IMF: Prioritize social protection in Egypt loan talks

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

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

“Despite $20 billion in loans to Egypt since 2016, the IMF has failed to deliver the reforms needed to meaningfully address the growing and irresponsible role of the military in the economy or to expand the net security system to adequately protect people’s economic rights,” said Sarah Saadoun, senior business and human rights researcher at Human Rights Watch. “Progress on much-needed reforms remains elusive, and millions of Egyptians are increasingly vulnerable to external shocks from the global economy.”

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

Even before the pandemic, about one on three Egyptians – about 30 million people – lived below the national poverty line, according to to CAPMAS, the Egyptian Central Agency for Public Mobilization and Statistics, and a little less another third were considered vulnerable, according to the World Bank. The two Egyptian cash transfer programs Takaful (“Solidarity”) and Karama (“Dignity”) cover only about 11 million peopleleaving tens of millions of people living in or near poverty without support even as prices, especially for foodhave increased considerably.

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

Expanding the coverage and benefits of these programs is all the more important as the government takes action that particularly hurts low-income people. Egypt heavily subsidizes imports of basic foodstuffs to ensure affordable access to food for its more than 102 million people. But in August 2021, even before the latest price shocks, President Abdel Fattah al-Sisi announcement that the decades-old bread subsidy program, which around 70 million Egyptians rely on, would be cut. Last July, the government reduced subsidies for sunflower and soybean oil by 20 percent and unblended vegetable oil by 23.5 percent due to upward price pressure on the state budget.

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

Egypt is particularly vulnerable to these shocks as the world’s largest wheat importer, 80% of which comes from Ukraine and Russia. The price of not subsidized bread has increased by 50% in Greater Cairo since the start of the invasion, according to the media reports. On March 20, Prime Minister Mostafa Madbouly Published a decree fixing the prices of unsubsidized bread as an emergency response to the sharp increase in prices.

The government was due to announce details of how much of the bread subsidy will be reduced by the end of March, but it is unclear whether those plans will continue given the current crisis.

On March 21, the Ministry of Finance announcement a series of emergency measures to mitigate the economic impact of the Russian invasion, including the allocation of an additional EGP 2.7 billion ($148 million) to add 450,000 new families to the Takaful and Karama programs, i.e. an increase of 12%. The measures also increased the allowances to each family by 1.5%. But the increase is still insufficient to support the millions of people who remain extremely vulnerable.

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

The IMF should also include measures in any future agreement with Egypt to restore judicial independence, which is essential for economic growth and the fight against corruption. Egypt class 136 out of 139 countries in the World Justice Project’s Rule of Law Index for 2021, with extremely low scores in enforcement, civil justice and criminal justice. Constitutional amendments passed by the Egyptian parliament in 2019 further undermined judicial independence by granting the president unchecked supervisory powers over the judiciary and the prosecutor, as well as the power to appoint the heads of judicial bodies and authorities.

The IMF has already made the promotion of judicial independence a key part of its programs, for example in Ukraine. In February 2021, the IMF detention the second tranche of a $5 billion loan to Ukraine, partly because the government has not made enough progress in judicial reform. Four months later, the Ukrainian parliament pass a bill reforming a board that selects and evaluates judges.

It is imperative that the IMF include strong anti-corruption requirements, such as restoring the independence of Egypt’s Central Audit 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 bodies, including the Central Audit Agency, an independent body designed to act as a watchdog of Corruption. The law had previously prohibited the president from removing such agency heads without cause.

In March 2016, President Sisi sacked Hisham Geneina, the head of the Central Audit Agency, after reporting losses of EGP600 billion (about $76 billion at the time) between 2012 and 2015 in due to government corruption. Later in 2016, a Cairo court convicted Geneina of spreading false information.

As part of its focus on corruption, the IMF should clarify that transparency measures related to state-owned companies extend to military-owned companies and it should independently verify that such disclosures are made as part of its exams. Military-owned companies lack any independent or civilian oversight, leaving the Egyptian public without access to the information needed to assess the costs and beneficiaries of state-funded projects. A complete solution report 2019 found that companies belonging to the Egyptian army operate in near total secrecyconcealing “hidden inefficiencies and losses”, despite capturing “a disproportionate share of public revenue”.

The military’s aggressive economic expansion has gone hand in hand with increased political repression, including against members of the business elite who are perceived as political opponents. In December 2020 and February 2021, national security agents arrested Safwan Thabet and his son, Seif Thabet, owners of the Juhayna Company, a major dairy producer, after they allegedly refused to hand over shares in their company to a public company. Since then, the men have been held in solitary confinement. At a minimum, the IMF should demand transparency on the role of military-owned companies in the Egyptian economy.

The issue of transparency is also closely linked to the role of civil society and the media – all the more so given the uncertainty about the reliability of official statistics. The IMF should demand that the Egyptian authorities reverse the crackdown on freedom of expression and association by releasing imprisoned journalists, parliamentarians and human rights defenders, as well as reversing the 2018 sentencing of former CAA chief Hisham Geneina.

“If the IMF is serious about helping to improve Egypt’s governance and build an economy that works for all Egyptians, it will have to radically change its approach,” said Timothy Kaldas, policy officer at the Tahrir Institute for politics in the Middle East. “He can no longer turn a blind eye 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. Middle East Democracy Project (POMED)
  7. Cairo Institute for Human Rights Studies (CIHRS)

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