF loan (as well as the World Bank loan)

|245| IMF, 2016. Egypt: IMF Reaches Staff Level Agreement on a Three Year US$ 12 Billion Extended Fund Facility, Press Release No. 16/375, August 11, 2016. Available at: https://www.imf.org/en/News/Articles/2016/08/11/09/49/pr16375-Egypt-IMF-Reaches-Staff-Level-Agreement-on-a-Three-Year-US$12-Billion-Extended-Fund-Facility

|246| Farahat, A., (2016) Deputy Finance Minister Explains Steps to Reduce FY 2016/2017 Deficit, Restructure Public Debt, Daily News Egypt, August 18, 2016. Available at: http://www.dailynewsegypt.com/2016/08/18/535990

|247| موديز تتوقع ارتفاع عجز الموازنة إلى 12% رغم إقرار ’القيمة المضافة’ http://www.aswatmasriya.com/news/de...

|248| ibid

|249| ibid

|250| Herrera, S. and Youssef, H., 2013. Macroeconomic Shocks and Banking Sector Developments in Egypt. The World Bank, Middle East and North Africa Region, Poverty Reduction and Economic Management Department. Available at: http://documents.worldbank.org/cura...

|251| ibid

|252| ibid

|253| ibid

|254| Piketty, T., 2014. Capital in the Twenty-First Century. Harvard University Press.

|255| ibid

|256| ibid

|257| ibid

|258| ibid

|259| The same effects we explained the proposed measures under the IMF sponsored program would have due to their inflationary impact.

|260| Piketty, T., 2014.

|261| Heikal, H., 2011. A Tweet from Tahrir Suare- Time to Tax the Rich, Financial Times, November 22, 2011. Available at: http://www.ft.com/cms/s/0/f39679f4-...

|262| ibid

|263| IMF, 2013. Fiscal Monitor, Taxing Times, October 2013. Available at: https://www.imf.org/external/pubs/f...

|264| As Picketty explains in his book Capital in the Twenty-First Century: if such a tax were to be levied, the tax authorities would of course need to be permanently and automatically apprised of any bank accounts, stocks, bonds, and other financial assets held by the citizens under their jurisdiction.

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