June 5 (Bloomberg) -- Less than three years after it was criticized for endorsing policies that deepened economic disparity under Arab autocrats, the International Monetary Fund is lending more money to the region than ever.
A $1.8 billion loan to Tunisia, which the IMF board is set to review June 7, will bring total assistance to Arab countries in the past year to about $10 billion, adding to an annual record set last year, according to data going back to 1980. The Washington-based lender has already approved aid to Morocco, Jordan and Yemen and is in talks with Egypt for a $4.8 billion loan accord.
The Arab Spring is proving to be both a boon to the IMF and a test of its ability to ease a perception that it’s an arm of Western powers wanting to impose their will on debtor nations. By recommending protection for the poor while advocating “more inclusive growth,” the IMF is trying to show in the Middle East, North Africa and elsewhere that it has discarded the boilerplate loan programs that drew criticism in Southeast Asia more than a decade ago.
“There have been dramatic changes in the IMF in recent years,” said Nobel laureate Joseph Stiglitz, a longtime critic of the fund for mishandling the Asian financial crisis in the 1990s, in an interview at the World Economic Forum in Jordan on May 25. “You see it not only here but also in Europe.”
The IMF has come under criticism for endorsing economic policies that failed to address income inequality in countries such as Egypt and Tunisia, where uprisings toppled Hosni Mubarak and Zine El Abidine Ben Ali in 2011. While funding shortages amid political unrest prompted the most recent aid requests, IMF officials and Stiglitz say the fund’s efforts to promote equality and job creation have made it easier for countries to seek assistance.
Founded as World War II drew to a close, the IMF agreed in 2009 to set fewer conditions for funding and has sought in recent accords with countries such as Greece and Pakistan to shield the poor from the effects of budget cuts. In Europe, IMF officials “are the ones that have been more reasonable, pushing for fiscal stimulation, for more debt restructuring,” said Stiglitz, a former World Bank chief economist who was a co-winner of the 2001 Nobel prize.
Not everybody is convinced the softer approach is genuine. Mistrust of IMF policies has twice helped torpedo Egypt’s attempts in the past two years to secure an agreement even as the economy suffers from the worst slowdown in two decades.
The fund has sought to explain its policies in the Middle East, starting a blog in Arabic with commentaries from officials including Managing Director Christine Lagarde. The effort seeks to counter the notion that the lender still dictates the same one-size-fits-all measures of lower public spending and higher interest rates that had alienated borrowers including Thailand.
“The IMF itself today is not the IMF that many countries remember from the 1990s,” Masood Ahmed, director of the Middle East and Central Asia department, said in an interview in Dubai May 21. “Every country has to find its own way and the IMF has to work with them to ensure that the policies that they are implementing meet the objectives that we and they share.”
Tunisian Finance Minister Elyes Fakhfakh said in April his country and the IMF were in agreement over 95 percent of the economic policies that needed implementing.
The fund’s aid to Morocco, a $6.2 billion credit line approved in August, helped reduce the kingdom’s credit risk. The cost of insuring Morocco’s debt against default dropped 61 basis points in the period to 213 on May 31, data compiled by Bloomberg show.
The assistance has centered on countries sharing similar difficulties: widening budget deficits, slowing economic growth and falling foreign reserves. In response, the IMF has recommended measures including a gradual reduction of energy subsidies that benefit the rich.
It hasn’t always gone smoothly. Decisions to raise taxes and cut subsidies in Egypt and Jordan sparked protests that forced authorities to put the moves on hold. Jordanian police later suppressed the protests and the government started paying poor families in cash.
Talks with Egypt remain stuck amid the government’s reluctance to impose unpopular measures before parliamentary elections that’s yet to be scheduled. Anti-IMF sentiment in the most-populous Arab country has spilled into popular culture.
In a song lamenting “Oh Monetary Fund,” artist Yasser El Manawahly describes the lender’s policies as “poison in honey.” The song, which has been viewed about 178,000 times on YouTube.com, shows that the lender still suffers from an “image problem” in Egypt, said Bessma Momani, a professor at the University of Waterloo in Canada.
To change perceptions and ease suspicions about its motives, the fund must “engage the public as much as possible, engage with civil society, engage with parliament,” said Momani, author of a 2005 study of Egypt’s relations with the lender.
IMF critics such as Tunisian politician Mongi Rahoui and Egyptian columnist Wael Gamal point to deeper disputes.
In the absence of social safety nets, the poor will bear the brunt of measures linked to the loan, said Gamal, a member of a group campaigning against the accumulation of foreign debt. The government isn’t seeking alternatives, including reducing imports and imposing a tax on mergers, and has instead chosen to focus on cutting the budget deficit, he said.
Talks between the IMF and the Egyptian government in April ended without an agreement. In a statement, the fund said authorities needed to address the country’s fiscal and balance of payments deficits in a “socially balanced way.”
The IMF “can’t support an unsustainable program,” Caroline Freund, former Middle East chief economist at the World Bank, said by phone May 29. “At this point really it’s more in the hands of the politicians in Egypt to basically bite the reform bullet,” said Freund, now a senior fellow at the Peterson Institute for International Economics in Washington.
The tussle over the loan has left the Egyptian government at the mercy of domestic banks charging 14.8 percent to buy one-year Treasury bills in local currency.
Support from other countries is also more expensive: Qatar last month converted a $2.5 billion deposit at the Egyptian central bank to 18-month 4.25 percent bonds, Al Masry Al Youm newspaper reported May 28, citing Egyptian Central Bank Governor Hisham Ramez.
The IMF said in November it was ready to offer a “22-month stand-by agreement” at an interest rate of about 1.06 percent.
Qatar’s assistance, while helping stem the slide in foreign reserves, hasn’t restored investor confidence. Egypt’s $1 billion in bonds due April 2020 have plunged this year, sending the yield up 237 basis points, or 2.37 percentage points, to 8.4 percent at 12:51 p.m. in Cairo today.
Qatar’s aid to Egypt and Tunisia has also stirred a public backlash against the possible political cost. In the case of the IMF, the suspicion is misplaced, said First Deputy Managing Director David Lipton.
“There’s often a perception that the IMF imposes hardship, because the IMF comes to a country when they’re suffering from hardship,” he said in an interview in Tokyo May 31. “But I think we have in fact a very good cooperation in a wide range of Middle Eastern countries right now.”