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Policy Brief

Can the IMF Really Influence Policy in Egypt, Tunisia, and Lebanon?

The IMF has become increasingly cognizant of the political impediments to economic reform, but it remains unclear if it can do anything to change them.
An Egyptian man counting money at a military-owned Wataniya petrol station in Cairo.

On April 6, Tunisian President Kais Saied spoke out against what he referred to as “foreign diktats” from the International Monetary Fund (IMF), rejecting a $1.9 billion rescue package. Saied has sought to consolidate power since initiating a self-coup in July 2021, and some in the West seemed to believe that a deal with the IMF could be used to bring him back from the edge. Despite Saied’s explicit disinterest in engaging in the painful reforms that could be required to rescue the country’s economy, including cutting subsidies and restructuring state-owned enterprises, the IMF is still holding out hope that they can incentive Saied to return to the bargaining table and moderate his behavior. Perhaps it is time to reassess the capability of international financial institutions to change government behavior.

Recent involvement of the IMF in the region sheds light on the limited capabilities of the institution to effect policy change amongst its loan recipients. Involvement with the IMF presents a stark challenge for governments: if they comply with the measures requested by the Fund, which typically focus on cutting subsidies and public sector employment, they risk upsetting their population and possibly setting off destabilizing protests. But if these governments refuse to implement some of the reforms recommended to stabilize their economies, they may contend with being cut off from international credit markets, and worse, economic collapse. 

Even when governments badly need international funding to stabilize their economies, they often remain unwilling to comply with the conditions necessary to obtain those funds. Lebanon is currently engulfed in the worst economic crisis of its history, finding itself on the brink of hyperinflation. A bailout package from the IMF could help ease the country’s cycle of currency devaluation. Many of the reforms required to secure a full program would also aid in mitigating the effects of the crisis and allowing depositors to recover their money. For example, the IMF has insisted that the Lebanese government amend its banking secrecy law and restructure the banking system so that the financial crimes that precipitated this crisis can be investigated. But banks and the government have stood in the way of meaningful reform, hoping to avoid being punished for their crimes and repaying depositors’ money. This has left the IMF and the Lebanese government in a year-long stalemate, and little progress has been made to salvage the economy. No amount of IMF conditionality has moved the needle. Changing geopolitical conditions could improve the situation, though it is a longshot: Assad’s reintegration into the Arab world and tepid rapprochement between Iran and Saudi Arabia could improve Lebanon’s likelihood of receiving Gulf support. Under such a scenario, the IMF might be more likely to engage with Lebanon without the requisite reforms, though this remains unlikely. 

The IMF has made perhaps its boldest attempt to influence domestic politics in Egypt. The organization is seeking to bail out Egypt in an effort to avoid the collapse of one of the region’s largest economies and resultant influx of migrants to Europe. In January, as part of a $3 billion loan package, the Egyptian government promised to reduce the outsize role of the military in the economy. The Egyptian military, closely entwined with the Sisi regime, has been given such preference by the regime that it largely crowds out private industry. As part of the deal, the regime agreed to level the playing field between the public and private sectors, purportedly aiming to sell off $2 billion worth of state assets in “non-strategic sectors” and open the books of remaining state-owned entities. This reform is badly needed, but real implementation seems highly unlikely. Only two military-owned firms, Wataniya and Safi, were included in the list of privatizations. A delayed review by the IMF indicates the organization’s dissatisfaction with the government’s progress on these changes. 

The implementation of these reforms is also dependent on regional politics working in Egypt’s favor. The government will need to find willing buyers for its public assets, which is a role largely expected to be filled by Gulf countries, the United Arab Emirates and Saudi Arabia in particular. However, in recent years, these countries have begun to lose patience with Egypt, and are no longer willing to play the role of donor. Instead, they are expecting returns on their investments and are not willing to pay inflated prices for unprofitable state companies. And given Egypt’s accumulation of vast debt over the past few years, the country does not currently appear to be the most reliable investment. In the past eight years since Abdel Fattah el-Sisi became president, Egypt’s external borrowing has quadrupled, as Sisi has sought to build a new capital and fund a number of megaprojects. A shortage of foreign currency and lack of progress on public asset sales has raised concerns about Egypt’s ability to meet its debt servicing requirements. The government now spends nearly half its revenues on debt servicing, a problem which has been exacerbated by its increasing reliance on “hot money” or high interest rate short-term debt. 

Part of the reason why implementation on these reforms seems so unlikely is the Egyptian military’s deeply entrenchment in the economy. Removing it from the economy is not as easy as signing an agreement with the IMF. In many ways, the Egyptian military serves as the ruling party, constraining Sisi’s ability to act unilaterally. They have a strong interest in maintaining the status quo, which sees them benefitting from first dibs at plum contracts with the government and exempted from paying value-added taxes. They are also incentivized to resist any reforms which would require transparency and force them to reveal corrupt practices. This reciprocal relationship undergirds Sisi’s rule, rendering him reluctant to undermine it. Given the military’s status as the ultimate powerbroker in Egyptian politics, any threat to their privileged position could jeopardize Sisi’s grip on power and undermine the country’s delicate stability. 

It should come as no surprise, then, that the Egyptian government has made little progress towards shrinking the military’s role in the economy since January. Instead, the army is making clever maneuvers to avoid retrenching its role. Just last month, the National Service Products Organization, a subsidiary of the military, signed a contract to build a factory to generate energy from biogas. The army also seems to be stripping assets from firms it plans to sell to those it plans to keep, much to the chagrin of Gulf investors in these companies. These do not appear to be good faith efforts aimed at shrinking the role of the army. And as history has demonstrated, it is unlikely that Egypt will pay the price for failing to uphold its end of the IMF bargain. Strategically important countries are rarely held to account for failing to implement loan conditions. Given its vital location connecting the Middle East to Africa and its sizable population, Egypt will likely continue to receive tranches of funding, regardless of its compliance. 

One of the most trenchant critiques of the IMF in recent years is that its singular focus on macroeconomic stabilization blinds the organization to politics, rendering its conditions irrelevant and impotent. The IMF’s recent tact in Egypt displays a new willingness not just to take politics into account, but to intervene and potentially alter the political environment. While this may be the IMF’s intent, it remains unclear whether it is possible for international financial institutions to change politics from afar. If the cases of Tunisia, Lebanon, and Egypt can serve as a guide, it seems unlikely that these governments are willing to have their policies dictated by outside forces, even if the alternative seems dire. Thus far, the IMF has been unable to court Saied in Tunisia, reform the banking industry in Lebanon, nor alter the role of the military in Egypt’s economy. 

Moreover, international financial organizations should be concerned not only by their inability to effect positive change in these countries, but the potential to cause harm. Providing concessional lending to authoritarian regimes can help to stabilize them by allowing rulers to extend patronage networks and build up their repressive capabilities. The IMF may be making the calculation that citizens are better off under a stable, authoritarian Egypt, for example, than the alternative. Given the events of the past decade, it is not difficult to imagine an alternative scenario where faltering economies lead to government collapse and economic disaster, and citizens are left worse off. Nevertheless, the use of these funds to prop up repressive regimes remains a tough pill to swallow. 

If we accept that the IMF cannot impact the political fundamentals of a country, it is worth thinking through areas where they might have the ability to make an impact. While reforms like shifting to a flexible exchange rate and reducing subsidies can have positive long-term economic effects, they can be incredibly burdensome on the most vulnerable. Repeated rounds of currency devaluation have left Egypt with a staggering 30% inflation rate, making food difficult to afford for the poor. The IMF has sought to counter this effect by expanding the provision of social protection. In Egypt, it asked the regime to expand its Takaful and Karama programs, which are conditional and unconditional cash transfer programs. The expansion of welfare programs is one area where the incentives of the IMF and authoritarian regimes could be well-aligned: these programs can support the poor while bolstering support for the regime, tying citizens’ ongoing wellbeing to the survival of the regime. However, welfare policies in authoritarian countries are often poorly targeted due to a lack of information on citizens and the government’s desire to use these goods as forms of patronage. The IMF could play a key role in ensuring that these programs are implemented in a more equitable manner. 

At the same time, the IMF should still work to incentivize governments to pursue reforms that might be painful for cronies and elites but necessary for economic growth. While it might seem unlikely that governments would be willing to make changes that would upset these key pillars of support, the poor and middle class can also represent important sources of stability for authoritarian regimes, and in many countries, these groups have been badly hurt by reforms. If the IMF can push governments to make changes that risk revolution from below, they should be even more forceful in pushing reforms that carry the risk of elite defection. For example, given that it is highly unlikely that the military will shrink its role in the Egyptian economy, the Fund can at least ask the regime to hold military companies to the same standard as civilian companies in terms of financial transparency. Taking into account that the military is a powerful and permanent fixture in the Egyptian economy could allow the IMF to engage with the institution in a way that is more likely to bring about tangible results. 

Finally, the IMF must determine if it is truly in the business of changing politics or not. For years, it has emphasized its role as a purely economic body, focused entirely on macroeconomic stabilization, and immune from the politics that might stand it its way. The Articles of Agreement, the founding documents of the IMF, cites as its primary purpose the promotion of “international monetary cooperation,” making no mention of politics. Recent shifts show a greater appreciation of the political hurdles that stymie economic reform, but the steps taken thus far have not made a dent in the way of neutralizing these political threats. 

Returning to Tunisia, it is worth taking seriously Saied’s objections to the IMF’s proposal. Tunisia faces a real prospect of social upheaval were it to make drastic changes to its subsidies and public wages. Even Egypt’s new State Ownership Policy makes reference to the need to preserve the country’s “social contract.” The Fund cannot expect that regimes, and especially authoritarian regimes, will make choices that run counter to their interests. Instead, the IMF must determine whether they want to work with these regimes, and if they do, how to make reforms within the political paradigm. Recognizing and working within the existing dynamics may be the only option available to these organizations if they wish to bring about change. 

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