IMF: Prioritize Social Protection in Egypt Loan Talks

In Egypt /Road Map Program, Statements and Position Papers by CIHRS

New Rights-Respecting Approach Needed in Any New Agreement

The International Monetary Fund (IMF) should ensure that any new loan program with Egypt expands social protection, strengthens judicial independence, and addresses corruption and the need for transparency, including for military-owned businesses, seven organizations said today.

On March 23, 2022, the Egyptian government officially requested support from the IMF to help mitigate the economic fallout related to Russia’s invasion of Ukraine. The IMF since 2016 has approved three loans to Egypt worth a combined US$20 billion.

“Despite $20 billion in lending to Egypt since 2016, the IMF has not achieved the reforms needed to meaningfully address the military’s growing and unaccountable role in the economy or to expand the social safety net to adequately protect people’s economic rights,” said Sarah Saadoun, senior business and human rights researcher at Human Rights Watch. “Progress on badly needed reforms remains elusive, and millions of Egyptians have been left increasingly vulnerable to external shocks in the global economy.”

The IMF and Egyptian authorities should not agree to any loan program that further raises the cost of living without dramatically increasing investment in universal social protection programs to ensure the right to an adequate standard of living, including food, for all.

Even before the pandemic, roughly one in three Egyptians – around 30 million people – lived below the national poverty line, according to CAPMAS, Egypt’s Central Agency for Public Mobilization and Statistics, and just under another third were considered vulnerable, according to the World Bank. Egypt’s two cash transfer programs Takaful (“Solidarity”) and Karama (“Dignity”) cover only about 11 million people, leaving tens of millions living in or near poverty without support even as prices, particularly for food, have dramatically increased.

Takaful supports impoverished families with children under age 18 and is conditioned on school attendance and health screenings, while Karama is an unconditional cash transfer program for low-income people over age 65, people with disabilities, and orphans. Egypt established these programs with World Bank support in 2015 to mitigate the impact of the sweeping economic and fiscal measures it implemented under an IMF agreement between 2016 and 2019. These reforms dramatically drove up the cost of living and increased poverty and inequality.

Expanding the coverage and benefits of these programs is especially important as the government undertakes measures that particularly hurt low-income people. Egypt heavily subsidizes imports of basic foodstuffs to ensure affordable access to food for its more than 102 million residents. But in August 2021, even before the latest price shocks, President Abdel Fattah al-Sisi announced that the decades-old bread subsidy program, which approximately 70 million Egyptians rely on, would be reduced. Last July, the government reduced subsidies for sunflower and soybean oil by 20 percent, and unblended vegetable oil by 23.5 percent because of the strain rising prices placed on the government’s budget.

The pandemic, and more recently, the impact of Russia’s invasion of Ukraine, have greatly exacerbated Egyptians’ economic hardships, reinforcing the importance of significantly expanding the country’s social safety net. Inflation hit 8.8 percent in February, the price shocks stemming from the Ukraine crisis.

Egypt is especially vulnerable to these shocks as the world’s largest importer of wheat, 80 percent of which comes from Ukraine and Russia. The price of unsubsidized bread has increased by 50 percent in Greater Cairo since the start of the invasion, according to media reports. On March 20, Prime Minister Mostafa Madbouly issued a decree that fixed prices for unsubsidized bread as an emergency response to sharply increasing prices.

The government was expected to announce details on how much the bread subsidy will be cut by the end of March, but it is unclear if these plans will go forward given the current crisis.

On March 21, the Finance Ministry announced a raft of emergency measures to mitigate the economic impact of Russia’s invasion, including earmarking an additional EGP 2.7 billion ($148 million) to add 450,000 new families to the Takaful and Karama programs, a 12 percent increase. The measures also increased allocations to each family by 1.5 percent. But the increase is still insufficient to support the millions who remain acutely vulnerable.

In considering measures to increase government revenue, reduce debt, and finance the expansion of social protection, the IMF should look to progressive taxation. A 2016 report by the Egyptian Initiative for Personal Rights, an independent human rights organization, found that the poorest 10 percent of Egyptians spend 6.4 percent of their incomes on a value-added tax (VAT) introduced as part of an IMF program, nearly twice as much as the country’s richest, who spend 3.3 percent. The income tax law passed in April 2020 raised the tax rate on those earning EGP 400,000 ($25,000) or more from 22.5 percent to 25 percent, which is a step in the right direction, but relatively low by international standards.

The IMF should also include measures in any future arrangements with Egypt to restore judicial independence, which is key for economic growth and fighting corruption. Egypt ranked 136 out of 139 countries in the World Justice Project’s Rule of Law Index for 2021, with abysmally low scores in regulatory enforcement, civil justice, and criminal justice factors. Constitutional amendments passed by Egypt’s Parliament in 2019 further undermined judicial independence by granting the president unchecked supervisory powers over the judiciary and the public prosecutor, as well as the authority to appoint the heads of judicial bodies and authorities.

The IMF has previously made advancing judicial independence a key part of its programs, for example, in Ukraine. In February 2021, the IMF withheld the second tranche of a $5 billion loan to Ukraine in part because the government failed to make sufficient progress on judicial reform. Four months later the Ukrainian parliament passed a bill reforming a council that selects and evaluates judges.

It is imperative for the IMF to include robust anti-corruption requirements, such as restoring the independence of Egypt’s Central Auditing Agency. The government has consistently undermined the independence of its own anti-corruption entities and fails to enforce its anti-corruption laws. President al-Sisi issued a decree in July 2015 allowing him to dismiss the heads of a number of regulatory agencies, including the Central Auditing Agency, an independent body designed to act as a corruption watchdog. The law had previously prohibited the president from dismissing these agency heads without cause.

In March 2016, President Sisi fired Hisham Geneina, the head of the Central Auditing Agency, after he reported losses of EGP 600 billion (about $76 billion at that time) between 2012 and 2015 due to government corruption. Later in 2016, a Cairo court convicted Geneina of disseminating false information.

As part of its focus on corruption, the IMF should make explicit that transparency measures related to state-owned enterprises extend to military-owned businesses and it should independently verify that these disclosures are made as part of its reviews. Military-owned businesses lack any independent or civilian oversight, leaving the Egyptian public without access to information necessary to evaluate the costs and beneficiaries of publicly funded projects. A comprehensive 2019 report found that Egypt’s military-owned businesses operate in near-total secrecy, concealing “inefficiencies and hidden losses,” despite capturing “a disproportionate share of public revenues.”

The military’s aggressive economic expansion has gone hand-in-hand with increased political repression, including of members of the business elite who are perceived as political opponents. In December 2020 and February 2021, National Security officers arrested Safwan Thabet and his son, Seif Thabet, owners of the Juhayna Company, a major dairy producer, after they reportedly refused to surrender shares in their company to a state-owned business. The men have been held in solitary confinement ever since. At minimum, the IMF should require transparency about the role of military-owned enterprises in the Egyptian economy.

The issue of transparency is also closely connected to the role of civil society and media – all the more so due to the uncertainty over reliability of official statistics. The IMF should press the Egyptian authorities to reverse the clampdown on freedoms of expression and association by releasing unlawfully jailed journalists, parliamentarians, and human rights defenders as well as reviewing the 2018 conviction of former CAA head Hisham Geneina.

“If the IMF is serious about helping to improve Egypt’s governance and building an economy that works for all Egyptians, it will need to dramatically change its approach,” Timothy Kaldas, policy fellow at the Tahrir Institute for Middle East Policy said. “It can no longer close its eyes to the tens of millions of Egyptians living in poverty and the vast expansion of opaque military dealings in the economy.”

Signatories:

  1. Human Rights Watch
  2. EuroMed Rights
  3. Civil Rights Defenders
  4. The Freedom Initiative
  5. The Tahrir Institute for Middle East Policy (TIMEP)
  6. Project on Middle East Democracy (POMED)
  7. Cairo Institute for Human Rights Studies (CIHRS)

This post is also available in: العربية

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