If Egypt accepts the US$20 billion potentially on offer from international sources, it will be setting itself for up for a debt cycle, some experts are warning. At G8 talks, leaders said that the money could be lent by the World Bank, the International Monetary Fund, countries and other banks to help the country recover from its current economic difficulties.
“Egypt should not be locked into a particular path before there’s even a new democratic government in place,” said Tim Jones, policy officer at the London-based Jubilee debt campaign, which lobbies for the cancellation of poor countries’ debt, including the debt Egypt accumulated under Mubarak.
“The danger with new lending now is that it is tying Egypt into a certain economic policy,” Jones said.
It is not yet known how much debt Egypt will take on in its transitional political state, but it seems clear it will be billions. And the decision will be made before any sort of elected government is in place.
In a press conference Monday, Egyptian Minister of Planning and International Cooperation Faiza Abul Naga said that the government did not accept the conditions stipulated by the IMF and the World Bank and was turning down some loans. She did not specify the amount or which loans were being turned down or the conditions in question.
Egypt has so far agreed to accept US$3 billion from the IMF. Before the G8 summit, the World Bank announced it would loan US$3.8 billion to Egypt, and is in talks to give an additional US$4.5 billion in support over the next two years, said Shamshad Akhtar, World Bank vice president for the Middle East and North Africa.
"The central aim of our program moving forward is to support the government's efforts to expand access to information, enhance transparency and accountability, and generate employment opportunities," he said. "How fast we can deliver this support, however, is largely in the hands of the Egyptian authorities."
The US has also promised a US$1 billion debt-for-investment swap, about which few details have been given, and an additional US$1 billion in loans.
At the G8 summit, leaders said that Egypt could receive as much as US$20 billion total in loans from international banks.
World Bank and other international loans can finance big and worthwhile investments, such as a new business, or new roads and hospitals in a country.
But if the loans are not paid off along with their interest, they can trap their guarantor, whether the Egyptian government or a private business, in an unremitting cycle of payments. Interest rates, naturally in flux, also pose a hazard and could double or triple in the coming years if the local economy faces more difficulties.
Egypt is already burdened with US$35 billion in external debt and US$155 billion in internal debt, according to estimates by the Central Bank.
“Loans constitute a burden that future generations will have to pay,” said Emad Shahin professor at the Kroc Institute for International Peace Studies at the University of Notre Dame, who returned to Egypt to study the revolution.
“It’s the wrong direction,” said Shahin, who is also a former professor of politics at the American University of Cairo. “You cannot have a revolution calling for dignity and independence only to hold out your hands to foreign countries.”
There are precedents that point to the dangers of this type of lending. When former autocratic regimes were toppled in Eastern Europe in the early 1990s, the World Bank and the IMF stepped in, lending money that was supposed to jumpstart free trade and capitalist markets, but also opening up the formerly closed economies to international trade. These countries have yet to emerge from their debt and none have emerged as economic tigers.
Two separate arms that often work in unison, the World Bank is a primarily lending body that focuses on development, and the IMF is a fund that is intended to give out money to countries in need with the intention of stabilizing the global economy.
Eastern Europe’s case is a cautionary tale without any success stories, said Peter Chowla, program manager for finance and the IMF for the Bretton Woods Project, a London-based group that criticizes the fund and the bank’s policies.
Most Eastern European countries were not ready for their goods to compete on the international stage, and local industry was crippled. Large-scale privatization, a condition of the IMF and World Bank loans, left the countries with high unemployment, austere governments and few social services.
Also, accepting a loan package could leave the fledgling democracy beholden to European and American economic interests, said Chowla.
One of the IMF’s dangerous conditions is usually an “aggressive privatization,” said Shahin, a continuation of the decades of Mubarak’s economic policy that widened the gap between rich and poor.
Under the privatization, the Egyptian government cut subsidies without developing small industry. Rising prices and stagnant salaries became the norm, with only a few businesses flourishing.
“That led to huge monopolies and an increased level of poverty,” Shahin said.
And in the world of international finance, a country’s debt also speaks for its character and the value of its currency.
The more debt a country has, the less likely it seems that the country has the resources to pay, the more skeptical investors are of investing within its borders. Without foreign investment, there is less demand for that country’s currency. With less demand, the currency devalues and the country is able to buy less in the global economy, and problems compound.
There are examples of countries that shunned international loans and now have stable, growing economies.
In an editorial titled “The loan from the fund against democracy,” Al-Shorouk economic writer Wael Gamal pointed to the example of Malaysia, which turned down IMF money during its economic crisis in 1997. Thanks to a government debt restructuring and cooperation, he said, their economy was growing again by 2000 without outside interference.
He said Egyptians should heed the words of Malaysia’s then-Prime Minister Mahathir Mohamad in answer to the institutions’ advice.
“Are we not responsible for our own country? They do not consider the suffering of our people, their problem. It is our responsibility. It is upon us to take care of our own security and well-being,” Mohamed said.
The economic policy should be something that is discussed by elected officials in Egypt, experts agreed, which the IMF and World Bank loans would not allow for.
“I think what we’re most worried about is that for the Egyptian democracy movement this is short circuiting the chance for any democratically decided policy,” said Chowla.
