Diplomats and others involved in crafting the IMF program acknowledge that they are dealing with an unpredictable situation. Although agencies such as the IMF and the World Bank officially eschew politics in evaluating loans and projects, conditions in the Arab Spring states are particularly volatile. The uprisings in the region have produced grass-roots democratic movements applauded by the United States, but have also strengthened Islamist parties and led to violence such as the September attack on the U.S. diplomatic outpost in Benghazi, Libya.
Egypt, in particular, remains a mystery. Morsi is seeking to maintain a moderate stance internationally while remaining aligned with the country’s formerly outlawed Muslim Brotherhood. Over the past three weeks, he won praise for helping broker a cease-fire between Israel and Hamas, unnerved potential lenders with his move to seize powers from the judiciary and resorted to martial law
ahead of a referendum on a proposed constitution.
The IMF had hoped to move forward this month on a $4.8 billion loan that Egypt desperately needs, as its foreign currency reserves dwindle and international investors pull money from the country. But over the weekend, Morsi reneged on imposing tax increases that the IMF had expected as a way to help bring down the country’s budget deficit.
On Tuesday morning, the IMF said that the Egyptian government had asked to delay further work on the loan “in light of the unfolding developments on the ground.” The tax hikes faced a public backlash at a time when Morsi is also trying to quell opposition to a proposed new constitution.
Egypt’s potential creditors say the situation has left them with a difficult choice: Take a chance on Morsi, or leave the country without a lifeline and surrender the ability to influence the government’s direction.
“Are these guys ready to change? The previous models . . . are not delivering anymore,” said Adnan Mazarei, deputy director of the IMF’s Middle East, North Africa and Central Asia Department. “The countries need to make drastic changes. . . . It means sectors don’t get set aside for connected people. It means banks don’t give favors. The fund recognizes it has to do something. Maybe in the past we should have pushed harder.”
The World Bank and the IMF have written extensively on the problems in the region: non-oil exports that collectively are smaller than Switzerland’s; a dearth of jobs for young people; closed and often state-dominated economies in which rulers dole out perks to favored allies. Because leaders, including now-ousted Egyptian president Hosni Mubarak, have used food and fuel subsidies to make up for the lack of opportunity among the poor and middle class, governments in those countries must finance what have become unaffordable benefits or risk political backlash if they are cut. Attempts to reduce fuel subsidies in Jordan have rocked that usually stable monarchy in recent months.