President Morsi’s decree granting him more power has acted as a catalyst for widespread protests in Egypt and a rupture in relations between the executive and judicial branches of government. It has also placed Egypt’s allies in an awkward position. The renewed turmoil will also inevitably raise questions about the recent agreement with the International Monetary Fund, which many view as essential for the economy’s wellbeing.
Egypt has turned to the IMF not out of choice but of necessity. Its economy is yet to gain proper momentum. Unemployment is too high, especially among the young. Foreign exchange reserves have stabilised but show little sign of returning to prior levels. The budget deficit is under pressure. Local interest rates have risen. And foreign investors remain hesitant, adding to the financial rationing that is holding back the private sector’s considerable potential.
The political and social implications of Mr Morsi’s decision are potentially profound. Most importantly, the current situation impedes progress towards the important goal of the grassroots uprising of January 2011: to deliver greater social justice and broad-based economic improvement, as well as reorient institutions towards the common good and away from benefiting deeply-entrenched minority interests .
A derailment of the IMF’s support for Egypt would add to the country’s challenges. This institution is the only creditor able and willing to provide Egypt with fast, low cost financing. Its involvement would facilitate $10bn from other creditors, as well as the reported $4.8bn from the fund itself. The institution’s technocrats can support Egypt in the implementation of its own reform programme via a coherent economic framework
Getting broad-based local support for the IMF’s involvement was never going to be easy. Some Egyptians still view the institution as an arm of western domination. Many have no desire to return to the days of external dependency. And most worry that the fund’s involvement would complicate already-delicate measures to reform Egypt’s subsidy system and its bloated public sector.
Mobilising external support for a fund programme is also complex. With its involvement in Europe over the last three years, the IMF has sent confusing signals about programme standards, funding levels and the application of conditionality. Some countries expect the IMF to apply the same leniency to Egypt. Others worry that this would constitute yet another step down a very slippery slope.
For now these issues have been crowded out by the political turmoil. But they will soon return.
Once the country regains its footing, which will probably involve Mr Morsi rescinding parts of the recent decree, the government and the IMF will need to move quickly to anchor the agreement aimed at stabilising the country’s immediate economic situation and providing the basis for meeting the medium-term objectives of the revolution.
To this end, the IMF needs to be open and explicit about the trade-offs involved as Egypt attempts to move from a horrid past to a better and more inclusive future. For its part, the government will need to engage in broad discussions on any IMF programme.
This would inevitably involve lots of noise. Yet this is Egypt’s new reality. And fundamentally it is not such a bad one.
For the first time in a very long time, average Egyptians feel empowered and able to influence the destiny of a country that they now own. To outsiders, this comes across as loud and messy. And it is. But it is also an indication of Egypt’s new checks and balances and, more broadly, its bumpy journey towards a vibrant democracy.
Proper engagement with the IMF on an Egyptian-owned program could help the country progress on this important path. In turn, this would increase the likelihood that the Fund would go from being seen as an instrument of western colonialism to a supporter of Egyptians legitimately seeking greater social justice, inclusive growth and fairness.