Egypt’s new IMF deal comes with a huge price tag for human rights

13 February 2017 by Mahinour El-Badrawi , Allison Corkery

Tahir Square on February 2011- CC

The government of Egypt has sealed a loan deal with the IMF following four years of negotiations. The impacts of the structural adjustment reforms associated with the loan raise strong human rights concerns, particularly for the status of economic and social rights in the country; aggravating employment conditions, the right to education, healthcare and to social protection.

In November 2016, the executive board of 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.
approved an agreement with the government of Egypt for a three year $12 billion loan. The new agreement is made under the IMF’s Extended Fund Facility, which supports long-term “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).

”. The IMF is also reportedly working with the government of Egypt to secure an additional $5 or $6 billion in bilateral funding, including from China and Saudi Arabia. Intended to remedy the country’s economic woes, the agreement pushes classic austerity-based policies in Egypt, which will aggravate poverty and inequality on a large scale. The staff report, outlining the policies underpinning the IMF arrangement under the Extended Fund Facility, was not publically released until mid January despite the announcement of the deal by managing director Christine Lagarde in early November.

The aim of the Extended Fund Facility loan with Egypt aims to restore stability and confidence in the economy. To do this, the programme supports the “government’s home-grown comprehensive economic reform plan”. This plan includes a range of monetary and fiscal reforms that first seek to reduce public spending, including by reforming the civil service and by reducing the public sector’s role in the provision of subsidised social services. The second aim of these reforms is to increase state revenue, including by introducing a value-added tax (VAT) and by liberalising the exchange rate to shore up the country’s foreign reserves and encourage foreign investment.

A critical first step in opening up the possibility of alternative avenues is addressing the uncertainty and lack of transparency surrounding the IMF deal.

So far, reforms have resulted in an unprecedented rise in 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. . The official inflation rate stood at 24.3 per cent in December 2016; the worst economic deterioration since 2013. This has huge consequences for the cost of living in the country, given its heavy reliance on imports. The burden of higher living costs will fall most heavily on the poor and is likely to exacerbate already widespread deprivations of economic and social rights in the country. In a country where over half of the youth population lives below the national poverty line and over a quarter are unemployed, the cumulative effect of these reforms is already starting to have a devastating impact on the standard of living of millions of Egyptians.

Opposition to the IMF deal since 2012

Unsurprisingly, there have been mass mobilisations against the IMF loan since it was first proposed in 2012. Social movements, non-governmental organisations, political parties and public 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. lawyers have all stood in opposition to it. Protests against the loan and its accompanying reforms continue, including, most recently, protests by the Union of Tax Workers and theLawyers Syndicate on the socio-economic impacts of the VAT. Despite opposition, the government has pushed through a raft of measures in 2016, triggered by its aspiration to secure the loan from the IMF.

In an attempt to decrease the public sector wage bill, the highly controversial Law 18 of 2015 was approved by parliament in August 2016, after being enacted by Presidential Decree in 2015. The law grants the state the power to terminate any employee’s contract within a six-month probation period, with no more than a “notice”. After six months, an employee may be relocated, subjected to a salary reduction of 50 per cent, or terminated after two consecutive weak performance reviews. This downsizing – praised by the IMF in 2015 – puts millions of state workers at risk of mass layoffs and disproportionately disadvantages women, who will be forced to compete in a discriminatory unregulated private sector where they earn 35-40 per cent less than their male counterparts. Law 18 of 2015 also reduces annual salary increases in the public sector from 10 to 7 per cent. This leaves the average Egyptian with less to spend as the cost of living soars.

Another measure being pursued to reduce public spending is to dismantle various subsidy systems in the country. In November 2016, the government announced a hike in the price of subsidised fuel of between 30 and 46.8 per cent, with a huge knock-on effect for a wide range of food and transport costs. In January 2017, It had already been raised 20 per cent in May 2016 andevery six months. The increase in overall import costs are also affecting access to subsidised infant milk, which led Egyptian parents to take to the streets in protest in September.

Revenue raising efforts are equally problematic. For example, 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.

floated the Egyptian pound (E£) in early November, right before the loan was approved, after devaluing it from E£8.8 to E£13 to the US dollar earlier in the same week. The exchange rate today stands at E£18.69. This affects the government’s debt servicing bills, which are paid in dollars. According to theCentral Bank of Egypt, foreign debt servicing increased to 18.1 per cent in the last quarter of financial year (FY) 2015/16. It is expected to reach 19 per cent ($62.1bn) in FY 2016/2017 and 21.8 per cent by 2020. This directly affects economic and social rights, as debt servicing ties up resources that could otherwise be used for fulfilling the government’s constitutional obligations to progressively increase spending on health and education, which it has so far failed to honour.

VAT legislation, approved in late August, introduced a 13 per cent VAT for the current financial year – replacing the previous 10 per cent sales tax – which will be raised to 14 per cent the year after. Although some basic food products have reportedly been exempt from VAT, this directly affects the cost of living and impacts poorer households disproportionately.

The cumulative impact of rushed and ad hoc cuts in public spending, subsidy removal, currency devaluation Devaluation A lowering of the exchange rate of one currency as regards others. , and regressive VAT increases will be spiraling inflation, higher import costs, rising living costs, wage stagnation, increased unemployment, poverty, and inequality with predictably dire consequences for economic and social rights. Indeed, the impacts of a weaker pound and higher inflation are already being felt. Food and beverages prices were 29.3 per cent higher in December 2016 than the year before. Again, this impacts poorer households disproportionately. Coupled with restrictions on imports, Egyptians are experiencing unprecedented shortages in essential items. There has already been a severe crisis in the price and availability of medication, as well as a deterioration in healthcare services caused by shortages in medical supplies. This is particularly problematic as it plays against the stated commitments the government of Egypt set for itself as it attempted to champion the developing nations’ implementation of the sustainable development goals during the 2016 High Level Political Forum voluntary review.

According to the IMF, social protection is a “cornerstone” of the government’s programme and will help to cushion the impact of the above measures. However, details of how budgetary savings will translate into an improved social safety net remain extremely scant in the IMF staff report and experience to date raises a number of red flags. Targeted social protection measures have been implemented through a World Bank World Bank
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, 189 members in 2017), 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.

technical assistance loan programme since April 2015, including ration cards for fuel and food and the introduction of two conditional cash transfer programmes. However, the World Bank warned in 2016 of a “substantial risk” to the success of these programmes in its own implementation and status report.

Inadequate social protection measures in the IMF programme

There are indeed a number of serious concerns regarding these social protection measures. First, the government’s commitment to funding them is unclear. World Bank documents indicate that it intends to set aside 10–15 per cent of savings from subsidy cuts for social investments. The IMF staff report states that about 1 per cent 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.
in fiscal savings will be directed to additional food subsidies, cash transfers to the elderly and poor families, and other targeted social programmes. Second, the programmes use a “proxy means test” to identify eligible households within selected districts. Simulations estimate an exclusion error of up to 59 per cent, which is significant. Furthermore, weak governance leaves the programmes vulnerable to abuse and manipulation. And most fundamentally, the scale of the programmes is too limited; they aim to cover about 1.5 million households by 2019; this represents about 40 per cent of the poor, meaning the remaining 60 per cent will be left to face the impact of rising living costs without support.

The Fund’s apparent lack of attention to sequencing reform measures is leading to adverse effects on the overall performance of the economy, as well as the status of economic and social rights. For example, subsidy removals have been expedited before the Egyptian government has built up the technical capacity to properly implement social protection programmes that target the poor. In the absence of an adequate social safety net, the living standards of the millions of Egyptian households already living in poverty are likely to drop even further, while a huge number of middle class households will be at risk of falling into poverty.

All of this is happening in a context of huge corruption scandals and an expanding military industrial complex that distorts the market. For example, the military receives unchecked economic incentives, one of which is a VAT exemption. In January, the military received a licence to form a pharmaceutical company. Although the IMF agreement makes a rhetorical commitment to enhancing accountability and combating corruption, the clear priority is “to create a competitive business environment”. It has tacitly endorsed reforms that will exacerbate corruption and praised the government for settling investor disputes, many of which have involved allegations of malfeasance.

It is also occurring against a backdrop of ever increasing restrictions on civil society space and freedom of expression and association. The Egyptian government has responded harshly to critiques of its economic reform plan. For example, in early December, Mona Mina, secretary general of the Doctors’ Syndicate, was accused of spreading false news for comments concerning the availability of medical supplies in hospitals. In November 2016, it was reported that two women were arrested in a subway station for discussing price hikes. More systematically, the government is attempting to silence independent analysis of the impacts of its economic reforms. Parliament recently passed a new law regulating civil society organisations, which the UN Special Rapporteur on the rights to freedom of peaceful assembly and association warned “threatens to devastate” independent civil society in the country for a long times to come.

An alternative path for reform

There are a number of alternative policy choices the Egyptian government can make with the support of the IMF to help address the country’s economic crisis. These would avoid such huge social cost and meet international human rights obligations, offering a blueprint for a fair and equitable economic model, as has been reaffirmed by various UN bodies in recent years. For example, in 2013, the Committee on Economic Social and Cultural Rights called on the Egyptian government to ensure its obligations under international human rights law be taken into account in negotiations with international financial institutions and provided detailed recommendations to fight poverty, improve employment conditions, and increase both the minimum wage and spending on education, healthcare and social protection. These recommendations were echoed by the Human Rights Council in 2014 during its Universal Periodic Review of Egypt.

Actions to implement these recommendations could include public efforts to reform and revive the productive capacity of the state, so as to provide the foundation for a development model based on decent work and fair wages. A human rights approach to subsidy reform can also guide the government towards building a social protection model that would effectively contribute to the eradication of extreme poverty. Egypt’s tax collection capacity is ranked at 151 out of 189 in the World Bank Group’s annual Doing Business report, down five points from last year. This suggests that it could raise revenue more fairly by strengthening the capacities of the state tax authority and pursuing more progressive tax reform. Combating illicit financial flows should be another priority, having cost the country $13.8 billion between 2011 and 2013 according to US-based thinktank Global Financial Integrity.

A critical first step in opening up the possibility of alternative avenues is addressing the uncertainty and lack of transparency surrounding the IMF deal. Opening channels for meaningful civil society participation in designing an economic reform plan that enjoys public support is likewise essential to deliver sustainable development for the country and its people.




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