Egypt and the Elusive Interest-Free IMF Loan

Back in the 80s, I loved Aldo Nova's one-hit wonder "Fantasy." Instead of treating it as a catchy tune and nothing more, I'm afraid that leaders of some other nations are truly convinced that life is just a fantasy and have a reality-challenged notion of economic governance. Today we have another instalment in the long-running saga of Egypt and the IMF. Or, in its current Islamic fundamentalist-led stage, what I call "Allah and moolah" [1, 2, 3, 4]. Having rejected the IMF bailout plan proposed by the previous military caretaker government--a whopping 6 out of 365 lawmakers voted for it before the aforementioned government dissolved parliament--some in the international community had higher hopes with the election of the fundamentalist President Morsi. That is, while his fealty remains to those in search of a (mythical) conditionality-free IMF loan, the hope was that the main reason for the hold-up was not longstanding opposition to the IMF (which remains unpopular there) but the presence of the now-gone military caretakers.

However, it seems things aren't going to be smooth even now. While Morsi was mollycoddling IMF Managing Director Christine Lagarde just a few weeks ago in hopes of gaining a bailout, negotiations have been less convivial. In particular, costly but politically popular fuel subsidies remain a bone of contention:

Government officials say the deficit for the last fiscal year that ended this summer reached nearly 11 percent of the GDP, at $22 billion. According to the Finance Ministry, the deficit for the first three months of this fiscal year is already nearly 23 percent higher than the same time last year, indicating that government estimates aimed at reducing the deficit to 7.6 percent of the GDP this year may be unrealistic.

IMF officials said the talks over Egypt's reform program would focus on measures to reduce the budget deficit without negatively impacting growth rates. But officials say such a program must address huge energy subsidies, which account for nearly half of state subsidies and which, in turn, consume over 27 percent of the state budget.

True, Egypt will most likely get a more lenient deal given its geopolitical importance. Then again, Morsi is once again pandering to the Muslim Brotherhood crowd in the meantime. When Lagarde was around, he tried to explain that the IMF's concessional rates did not constitute usury and was that compatible with Islamic beliefs. With her gone, though, he's backtracked somewhat to fantasyland in claiming that Egypt will not accept any deal which involves being charged interest:

Earlier this month, Morsi promised to overhaul the decades-old subsidies program and reiterated his pledge to abide by Islamic banking laws and not agree to pay interest on the loan, telling a cheering crowd that "we'll go hungry before we eat off interest."

Apparently, there is a game going on backstage wherein fundamentalist-linked parties are attempting to style the 1.1% due on the IMF loans not as "interest" but as an administrative fee. To its credit or otherwise, the IMF is not playing along with this gambit to appease the fundamentalists, effectively telling them that it won't play the name game on what it charges:

The Muslim Brotherhood’s Freedom and Justice Party and the more conservative Salafist Al-Nour Party have argued, for different reasons, that the IMF loan is sharia-friendly. It is the loan’s interest rate, at an easy 1.1 percent, that has garnered the most debate because Islamic law prohibits the paying of interest. While the Brotherhood views the loan’s interest rate as merely a “loan processing fee” therefore cancelling the “interest” nature of the loan and replacing it with an “admin fee”, the Salafis have described the loan as “mudtar,” a term used in sharia law to denote the idea of last resort.

But all these technical details have been undermined by the IMF itself, which has distanced itself from claims that its loan is sharia-compliant. In an emailed statement, a spokesperson from the international bank said: “It is not up to the IMF to determine whether its lending is sharia-compliant.” Economists say the IMF loan can only become fully “sharia-compliant” if it is specially restructured into an acceptable form under Islamic law, otherwise what would be the point of Islamic finance if all that is needed is some verbal endorsement from a political party?

Westerners who were hoping that Egypt would ramrod the IMF rescue through the executive since the parliament remains dissolved may yet be disappointed, then. Despite obviously being beggars, the Egyptian leadership holds on to this fantasy that they can still be choosers.