Thursday, March 3, 2016

Loans are preconditioned, no shame in this

It was recently announced that Egypt would receive a loan from the World Bank amounting to $3 billion, a third of which has already been delivered.
Another loan will reportedly be provided by the African Development Bank. These agreements appear to be a certificate of confidence in the Egyptian economy’s robustness and the credibility of the government's economic reform program.
The government asserted that there are no preconditions from the World Bank side, but soon the bank itself revealed the main conditions for the loan. The international institution, its advice and loans, will be a main part of the economy’s pillars in the coming phase, so it is important to get to know the nature of the conditions.
The aim of this article is not to praise the economic reform program, attack it, or to oppose the World Bank loan or encourage it, but to clarify its mechanisms.
If a country wants to receive funding from an international institution, it requests the help of a consultative team in order to draw up an economic reform program. Usually, the World Bank’s advisory team is the one asked for technical support for two reasons.
First, the experience that the team has accumulated through many of economic reform experiences supervised by the World Bank around the world, whether successes or failures.
Second, the participation of the World Bank’s advisory team in drawing up the economic reform programme makes it axiomatic that the country receives the loan from the World Bank in the end.
According to the submitted final plan, the team responsible for funding is to examine the financial plan. It also inserts some conditions in order to ensure the commitment of the country requesting the funding to the submitted financial plan. 
In addition, the World Bank’s participation in drawing up the economic reform plan gives it much credibility among other international institutions and facilitates like funding.
The World Bank during the last three years offered a lot of technical support for the reform program. With the beginning of the second interim phase in mid-2013, it was evident that the economy was in need of an integrated reform program, which was laid down by the government with the help of the World Bank’s expertise and several other international institutions in order to achieve three main objectives.
First, decreasing the rising budget deficit. Second, the provision of sustainable sources of energy. Third, improving the environment for investment.
During the past two years, the government worked on the implementation of that program through decreasing energy subsidies, setting the future wages cuts item via the Civil Service Law, which parliament opposed, the issuance of the Investment Law, and holding a big economic conference last year.
Despite the World Bank’s participation in laying down the economic reform program, which some view as reform based while others saw as austere, the government embarked on its implementation. However, Egypt didn’t resort to borrowing from the World Bank aside from recently. 
This followed the retreat of generous Arab Gulf financial support, which flowed to Egypt since the middle of 2013 until the beginning of 2015, filling the funding gap and Egypt’s needs for dollars.
However, during 2015, the situation changed because oil prices declined. Thus, the capacity of Gulf countries to support the Egyptian economy decreased and tourism revenues declined after the Russian plane crash in Sinai.
Moreover, the gap between imports and exports has widened at a time when the value of the Egyptian pound became high in comparison with several foreign currencies, while foreign investments didn’t flow as was expected. This was due to political and security turmoil on the one hand, and signs of a new world economic crisis on the other. This led to a big financing gap for the government and great pressure on the Egyptian pound. Consequently, the government sought financing via international institutions.
The economic reform program that the government submitted to the World Bank was not on the spur of the moment. The government, indeed, had begun to implement it since 2014. 
However, in the previous phase, the government relied heavily on Gulf support that was not conditioned on direct economic reform, but undeniably came with heavy political costs that Egypt will continue to pay for some time.
Now, after the decline of Gulf support and the beginning of the financing stage from international institutions, the institutions have enough wisdom themselves to set conditions. The conditions make Egypt committed, as is the case of any country borrowing, to implement economic reforms submitted in its plan to ensure the sustainability of the financial situation and the ability of the economy to repay debts that will be due later.
The economic reform program is not new and the World Bank’s conditions imposed on the Egyptian government, forcing it to implement the measures it submitted in its plan, are not strange. This is the way things are done if a country wants to receive loans.
Naturally, this does not mean that the economic reform program that the government has set is the best. On the contrary, there are lots of question marks, especially regarding the social consequences for such measures that will lead to a rise of prices to a great extent. This was actually observed and recorded by official statistics.
Perhaps the government’s move months ago towards launching initiatives to decrease prices in cooperation with the Ministry of Supply and sovereign entities is the best evidence of the inflationary effect of those policies that negatively affect society, along with social protection programs launched in a precautionary manner. But in reality the negative effect of those policies is much greater.
International financial institutions now play a large role in the Egyptian economic scene after the decline of Gulf support. We now receive big loans that may grant us a certificate of confidence and contribute to solving the dollar crisis, but society will endure a significant social cost due to the conditioned economic reforms. 
The next generations will be obliged to repay those loans. Thus, such matters must be taken seriously.
The relationship between the World Bank and Egypt should not be viewed as a submissive relationship, for there is a mutual interest between the World Bank and Egypt. At the same time, it is illogical to deny the existence of conditions for the loans.
Those conditions must be declared and presented before society for discussion before they are approved by the House of Representatives, while putting into consideration the social and political consequences of the critical reforms.

Omar El-Shenety
3 March 2016 
This article was published in "Al Ahram Online"

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