IMF ‘Harsh’ Legacy May Block Mideast Loans After Egypt’s $3 Billion U-Turn

Egypt turned down International Monetary Fund loans that would have helped the economy because the lender was seen as tainted by concessions demanded of past borrowers, former Finance Minister Samir Radwan said.

“People are still affected by the past, when the IMF used to impose harsh conditions,” said Radwan, who axed a $3 billion accord with the IMF in June within three weeks of negotiating it. He was replaced in a July 17 reshuffle aimed at placating protesters demanding faster change after the toppling of former President Hosni Mubarak, who is due in court tomorrow on corruption charges.

The IMF loan was offered with few strings attached and was vetoed by Egypt’s interim military rulers after a “damaging” media campaign, even though the North African country needed the cash, Radwan said in a telephone interview on July 27. The reversal shows how hard it may be for the IMF to shake off the legacy of past policies, even after admitting mistakes.

The fund endorsed economic programs under Mubarak that deepened Egypt’s income inequality and helped fuel this year’s uprising, protest leaders say. Tunisia, too, has yet to take up the fund’s offer for help after the revolt against President Zine El Abidine Ben Ali, whose policies the IMF also praised.

Photographer: Nicholas Kamm/AFP/Getty Images

Samir Radwan, Egypt's finance minister. Close

Samir Radwan, Egypt's finance minister.

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Photographer: Nicholas Kamm/AFP/Getty Images

Samir Radwan, Egypt's finance minister.

“Egypt’s rejection of the IMF taught the Fund that it has a serious image problem that needs immediate attention if it wants to play a crucial role in new democratic regimes of the Middle East,” Bessma Momani, a professor at the University of Waterloo in Canada and author of a 2005 study of Egypt’s relations with the IMF, said by e-mail.

One Size Fits

Mistrust of the Washington-based lender has spread since the 1997 Asian crisis. Economists such as Nobel laureate Paul Krugman say the IMF helped worsen a recession by dictating a one-size-fits-all policy of higher interest rates and lower government spending -- when developed nations facing slumps typically do the opposite.

Radwan argued that IMF terms were reasonable and Egypt -- whose economy shrank at an annual rate of 4.2 percent in the first quarter while yields on its dollar bonds surged -- needed the money to “get out of the bottleneck by raising public investments.”

“The military council said it doesn’t want to burden the democratically elected government with debt,” he said, adding that he didn’t agree because “we are already indebted.”

From the start, Radwan’s overtures to the IMF were greeted with suspicion by Egypt’s media and political activists.

‘What’s the Catch?’

“What’s the catch?” television talk-show host Yousri Fouda asked Radwan in April when he returned from initial talks in Washington. “The fund’s loan is against democracy,” columnist Wael Gamal wrote in Al Shorouk daily on June 12.

“For years we have been told that this is the IMF doctrine: cut budget deficits, reduce spending and liberalize markets,” Wael Khalil, an organizer of the protests that ousted Mubarak in February, said in a telephone interview.

Under the management of Dominique Strauss-Kahn and the pressure of the financial crisis, the fund has loosened up.

It agreed in 2009 to set fewer conditions for funding, and place less emphasis on structural changes such as overhauls of banking or tax systems. It’s paying more attention to unemployment and social affairs, said Christine Lagarde, who took over as managing director last month.

“We cannot only be driven by the hope to reduce fiscal deficits,” she said on July 6.

Shield the Poor

The IMF in recent years has recognized that the policies it advocated in the 1990s in countries such as Korea and Indonesia weren’t always appropriate and may have alienated recipient countries. Recent fund-backed programs, including in Greece and Pakistan, have sought to shield the poorest from the impact of budget cuts. The fund also sought to improve its image in the Middle East, holding roundtable discussions last year with students across the region. Strauss-Kahn attended one in Jordan.

The fund has reviewed its approach, said Masood Ahmed, its director for the Middle East and Central Asia. Even before this year’s revolts, it had “begun to focus more explicitly on policies that ensure that the benefits of economic growth are shared more broadly, and on protecting the most vulnerable members of society,” he said by e-mail.

Tunisia Not Borrowing

Still, it’s struggling to find customers in the region. Tunisia needs at least $1 billion in additional financing this year, central bank Governor Mustapha Kamel Nabli said in June. Like Egypt, the country is seeking to stabilize its economy amid political turmoil, and it’s borrowing from the World Bank, the European Investment Bank and the African Development Bank. Yet Nabli said last week that Tunisia won’t be seeking IMF loans.

Egyptian activists recall the praise for “prudent macroeconomic policies” under Mubarak in a March 2010 IMF report. By cutting debt and attracting investment from companies such as Vodafone Group Plc (VOD), Egypt boosted growth to about 7 percent a year by 2008, yet the numbers masked youth unemployment rates above 20 percent.

A sense that Egypt’s new rulers were going back to business as usual fueled anger at the IMF accord, Khalil said. “Nobody felt that the government was serious about reviewing past policies,” he said. “The first thing they did was go to the IMF.”

Countries that shunned IMF loans in the past were often seeking to escape spending discipline. Egypt is doing the opposite -- tightening its belt in order to do without IMF money.

Investments Scrapped

The IMF backed a proposed budget deficit of 11 percent this year to finance higher public investments and wages. When the government rejected the loans, it cut that target to 8.6 percent, trimming some of the spending plans.

As a result, “there isn’t enough stimulus spending to compensate for weak investment,” said Mohamed Abu Basha, an economist at EFG-Hermes Holding SAE in Cairo. Growth may slow to 1.6 percent this year from an estimated 2.6 percent the previous 12 months, according to a Bloomberg survey.

Nor are funds cheaper elsewhere. Qatar offered a loan at 7.5 percent, before agreeing to reduce that to 4.5 percent, Radwan said. The IMF would have charged 2.5 percent, he said. Egypt sold 3 billion Egyptian pounds ($504 million) of three- year bonds yesterday to yield 13.35 percent.

Khalil said that after succeeded in ousting Mubarak and pressuring the generals to prosecute him, Egyptians won’t tolerate a repeat of the economic failures of the past.

“We will be much more difficult to satisfy,” he said.

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net.

To contact the editor responsible for this story: Louis Meixler at lmeixler@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net.

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