Reform First

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One Egyptian Pound, courtesy of Winter Sorbeck/Wikimedia

This article was originally published 31 May 2014 by

Steven Cook, who knows lots about Egypt, offers an insightful analysis of its impending financial and economic problems. In a word, Egypt could go broke and the state could disintegrate:

“Egypt’s economy remains shaky and the threat of a solvency crisis lingers. Indeed, the continuation of violence, political protests, and general political uncertainty—even after planned presidential and parliamentary elections—along with a hodgepodge of incoherent economic policies, all portend continuing economic decline. This in turn could create a debilitating feedback loop of more political instability, violence, and economic deterioration, thus increasing the chances of an economic calamity and yet again more political turmoil, including mass demonstrations, harsher crackdowns, leadership struggles, and possibly the disintegration of state power.”

Only Gulf generosity has kept Egypt’s foreign currency reserves above the minimum required, tourism is in a tailspin, debt is close to 100% of GDP and subsidies (especially for fuel) burden the state’s budget. There are many ways in which Egypt could be sent into default. I recommend you read Steven’s trenchant account.

But much as I am taken with his account of the problems, I find it difficult to see merit in the options he discusses: US loan guarantees, US debt relief, foreign assistance to pay down domestic debt and Gulf fuel transfers. He also proposes, in the event of default, that the US support the military, provide financial assistance and restore food aid. None of this is contingent on Egyptian economic reforms.

Here is where I depart from Steven:

“It is up to the Egyptians to undertake reforms to forestall this outcome. Given the fact that the Egyptians have done little in this regard, a solvency crisis is entirely plausible. Consequently, the United States has a strategic responsibility to do what it can in Egypt to prevent the causes of insolvency…”

This is a slippery slope: he is proposing that the US try to prevent insolvency, even though the Egyptians have been unwilling to undertake reforms. Doing so will relieve some of the pressure on Cairo to undertake reforms, make insolvency more likely and increase pressure on the US to prevent it. Moral hazard lights are flashing.

No. That is not the path we should go down. We should encourage Egypt to put forward a plan for reform first, then provide assistance. The way to do this without putting the US on the front line is to encourage Cairo to go first to the International Monetary Fund for money. This is politically difficult in Egypt, as everyone knows the IMF will condition its assistance on reforms. But it is a lot better for the US than asking American taxpayers to pay for Egyptian fuel subsidies. And Field Marshall, soon to be President, Sisi should be expected to do unpopular things as early as possible in his mandate. He surely won’t do them as the time approaches for another election.

Steven envisages the IMF eventually playing what he calls:

“an important role in assisting the next government to redraw Egypt’s social contract in a way that is both politically acceptable at home and can command the strong support of the rest of the world….foreign donors will need to accept a slower reduction in subsidies than under a conventional IMF program in order to increase the likelihood that Egyptians can make headway on reforms in a coordinated and more coherent manner.”

I’ve got no problem with this: a slower than usual reduction in subsidies may be necessary, though it seems to me the IMF has in fact accepted some pretty slow reductions from other countries as well. What I object to is providing unconditional US assistance and then expecting the IMF to succeed in negotiating conditions. The IMF should go first. The US can then be generous, promising its taxpayers that the money it provides will in fact finance a transition away from subsidies.

The US has gotten very little for the billions it has provided Egypt in the past. Cairo is headed back to military autocracy and its economy to insolvency. Nor has Egypt gotten rich off the aid. A lot of it was wasted on military hardware Egypt didn’t need but American companies were glad to sell. The best that can be said is that the money encouraged Egypt to maintain its peace treaty with Israel, though Cairo had ample other reasons to avoid yet another, likely unsuccessful, war once it regained sovereignty over Sinai.

We need to avoid being trapped into another several decades of fruitless expenditure on aid to Egypt. Reform first is the way to go.


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