For weeks in March and April the Egyptian press reported on the government’s talks with the International Monetary Fund with a degree of breathless fascination. The frantic interest in the attempts to reach a deal on a $4.8 billion loan does not come solely out of concern for the country’s fiscal position: the outcome of the talks will be felt in the lines for bread and petrol that have built up in recent weeks.
The government of the now-deposed Hosni Mubarak, brought down after months of violent clashes and mass protests across the country, used heavy subsidies on bread, petrol, diesel and cooking gas to keep a lid on unrest, leaving a fiscal legacy that its successor is now struggling to unwind.
Across the Middle East and North Africa, this is the challenge that policymakers face: to attract the concessionary funding to repair the economic damage done to their countries by external and internal conditions, they have had to take deeply unpopular measures that directly impact on already restive strata of society.
Fuelled in large part by these subsidies, Egypt’s budget deficit has widened, inflation is driving upwards past 8%, and the official unemployment rate has passed 13%. This could well be higher, particularly among 18–25 year olds. Inflation and joblessness were major contributors to the social anger which spilled over into revolution in 2011, and the overt tension between the military, the political class and the Muslim Brotherhood has done little to calm nerves locally or internationally.
The competing concerns within the government and society have also been manifest in an inability to push through the kind of economic reforms that the IMF and other donors expect as a precondition to their support. With elections due later this year, some analysts, such as Oren Klachkin at IHS Global Insight, believe that chances of major reform seem slim, even with the carrot of an IMF loan still hanging in front of the government.
“The type of reforms the IMF wants, most formidably subsidy reform, will be extremely hard to implement in the current environment as populist pressures remain strong, not to mention the current downtrodden economic state and the general structural issues pervading the economy,” Klachkin says. To be able to drive through this kind of reform, the president, Mohammed Morsi, will need to corral not only his opponents within the Muslim Brotherhood, which propelled him to power, but also the formal political opposition, who have so far been uncooperative. With 40% of the population living on less than $2 per day, subsidies are politically and socially difficult to give up.
SOME HOPE
The structural socio-economic problems of youth unemployment and participation in Egypt were also present in Tunisia, the birthplace of the Arab Spring. Long dependent on foreign investment and trade, principally from and with the European Union, the country already had the headwinds of the slump in demand from its major partner, even before its political upheaval. Official unemployment is at 17%, with youth unemployment estimated at above 30%. And yet the country has managed to gain some respite from its budget problems through a 24-month, $1.75 billion stand-by arrangement from the IMF. The government has increased fuel prices by 7%, reduced milk subsidies and raised taxes in order to try to trim its deficit – but labour movements and some civil society groups have called for strikes and protests.
Tarek Shahin, a regional specialist at Investec Asset Management, sees in Tunisia’s IMF deal some hope for Egypt. “Tunisia’s external position is worse than Egypt’s and their economy is smaller,” he says. “The fact that they got a $2 billion nod at least numerically, increases the likelihood that Egypt will get it.”
The Tunisian government has been under intense pressure since the assassination of opposition leader Chokri Belaid, and the prospect of a sudden change of government is higher, according to Shahin. “In Egypt you have an unpopular, but much more mandated government that’s in control of the public finances and is spearheading the talks with the IMF,” he says.
Morocco, which saw little of the mass unrest in its neighbours, is also taking heed of the examples across the region. The financial crisis in Europe hit remittances, trade and tourism, while the government of the time spent heavily, in particular on public-sector salaries, in order to mitigate social pressures. In April its successor, an Islamist-led coalition, announced the suspension of $1.75 billion-worth of public investments.
Jordan, which also experienced less of the political tension of other countries in the region, secured a stand-by arrangement with the IMF as well, with the second tranche released in April. The country’s new government has shown that it is willing to institute fiscal reforms, including moving away from subsidies to means-tested cash transfers. State finances have historically relied heavily on now dwindling international aid inflows, and the budget deficit has ballooned. With a crisis brewing over refugees flooding across the border to escape the civil war in Syria, the country remains in a precarious state without further assistance.
Other donors, including Qatar and Libya, have stepped in to shore up regional finances in the interim, but their aid is quickly politicized and unpredictable. The IMF is, analysts say, the keystone institution that investors are waiting for before returning to back countries which are battling to return to their pre-crisis financial positions.
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