Rhetorical Hypocrisy and Ideological Rigidity at the IMF - Salma Hussein
Rhetorical Hypocrisy and Ideological Rigidity
at the IMF - Salma Hussein
In Lebanon,
Egypt, and around the world, popular sentiment speaks the truth. In 2012 and
again in 2013, the Egyptian masses rallied in the streets,
and political parties, civil society organizations, and political and cultural
elites protested against an agreement with the IMF. Neither the masses nor
those elites knew the details of the agreement. One might say it was a protest
for the sake of protesting.
However, it
later became clear that the protest was due to a sound intuition based on
previous international and local experiences, through which people learned that
the IMF is not up to any good. Over the past decade, despite the vast
geographic scope and the varying local circumstances of each country, results
were similar, without a single success story in the region.
In 2015, the
state thought it had arrived at the right formula in Egypt. Then, the IMF
Managing Director, Christine Lagarde, arrived. The mass movements had been
suppressed, and many of their leaders had been arrested. The time seemed ripe
for the IMF to lure the government, which suffered from capital flight. Lagarde
began her moving speech with verses sung by Umm
Kulthum. The negotiations lasted a whole year, during which the IMF and
stakeholders pressured the government to borrow from various sources.
The IMF experts
used all the right keywords: we have changed, the program is local, not
imposed, education and health, job creation, inclusive development, public debt
reduction, etc. Private and state-run media echoed them. And everyone believed
them. The opposition and the oppressed masses awaited what the IMF would do in
a new world.
The worrying
signs of the IMF programs' results in Tunisia, Morocco, and Jordan began to
emerge in 2012. However, they were not scrutinized enough, especially given the
lack of coordination at the governmental level and even at the level of party
and civil society work. The people and elites of each country were drowning in
a flood of local political changes.
So, when Egypt
was late in its agreement with the IMF, the situation of Jordan and other
countries that had entered into similar agreements was not discussed. These
countries belong to a new generation of IMF programs, the generation following
the Arab revolutions and international social uprisings, the generation
following the recognition of growing inequality around the world and its
detrimental effects on sustainable growth, development, and stability. How did
this IMF recognition affect the Egyptian program? It was merely wishful
thinking that did not come true.
1.
Political Context
In 2013, a
counter-revolution erupted and was followed by a security vacuum. Capital fled
the country, and Egypt fell into a foreign exchange crisis. One sign of US
support for the Egyptian regime (despite public condemnation) was when the
Obama administration's Secretary of State John Kerry sent a letter to the IMF
Managing Director urging them to support Egypt. He also linked US aid to the
country with borrowing from the IMF.
2.
Transparency
No official
document was published before the agreement or presented to an elected
parliament. It was only discussed with the government and two pro-government
MPs. In violation of its rules, the IMF also delayed announcing program details
within the specified timeframe. When complying with its regulations, it omitted
any criticisms or details the Egyptian government did not wish to disclose.
3.
Implementation
A close reading
of the IMF's first staff review documents revealed that Egypt had failed to achieve
nine of the 14 program objectives, despite the government implementing the
agreed-upon measures. The government implemented some measures with negative
social impacts, but failed to implement most of the measures with positive
social impacts. Furthermore, the government and the Central Bank failed to
implement five required reforms, which are essential and beneficial to both the
social and economic levels, such as those related to transparency and
mitigating social impacts. Did the IMF warn against non-compliance with the
program or take any action to pressure the government to implement positive
measures?
In reality, the
IMF welcomed the government's commitment and successful
implementation. However, it did not refer directly or indirectly to
any measures the government ignored or the quantitative targets that were not
achieved despite its commitment to implement them. For example, the target was
to reduce government spending by 0.6% of GDP. However, despite the government's
commitment to reducing the government wage bill and raising subsidized energy
prices, as requested by the IMF, government spending doubled, and the deficit
widened (due to the conditionality of the flotation and liberalization of
energy prices).
This failure to
achieve quantitative targets and implement social and economic reform measures
was repeated during every visit over the three years during which Egypt
received its first and largest loan from the IMF.
Egypt adhered
to only a handful of measures in each loan review. However, these measures are,
in fact, the worst in terms of their impact on growth, unemployment, inflation,
and income distribution. Meanwhile, the IMF commended the government's
outstanding commitment and disbursed the due tranche of the loan.
Thus, Egypt
became the IMF's second-largest client after Argentina during this period.
Then, loans followed one after the other. It is now implementing—or not
implementing—the conditions of the fourth loan and is requesting a fifth.
Meanwhile, the structure of external borrowing has deteriorated, and its costs
have increased.
Egypt only
implements the real conditions—the so-called "prior actions" (i.e.,
those before the announcement of the loan or before receiving each tranche).
However, almost no other actions are implemented, and most structural measures
or quantitative targets are not achieved. When the IMF issues its reports, it
either modifies those targets, accepts the government's explanation for the
reasons for not reaching them, or completely ignores useful measures and
targets.
Lessons Learned
Let us not be fooled by the
elegant wording of the IMF documents.
In the
documents issued by the IMF in Morocco, Tunisia, Jordan, Iraq, and Egypt, the
preambles and stated objectives vary from country to country. They all sound
friendly and reasonable; you can't help but agree with and even admire them.
Here and there, they talk about education and its importance, tax fairness, and
combating corruption. However, these are not what the IMF experts measure, nor
do they determine the criteria for their satisfaction. They are merely the
pre-emptive actions imposed by the IMF, no more, no less. These are constants
that do not change from one country to another.
If the IMF must be consulted,
let it be for technical advice on a sectoral matter related to governance and
transparency.
The decision to
borrow from the IMF is subject to the approval of the major industrialized
countries that hold the largest voting bloc in the organization's Board of
Directors, led by the US. However, the reality is that the IMF prefers to
include a greater number of countries/clients in its fold, as this increases
its profitability. Therefore, the basic principle is to entice countries, and
one of the foundations of seduction is reluctance.
The more the
IMF masters the game of reluctance, the more governments will follow,
encouraged by vested interest groups.
The wealth of
all those with dollar assets increases, as it does for those with surpluses
that can lend to the government, those with energy-intensive
facilities (including power plants), and, finally, the banking system. All of
these people are guaranteed increased wealth by the IMF's programs. Therefore,
it is best for governments not to resort to the IMF. If they must, let it be
only for technical advice, such as in banking sector governance.
Borrowing from the IMF Leads
to the Trap of Foreign Loans
Literature,
both critical and supportive of the Bretton Woods institutions, often states
that the IMF is a last resort lender. Governments must resort to the IMF when
they cannot borrow from rich countries or global markets. Nonetheless, the
former statement is false, as all regional experiences, most notably Egypt,
have proven. In effect, the IMF is the first resort lender.
Foreign loans
increase exponentially after each agreement with the IMF. It designs its
programs to raise interest rates under the pretext of combating inflation.
Raising interest rates is tempting for global financial capital, local banks,
and the wealthy, whether to compensate savers in local currency for rising
inflation or to profit from lending to the government. Therefore, when the IMF
issues a "certificate of confidence" through lending to a country, it
is in effect reassuring them of the high return on that loan and that it
guarantees those loans by restructuring public finances, reducing all
government spending except for interest on government debt and loan repayments.
Ultimately, the
government finds itself forced to borrow from abroad to meet its external debt
obligations, which leads to an increase in short-term, high-interest external
debt, further exacerbating the country's financial fragility in the face of
shocks.
Inflation is raised through a
deliberate policy that benefits banks, businesses, and owning families, at the
expense of the macroeconomy and fair income distribution.
The IMF induces
this inflation through policies designed to raise rates at the beginning of the
program: most notably, the devaluation of the local currency and the
liberalization of energy prices for the household sector (excluding businesses
and factories, or at rates much lower than those afforded by households). There
is nothing worse than these policies on the economic and social levels, taking
flotation and its economic impact as an example. It is a harmful measure for
the economy, even by the standards of neoclassical economics, as it represents
a negative shock to aggregate demand, which is composed of the sum of consumer
demand, private sector investor demand, government demand, and the net trade
balance.
Currency
devaluation doubles the import bill in a country like Lebanon (or Egypt,
Tunisia, or Jordan) that relies on imports to meet its energy needs, food, and
many inputs, worsening the net trade balance. Secondly, the depreciation of the
local currency deteriorates the country's finances, exacerbating the budget
deficit (supposedly being reduced). That is, the state's ability to consume and
invest diminishes. Worse still, as the Lebanese Lira lost its value, the real
incomes of millions of people declined, leading to a decline in household
consumption.
Finally,
flotation leads to higher domestic production costs, fueling inflation. Local
industries, especially small ones that rely on imported inputs, lose
competitiveness, affecting investment demand. The result is a decline in growth
rates and quality, while unemployment and informal employment rates rise due to
decreased aggregate demand. If the government wants to avoid these adverse
effects, it should try asking the IMF to float and liberalize electricity
prices at the end of the program, rather than at its beginning. But it will
certainly not succeed.
In conclusion,
migratory birds may know the safe routes taken by their ancestors through
proven methods, but they remain incomprehensible to scientists. It's as if the
effects, danger zones, and shocks are passed down through generations, even
embedded in our genetic makeup. By the same unknown mechanism, people,
generation after generation, instinctively oppose IMF and World Bank programs,
no matter how sophisticated their rhetoric. Many scientists and researchers now
understand the reasons behind this innate rejection and support it with
scientific data and evidence.
However, just
as predators use tricks, colors, and sounds to lure birds onto paths that end
up as traps, in the case of humans, these self-interested beings possess the
means of desperate deception to convince their prey that this path is in their
best interest.
Long live the people's sound instincts!
This article was published as part of the newsletter “IMF Policies: No Rule Fits All”. The views and opinions expressed are those of the author and do not necessarily reflect the official position of the Arab NGO Network for Development (ANND)
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