international analysis and commentary

Tunisia and Egypt: foreign loans and domestic consensus


For more than a year now, Tunisia and Egypt have been negotiating with international financial institutions in order to obtain significant loans at competitive rates and at acceptable conditions in terms of reforms to be implemented in return.

In both countries, this has proven to be a demanding task, carried out mainly by newly-elected Islamist forces. These parties have campaigned on social justice platforms, committing to redistribute wealth and extend social services. As shown by several recent polls, economic grievances (more so than political or normative ones) were the main catalysts of the 2010-2011 revolts and still represent the most widely shared concerns by local populations. A recent Pew Poll found that more than 70% of Egyptians are unhappy with the economy, 33% wish for a strong leader to solve the country’s problems, and 49% believe that a strong economy is more important than a good democracy. It is therefore no surprise that rather than making unpopular decisions on economic issues (in the absence of political consensus and within a highly polarized political spectrum) the current Islamist leadership has opted for a “wait and see” approach. 

Tunisia’s Ennahda, and to a lesser extent the Egyptian Muslim Brotherhood, are known for an anti-globalization stance, which, however, has not yet translated into specific programs and ideas. In their cries against the unequal redistribution of wealth brought about by neoliberal models of economic development, these parties have so far failed to formulate – beyond generic calls for the implementation of principles derived from Islamic finance and Islamic economy – adequate economic recipes.

On these issues it is easy to note an ambivalent attitude by Islamist forces in the region, with numerous calls by Ennahda and Brotherhood leaders for more foreign capital, support for the private sector and respect of free market principles. Many, especially in the West, are confused by flip-flopping discussions and by the cleavage between what they expected to see happening after the fall of the previous regimes and the reality on the ground. Several commentators have been misled over the extent of socialist principles Islamists would have taken to the fore once in charge of drafting economic policies.

The confusion arises because of the distance between traditional Islamist charitable activities and their adherence to the main pillars of the economic paradigm adopted (at times directly imposed) by the major international financial institutions.

With the rapidly deteriorating economic conditions, negotiations with the main international financial institution, the International Monetary Fund (IMF), have intensified in both countries, but with very different results. In April 2013, Tunisia agreed to a Staff-Level Agreement with the IMF for a two-year loan equaling $1.75 billion. While seemingly accepting the loan’s conditions more smoothly than Cairo, recently the Tunisian Constituent Assembly re-discussed the terms of the loan in a very vocal way. Some deputies within Ennahda declared that international financial institutions ostracized the Islamist movement in the 1980s and today try to do the same with Ansar al-Sharia, while others expressed fears of excessive debt or foreign interference. And while the Tunisian Minister of Finance defends the agreement, the assembly has so far refrained from supporting it, emphatically suggesting that the Ben Ali family assets – which values between 15 and 50 billion dollars -, once confiscated, could easily substitute the loan.

To date, on the other hand, Egypt has signed two such agreements, one under the transitional Supreme Council of the Armed Forces (SCAF) in 2011 and one under the Muslim Brotherhood’s President Mohamed Morsi in November 2012, neither of which was implemented. While still competing for power, the Muslim Brotherhood had strongly pushed against such a loan proposal and had influenced SCAF into rejecting it – even though, incidentally, the conditions imposed would have been milder than a year later.

The second agreement, signed by the Brotherhood, was suspended three weeks after it was signed, due to a failure by the government to effectively impose sales tax increases amid political protest.

The agreement would have paved the way for a maxi-loan worth $4.8 billion, which would have been accompanied by loans from other donors for a total of $9.7 billion.

In March 2013, given the on-going stalemate in negotiations, the IMF suggested a short-term loan of $700 million, to get by until after Egypt’s parliamentary elections – which have been put on hold pending the judicial review of the electoral law – but Morsi refused. In the meantime, unemployment has risen from 9% to more than 12%, foreign reserves have dropped and the budget deficit is worsening. Several commentators now foresee a summer of fuel shortages and power cuts and no deal in sight until after the elections will have taken place. The relevance of these loans hinges upon the dire straits of these economies, both of which have failed to recover since the uprisings.

It would however be incorrect to presume that Cairo has no option but to acquiesce to IMF conditions and is only buying time and waiting to hold elections before finally accepting the plan. Namely, other donors, from the region and the Gulf in particular, have not been standing still and are relieving some of Morsi’s fears. Qatar has recently pledged $3 billion for the purchase of government bonds; in April 2013 Libya deposited $2 billion in Egypt’s central bank, while Saudi Arabia deposited $1 billion. US bilateral assistance, on the other hand, is less and less relevant: while in 1981, US aid amounted to 5% of Egypt’s GDP; in 2012 it amounted to less than 0.25%, a percentage far too small to counter the multifaceted influence of other players.

With the ability of both the EU and the US to directly support the North African transitions now rapidly waning, they have staked their credibility as intermediaries vis-Ă -vis international financial institutions. Negotiations however are proving much harder than expected, especially with national elections looming in both countries between the end of 2013 and early 2014.