Dr. Usman W. Chohan
The recent positive economic data from Pakistan is leading many to hail it as “emerging market success story,” reminiscent of Egypt’s “impressive” economic turnaround after 2016. Foreign short-term funds are flowing in, the stock market has realized world-beating monthly returns, and florid pronouncements regarding Pakistan’s success in replicating the Egyptian “success” abound in the press.
The comparison between Pakistan today and Egypt circa 2016 is indeed uncanny, because it was under the same IMF country-head, Dr. Reza Baqir, that both countries signed themselves for an IMF bailout, and it was under his direction that both “reform” programs have been executed.
If Pakistan’s economy is indeed being remoulded along the lines of Egypt circa 2016, then it pays for us to examine just what has happened to Egypt since the IMF stepped in.
As of 2016, Egypt faced even graver problems than Pakistan did in early 2019. The country was starved for foreign exchange, negativity was widespread, protests were brewing (but quashed), and foreign investors largely turned their back on the country. Sound familiar?
In desperation, the Egyptians negotiated a bailout package (Extended Fund Facility) with the IMF, which came out to twice the size ($12 Bn) of Pakistan’s bail-out of $6bn.
As with Pakistan in 2019, the Egyptians had to massively devalue their currency first. Whereas pre-devaluation the rate was 8.8 Egyptian pounds to the US dollar, after gutting the exchange rate and unpegging it, the currency fell to 15 pounds to a dollar. This fall in fact continued for another year until the floating exchange rate hit 17.6 Egyptian pounds to the dollar by 2018.
The IMF also forced Cairo to cut pro-poor energy subsidies and imposed a regressive value- added tax, while aiming to strike at social protections and welfare spending, such that the government’s headline deficit would fall from 12.2% of GDP in 2016 to 8.2% by 2019.
Spending on education fell to 2.7% by 2017, one of the lowest in the region, and much feebler than the 4-5% that Egypt spent in the 1990s and 2000s.
Similarly, spending on healthcare collapsed to 1.5% in the fiscal year 2017-18, in comparison to the 5% of GDP that Egypt spent in on average in the 2000s. This too occurred in a country where there are less than 16 hospital beds per 10,000 people, 22% of the population has
Hepatitis C, 23% of adults smoke and 29.5% suffer from high blood pressure. From a foreign bond investor’s perspective, it all sounded too good to be true, the yields on
Egyptian government bonds were in excess of 17%, and there was little fear of currency loss given the hit of the devaluation. By way of comparison, Pakistan’s government bond yields are also in the double-digits today.
For Egypt, the headline numbers began to look good on paper, and GDP growth in the fiscal year 2018-19 was 5.6%, which was the highest in a decade. It was also higher than its Middle Eastern peer group that included countries like Qatar, Iran, UAE, and Saudi Arabia.
Egypt received accolades from the usual suspects: the IMF, World Bank, Bloomberg, Financial Times, and heavy-hitter investment banks such as Morgan Stanley. It began to attract a great deal of hot money in 2017-18, in ballpark of $30 billion USD, which was second only to the UAE in the Arab world and far ahead of Lebanon, Morocco, or even Saudi Arabia.
All of this, naturally, concealed the economic burden on the people that such “reforms” entailed. Inflation rates averaged 21% in the fiscal year 2018-19, which crippled household purchasing power. Income inequality worsened such that Egypt’s Gini coefficient of 53.7 surpassed even the notorious Latin American economies such as Brazil.
Meanwhile, the state of Egypt’s youth unemployment of 32.2% has become so frightening that it puts other third-world countries to shame; and the youth in Egypt account for a whopping 79% of the unemployed. Most iconic of all, the poverty rate in Egypt grew from 27% before the IMF bailout to 32.5% after Reza Baqir took the helms of the IMF in Cairo. This poverty expansion of five percentage points is the most important figure that Pakistanis must keep in mind.
Yet somehow Egypt is a success story. How so? Funds in New York and London can reap wildly high yield spreads on their hot money that Egypt will eventually owe with massive interest.
Is this problem reminiscent of how Pakistan’s economy is being reshaped? The stock market has experienced a boom while foreign funds are sweeping up our government bonds. Yet a conversation with the average voter would present a starkly different picture from what the IMF seeks to portray. If Reza Baqir’s oversight of the IMF program in Egypt (and possibly Pakistan) is reminiscent of anything, it is the Egypt of antiquity. For all the glory of the pyramids, libraries, and sphinxes, the Lord himself condemned the hubris of the pharaoh Ramses II and sent prophets to guide the people to deliverance.
But as with the pharaoh, the IMF is yet to repent.
—The writer is Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). He can be reached at [email protected]
