A deal with the World Bank for a US$1 billion loan could fall through if the Egyptian government does not adopt a value-added tax (VAT), documents exclusively obtained by Mada Masr reveal.
The loan is also contingent upon the bank being satisfied that Egypt has achieved acceptable progress in implementing economic reforms.
The presidential decree approving the agreement, dated December 28, has not yet been ratified by Parliament or published in the Official Gazette, and contains details of the agreement not yet publicly released by Egypt or the World Bank.
The core of the presidential decree is a loan agreement, signed by Minister of International Cooperation Sahar Nasr, listing the conditions agreed upon between Egypt and the International Bank for Reconstruction and Development (IBRD), the lending arm of the World Bank. The agreement covers the first installment of a planned US$3 billion loan agreed to in December.
Much of the agreement is standard legal boilerplate, based on the IBRD’s General Conditions for Loans. However, the agreement with Egypt contains several specific provisions.
Most controversial are the conditions detailed in Section 5, which outlines the requirements Egypt has to meet before the World Bank is legally bound to issue the loan. The section begins with a standard assertion that the agreement is only valid once it has been approved in accordance with Egypt’s legal and constitutional requirements. Since the decree issuing the loan has not yet been approved by Parliament or published in the Official Gazette, it is questionable whether this condition has currently been satisfied.
According to Article 151 of the Constitution, the president has the right to sign treaties, but they only obtain the power of domestic laws upon ratification by the House of Representatives and publication in the Official Gazette.
Section 5 of the agreement adds a number of special conditions for Egypt. According to the document signed by Nasr and approved in a decree by Sisi, the World Bank is only required to hand over the money once it is satisfied that Egypt has made acceptable progress in the implementation of a development program and improving its macroeconomic framework — including the adoption of a VAT.
The centrality of the VAT to the loan agreement is reinforced in the program document recently made public by the World Bank. In it, the VAT is referred to as a “condition of effectiveness” — a legal mechanism that allows the bank to withhold funds until it is satisfied that particular conditions have been met.
Section 5 of the loan agreement also specifies an “effectiveness deadline,” a date at which the loan agreement can be terminated if the aforementioned conditions are not met. The deadline is set at 180 days from the December 19 signing of the agreement — June 16, 2016 — although the bank is given the right to push back the date at its discretion.
Under Section 4 of the agreement, the IBRD is also given the right to suspend the loan if events disrupt the implementation of Egypt’s development program.
The full document, as obtained by Mada Masr, can be accessed here.
Item two of the document outlines the mechanism by which the loan will be made available.
In it, the IBRD agrees to provide Egypt with US$1 billion in a single installment. However, Egypt will be charged a “front-end fee” of US$2.5 million, in line with the IBRD’s standard practice of imposing a 0.25 percent fee to borrowers. This means Egypt will only actually receive US$997.5 million.
Here, the bank again gives itself the right to withhold funds if it is not satisfied with the progress of Egypt’s economic program.
The loan agreement specifies a series of 10 pre-conditions, or “prior actions,” which the government has already put in place. These pre-conditions, also detailed in the World Bank’s loan documentation, amount to a lineup of neoliberal policies aimed at cutting subsidies and public sector wages while liberalizing Egypt’s energy sector and introducing investor-friendly reforms.
Although there is nothing new in this list, it highlights a series of austerity measures and liberalization policies that began within a month of President Abdel Fattah al-Sisi’s 2014 inauguration.
First out of the gate was the slashing of energy subsidies in July 2014, one of Sisi’ first big moves as president. The legal framework for subsidy cuts — a five-year plan to increase electricity prices — is one of the loan agreement’s “prior actions.”
Other prior actions include a flurry of investor and business-friendly laws passed in the run-up to the Egypt Economic Development Conference in March 2015: a tax law that reduced the maximum rate of corporate and personal income tax from 30 percent to 22.5 percent; a law that paves the way for privatization of the electricity sector; a draft law that liberalizes the natural gas sector; and an investment law that rights groups argue gives too much power to investors.
The provisions of the civil service law are not explicitly mentioned. However the list of prior actions includes the 2016 budget law, which calls on government entities to contain the public sector wage bill.
Also included are revisions to the renewable energy law (including the introduction of a feed-in tariff for renewable energy projects), reforms to the industrial licensing law and amendments to the competition law.
The World Bank’s program document makes it clear that if Egypt wishes to receive the remaining installments of the US$3 billion package it has requested, the government will have to go even further with these policies.
The bank expects the public sector wage bill to be reduced from 8.2 percent of GDP in the 2014/15 fiscal year to 7.3 percent of GDP by 2018/19. Energy subsidies are to be reduced from 6.6 percent in FY2014/15 to 3.3 percent of GDP this year, and further by 2018/19. Meanwhile, the bank expects the state-owned electricity company to reduce its share of the market from 92 percent last year to 85 percent by 2018/19, and for the natural gas market to be fully liberalized.
The provisions set out in the presidential decree and the World Bank development policy document clearly set Egypt on a path of fiscal consolidation and neoliberal reforms, many of which will likely be hugely unpopular.
This leaves an open question of whether the World Bank has pushed Sisi’s government into making reforms, or whether the bank is simply supporting and reinforcing the administration’s own agenda.
“I think the government is looking for a political pretext to launch these reforms,” says economic researcher Amr Adly. “It’s a very old game Egypt has been playing with international financial institutions since the 1970s.”
“The amount of money they are negotiating does not justify the conditions they are imposing,” Adly adds. Instead, he believes that the Sisi administration sees neoliberal reforms as necessary to stabilize the economy and attract investors.
Obtaining a World Bank loan thus comes as a triple win for the government: it gives an international stamp of approval to the government’s economic program, it gets Egypt at least a billion dollars in loan money and gives the government an outside actor to blame for austerity policies.
With a parliament now in place, Sisi also has to worry about actually being able to pass legislation, not just how unpopular it might be with the general public. Few anticipate the legislature will openly oppose Sisi’s policies, but parliamentarians have already proven to be unexpectedly unruly when it comes to passing measures that negatively impact their constituencies — particularly the civil service law. Thus, encoding specific reforms like the VAT into the loan agreement could continue to prove politically expedient for the Sisi administration, as it finds itself facing resistance to reforms from both the public and the Parliament.