Tim Callen opened the discussion by highlighting the volatility of the oil market, on which GCC countries have been highly dependent. Firstly, he noted that major changes had begun to emerge in the oil market in 2014 and there was talk about a peak in demand. Such changes impacted the prior dynamic in GCC countries, where they had used high oil revenues to increase growth within non-oil sectors. The pandemic has only deepened this impact. Moreover, Callen noted that Gulf states have carried out substantial reforms since the pandemic’s beginning and that not enough credit was given to governments for their effective responses. In moving forward, he stated that we are beginning to see a gradual rebound of the economy, yet, at least for the GCC region, it will not offset this year’s gross domestic product loss. Finally, he contended that boosting productivity will be the key to diversification and generating self-sustaining private sector growth, in addition, that countries should tailor their economic responses to target the most vulnerable sectors.

Khalid Abu-Ismail then spoke on inequality, poverty, and development in the region. Firstly, he contended that the pandemic has exacerbated the rise in poverty that we had begun to see in 2010. Indeed, since 2010, while human development indicators have continued to improve in some countries, conflict has impacted many others. Thus, a gap has emerged in which least developed countries and countries in conflict lag behind middle income countries as well as those rich in oil. Besides this gap, the Arab region is the only one worldwide where money metric poverty has increased regardless of how it is measured. This, Abu-Ismail stated, was the situation going into 2020 and the pandemic has only worsened circumstances. Growth rates are projected to decline by as much as five percent region wide on a per capita basis and six million jobs are assumed to have been lost. Yet, these are regional statistics and each country has been impacted uniquely. Lebanon, for instance, has been hit hard due to its difficult political situation. Furthermore, Abu-Ismail noted that a lack of data makes it difficult to assess the impact of economic recovery policies. However, it is clear that for most middle income countries, decades of fiscal reforms and liberal economic policies have in part created an economic system ill-equipped to provide institutional social protection.

Bessma Momani mentioned the need to bolster public trust in the region. The professor contended that a country’s economic recovery is dependent on how well it manages the public health crisis, and an effective health strategy demands high levels of public trust. Indeed, civilians must have confidence in their leaders if they are to follow proper health guidelines stipulated by them. Unfortunately, Momani stated that across the Middle East levels of public trust are low. Furthermore, the professor expressed doubts that governments are doing all that they can to manage this crisis. On this note, she stated that it is not solely a matter of calling for a lockdown, but providing civilians the economic support that they need to forgo work. This presents a significant financial cost that some governments have been unwilling to incur. Finally, Momani noted her disappointment in many Middle Eastern countries for continuing to invest significantly in the military. She stressed that rather these large sums should be put into investing in public health and trust, as well as recovering the economy. Indeed, the professor recommended that Middle Eastern countries make investments that will improve society in the long term. Specifically, she encouraged spending in the sectors of technology, education, renewable energy, and agriculture.

In the subsequent question and answer session, panelists focused on small and medium-sized enterprises (SMEs), diversification and expat workers in the Gulf, and public discontent. Firstly, Abu-Ismail recommended that countries design fiscal stimulus packages so that they support SMEs. He stressed the need to stop the drain from the formal private sector into the informal sector, and to increase productivity and expert competitiveness of firms. Callen spoke on the status of the expat community following this crisis in the GCC countries. He noted that most expats have not returned to their sending countries and that there is a lack of information regarding their situation in the host countries. Callen also noted that among GCC states we do not have a good example of one that has successfully diversified. Finally, Momani spoke on the matter of public discontent. She stated that the virus is dissuading people from protesting and that a lack of demonstrations does not mean that public satisfaction is high.

       

Introduction

The COVID-19 crisis has posed a daunting test for Arab countries, which had already faced governance and institutional challenges prior to the pandemic. Most Arab countries have seen their healthcare systems and economies pushed to their limits; while conflict-affected and fragile states have been left particularly exposed, even the region’s stable and higher-income countries have been deeply affected.

On June 16, 2020 the Brookings Doha Center and the Hamad Bin Khalifa University College of Public Policy held a joint online workshop to discuss governance in the Arab region and what can be learned from responses to the COVID-19 crisis. Workshop participants included a number of distinguished scholars based at universities, think tanks, and international organizations. These scholars considered how the pandemic has exposed and intensified governance problems in the Arab region, as well as how the crisis might provide an opportunity for Arab policymakers and the international community to rethink institutional responses and overcome governance deficits.

In this roundup, workshop participants outline their thoughts on a range of institutional and governance issues facing the Arab region and offer recommendations for how these can be addressed as the pandemic continues. Touching on issues of trust, corruption, reform, and inclusivity, these pieces offer key insights into the current situation in the region, as well as into what actions can be taken to improve institutions and governance in the months ahead.

COVID-19 has made clear the need for a new social contract

Authors: Adel Abdellatif, Deputy Director, United Nations Development Programme Regional Bureau for Arab States, and Ellen Hsu, Researcher, UNDP Regional Bureau for Arab States

Arab countries have made significant progress on health indicators in recent decades, as evidenced by longer life expectancies, broader child immunization coverage, and lower maternal and infant mortality rates. However, the COVID-19 pandemic has seriously tested the public health capacities of Arab governments, revealing fissures in their preparedness and demonstrating the absence of national public health emergency response plans to address epidemics or pandemics, as indicated by the Global Health Security Index. Once the coronavirus arrived, Arab governments (with some exceptions, like the Gulf countries and Jordan) could neither turn to strong coordination between ministries nor to a vibrant civil society to deliver an effective, whole-of-government, whole-of-society response.

Arab countries have also struggled to assess and address the socio-economic impact of the COVID-19 crisis, putting into question their ability to absorb shocks, whether environmental, global, or societal. This institutional fragility, which can be attributed to inadequate investment in key social services, has resulted in weak capacities to deliver core functions, susceptibility to breakdown when shocks and crises hit, slow recovery, and deteriorating state-society relations. Governance structures, highly centralized and poorly digitalized, present yet another hurdle. Service delivery can be improved by devolving decision making and introducing digital technologies, including in the health care system where digital medical records play a crucial role in epidemiological surveillance.

Social safety nets in the region are a case in point of how the quality of government investment in social services matters. Besides being fragmented, social protection often fails to cover the most vulnerable groups, such as informal workers, unemployed women and youth, and refugees, leaving them exposed during a crisis like the COVID-19 pandemic. While it is still too early to quantify the social cost of the lockdowns implemented across the region starting mid-March, we already have indications that in many Arab countries, poor and middle-class households are losing their livelihoods and falling below poverty lines. Meanwhile, the top 10 percent of adults, who are estimated to hold 76 percent of the wealth, continue to live mostly unaffected, suggesting a deepening of inequalities is underway that will be irreversible in the foreseeable future.

With all the usual lifelines being cut, from remittances to foreign direct investment and official development assistance, Arab countries are faced with few funding prospects and must turn to domestic sources, which have historically been scant due to low taxing capacities. Yet, it is easy to imagine how improving tax collection and instigating broader tax reform at such a juncture would only trigger more capital flight and fuel fierce public resistance. The latest Regional Economic Outlook from the International Monetary Fund (IMF) projects a 5.7 percent contraction in 2020, the largest in 50 years, which suggests that the region, already battered by conflicts and crisis, has entered an even longer, darker tunnel, from which it can only emerge through a paradigm shift in governance, resulting in a new social contract. In this way, the COVID-19 pandemic is another call for change in the Arab region—an opportunity to adopt more inclusive social policies, reform institutions based on accountability, and build more sustainable economies.

IS COVID-19 in the Arab region a bane or blessing for reform?

Author: Robert P. Beschel Jr., Nonresident Senior Fellow, Brookings Doha Center

Health data for the Arab region indicates a paradox of sorts. Although policy responses to the COVID-19 virus have not varied much from country to country, the disparity in outcomes at this stage has been significant. While there were modest differences in the speed with which Arab countries reacted and in the quality of implementation, almost all proceeded with border closures, social distancing, quarantines, sheltering in place, shutting down non-essential services, and procuring necessary supplies. However, the number of COVID-19 fatalities per capita—a good proxy for both virus spread and the underlying quality of the health care system—has varied dramatically.

The countries of the Gulf Cooperation Council (GCC), which by any measure of overall government effectiveness, health care spending, or pandemic preparedness would have been expected to perform relatively well, have struggled to contain the virus. At the time of writing, Kuwait has experienced 113.8 fatalities per million, followed by Oman at 104.4; Saudi Arabia at 92.9; Qatar at 65.3; and the United Arab Emirates (UAE) at 36.1. In contrast, it has been the middle-income countries—specifically Jordan and Tunisia—that have led the way. Jordan has experienced slightly more than one death per million, and Tunisia around 4.4—figures that compare favorably with those of Australia, Korea, and New Zealand.

It is not entirely clear why these trajectories have diverged so markedly. Jordan moved quickly to implement a full lockdown, and its ability to enforce social distancing and ramp up testing for large numbers of vulnerable citizens was impressive. Yet other countries, such as Saudi Arabia and the UAE, also pursued robust responses and are experiencing fatality rates that are many times greater. It could be that the GCC is much more heavily integrated into the global economy, including early COVID-19 hotspots such as China, Europe, and Iran, and that this allowed the virus to spread undetected. In 2019, for instance, Dubai’s airport was the fourth busiest in the world, receiving nearly 10 times the passenger traffic of Queen Alia International Airport in Amman. It could also be that many GCC countries have large expatriate labor forces who live in crowded conditions where social distancing is difficult. Or it could be a matter of under-reporting in several countries. The most troubling hypothesis is that it remains early in the pandemic, and countries such as Egypt, Morocco, and Lebanon have yet to see major increases in cases and fatalities.

The pandemic has led to improvements in the quality of inter-governmental coordination—a chronic problem in the Arab region, where siloed ministries and vertical information flows are the norm. Several countries have also developed innovative tech solutions in areas such as contact tracing, and the pandemic could accelerate efforts to move more government services online. The pandemic may serve as a valuable learning opportunity and a useful impetus for improved health spending and services in the Arab region, particularly in rural hinterlands. It may even provide Arab countries with the necessary motivation and political will to institute long-awaited policy and administrative reforms that would better target and protect vulnerable populations while reducing the footprint of the public sector in the labor markets. To paraphrase Machiavelli, it would be a pity for Arab policymakers to let a good crisis go to waste.

Arab governments must foster inclusive governance during COVID-19

Author: Bessma Momani, Professor of Political Science, University of Waterloo

Amid the pandemic, Arab countries have been forced to contend with the global collapse of oil prices, reduced rents and workers’ remittances, and declining foreign aid and investments. At the same time, they face increasing political and social demands from a relatively young population seeking decent jobs, economic prosperity, and accountable governments. In a region where citizens often have low public trust in their officials and authorities, governments and policymakers will need to be ever more sensitive to the demands of their people.

Arab governments will have to provide more social services to counter economic malaise, even as government revenues invariably decline; they will also need to get broad-based buy-in to implement their policies. If governments cannot successfully meet citizens’ needs and obtain broad societal support for their policies, they could face increased political challenges to their rule, including public demonstrations, protests, labor strikes, and outright defiance of authorities’ rules. In times of crisis, an inclusive and cooperative approach to policymaking may not be easy, but it is key to ensure that clashes over dwindling state resources do not turn into outright confrontation.

In addition to effective and consistent political communication with citizens, inclusive and participatory governance requires engaging civil society, the private sector, youth groups, political parties, labor groups, and professional associations in charting a path forward for Arab economies and societies. When cooperation is institutionalized at a national level, be it through national discourses, bargaining, or town halls, political support can be better achieved and policies can be implemented more effectively.

To build and nurture public trust, transparency and accountability are key. Arab publics are rightfully skeptical about their governments’ past attempts at transparency, particularly with respect to the public purse and government finances. To ask citizens to tolerate expected economic and social hardship resulting from this global pandemic, Arab governments will need to demonstrate to their citizens the constraints on generating revenue and the allocation of national finances. Any policy option will require trade-offs, and it will be important for governments to explain the rationale for their choices. The critical nature of the pandemic and the deep economic recession it is likely to cause warrant new modes of governance.

To keep economies going in the time of COVID-19, governments will need to build, and earn, the trust of their citizens. Elevating the public profile of health authorities who can effectively communicate with people to build trust, compliance, and support is one key tool at the disposal of Arab governments. Utilizing security forces to carry out these public health directives is often tempting, but will heighten public fears over loss of civil liberties. In a region that has already experienced the momentous Arab Spring and where public trust in governments remains low, further empowering security services like military, police, and intelligence authorities to carry out the task of implementing public health directives is unwise. Instead, Arab governments can leverage the pandemic to chart a new political-economic course with their citizens, but only if they take on the difficult task of building broad-based consensus, trust, and accountability.

COVID-19 could be an opportunity for Arab governments to rebuild trust

Author: Michael Robbins, Project Director, Arab Barometer

While trust in government has declined significantly across the Arab region over the last decade, the COVID-19 crisis offers the possibility of a reset for governments. In the period since the Arab Barometer began conducting nationally representative public opinion surveys in the region in 2006, trust in government was at its highest during the Arab uprisings of 2011, at 53 percent. While political changes in countries like Tunisia translated into broad support for the government, trust was high even in countries like Jordan, which did not experience significant changes during the uprisings.

By 2018, trust had fallen across the region to just 34 percent. The decline was most dramatic in Tunisia—a drop of 42 points to just 20 percent. Tunisians appear increasingly frustrated with the ongoing failure of their government to address the economic and social conditions that led to the revolution in 2011. However, trust also fell in countries where little changed as a result of the Arab uprisings. For example, the decline in Jordan was 34 points over the same period, falling to just 38 percent. In short, the inability of governments of all stripes across the region to tackle key problems, like corruption and economic conditions, has led to a crisis of political trust.

As COVID-19 has become a dominant concern in the Arab region, governments have been forced to make difficult choices. Evidence from across the globe suggests that governments that have taken strong action to prevent the spread of the virus, even at the cost of economic health, have been viewed favorably by their citizens. Meanwhile, governments that have been unable to protect citizens by limiting the number of virus cases and deaths tend to enjoy lower confidence.

Regardless of regime type, government legitimacy depends in large part on the ability to improve conditions for ordinary citizens. COVID-19 has offered a clear opportunity for governments to prove their ability to protect the lives of their people. For instance, Jordan’s decisive measures to close its borders, lock down, and provide for the basic needs of its citizens have limited the spread of COVID-19 and demonstrated the government’s competence. This policy success is likely to result in higher levels of trust in government. Other countries, such as Morocco, Lebanon, and many GCC states, have also taken decisive action, including imposing lockdowns and closing international links. These initial efforts are likely to be viewed positively by their citizens. However, countries such as Iraq have proved far less effective in finding ways to limit the pandemic’s spread or ameliorate its effects, meaning trust in government is likely to fall.

Overall, the pandemic’s potential positive effects on trust in countries like Jordan, Morocco, and Lebanon are unlikely to last if their governments are unable to address the long-standing challenges facing their societies. In Lebanon, for example, the government’s failure to prevent the massive explosion in the port has clearly undermined any increase in trust that may have resulted from its initial better-than-expected response to COVID-19. While positive performances on COVID-19 are likely to lead to new opportunities, Arab governments will need to continue meeting citizen expectations in order to permanently reverse the decade-long decline in trust.

COVID-19 could reinforce corruption and cronyism in Arab politico-administrative systems

Author: Rahel M. Schomaker, Professor for Economics at CUAS Villach and Associate Research Fellow at the German Research Institute for Public Administration Speyer

The majority of countries in the Arab region are characterized by high levels of cronyism, nepotism, and corruption compared to world averages. They also face a gridlock of administrative reforms and mistrust, both within the politico-administrative system and between the state and citizens. While various states have attempted to address these issues in the aftermath of the so-called “Arab Spring,” the current pandemic threatens to undermine or undo their efforts. The pandemic has not only had a negative economic impact on the region, resulting in around 50 million jobs lost, firm bankruptcies, and increasing public debt, but has also posed major challenges for public administration, which can hardly manage the additional burdens of spontaneous digitalization, infection tracking, and lockdown executions.

While there is some evidence that Arab governments have been exploiting the pandemic to entrench authoritarian rule, there are also indications that public administration in these countries is not able to follow the rules of good governance any longer. In times of crisis, oversight measures are often ignored for the sake of speed and sequencing of anti-crisis action, and administrative capacities may be bound up elsewhere.

This lack of oversight during the pandemic has opened up space for corruption and nepotism in areas such as public procurement and execution of public health measures.  For example, in Egypt, public authorities implemented the curfew more carefully in wealthy neighborhoods, while in Saudi Arabia, several cases of COVID-19 related corruption were reported, including bribery of hotel managers to skirt strict quarantine measures.

Meanwhile, in countries like Lebanon that were economically and socially vulnerable before the pandemic hit, the crisis has further lowered trust in political elites and led to social unrest and protests. While in many countries around the world people generally trust information provided by the government, a significant share of individuals in the Arab region are convinced that much of the information they are receiving about the virus is inaccurate, resulting in decreased trust toward public sources and the media.

Beyond the sheer challenge of implementing epidemiological measures during the pandemic, politico-administrative systems in the Arab region face the challenge of maintaining or (re)building public trust in public administration and the government. While high trust levels are most strongly correlated with openness and transparency in decision-making and low levels of administrative discretion, a first step to rebuilding public trust and reducing corruption could be to make more detailed information about public action during the pandemic widely available.

COVID-19 further expands the poverty belt of the Arab region

Author: Ishac Diwan, Chaire Socio-économie du Monde Arabe, Paris Sciences et Lettres

After years of progress, the Arab region’s poverty belt has started to grow again, a process that has been dramatically exacerbated by the COVID-19 crisis. The region now includes one of the largest concentrations of misery and despair in the world. The aim of this piece is to raise the alarm by presenting recent data from reputable sources.

The United Nations Economic and Social Commission for Western Asia (ESCWA) has estimated that the regional headcount poverty ratio for the 14 non-Gulf countries was 29.2 percent (101.4 million people) in 2019—up from 22.8 percent (66.4 million people) in 2010. ESCWA also predicts that COVID-19-related shocks will push an extra 16 million people into poverty in 2021.

Due to ongoing wars and policy failures, a growing number of countries around the world are now classified by the World Bank as “fragile and conflict-affected.” The list now includes eight countries and territories in the Arab region: Iraq, Lebanon, Palestine, and Syria in the Levant; Somalia, Sudan, and Yemen in the Horn of Africa; and Libya in North Africa. Using national poverty lines, 56 percent of the region’s poor live in these countries.

Three Arab countries—Syria, Yemen, and Somalia—are also among the United Nations’ top five largest humanitarian global operations. Humanitarian assistance to Arab countries represented 59 percent of the total funding committed toward UN-coordinated appeals in 2019. More than 30 million people in the region are in need of basic food support to survive. Internally displaced persons (IDPs) in the region constitute 47 percent of global IDPs.

The poverty rate is rising in poor countries. It stands at 73 percent in Yemen and at least 50 percent in Sudan. But the poor also constitute 76 percent of the population of middle-income Syria, 27 percent in Egypt, 38 percent in Palestine, and 17 percent in oil-rich Iraq. In Lebanon, the economic and financial crisis was expected to push as much as 45 percent of the population into poverty, even prior to the tragic explosion at the Beirut port, which could render even this somber estimate too conservative.

In 2020, vulnerable Arab economies have faced several devastating shocks. While more than 60 percent of the U.N. humanitarian appeal was funded in 2019, this collapsed to 17 percent in 2020 (through June) as donors became preoccupied with domestic problems relating to the COVID-19 pandemic. Meanwhile, Gulf Cooperation Council (GCC) countries are speeding up programs to replace migrant workers with nationals, with remittances projected to fall by 20 percent overall in 2020, and more in the most fragile countries. Lower availability of foreign exchange reserves is leading to devaluation, inflation, and higher food prices.

The case of Yemen is the most wrenching at the moment, with COVID-19 expected to lead directly to 42,000 deaths. Remittances have reportedly fallen by up to 80 percent this year, while official development assistance (ODA) pledges fell from $4 to $1.4 billion (through June 2), as GCC countries disengaged to focus on managing the effects of the pandemic at home. Foreign exchange reserves are nearly exhausted, and famine is now a real possibility.

The call for new social contracts to reverse the economic decline of the region has become common. Facts on the ground suggest that without urgent political progress, the future will be dire.

COVID-19 requires Arab governments to improve foreign aid management

Authors: Theodosia Rossi, Research Assistant, Brookings Doha Center, and Nader Kabbani, Director of Research, Brookings Doha Center

The COVID-19 pandemic has placed further strain on already tense relationships between Arab countries and international financial institutions (IFIs), at a time when many of the former are desperately in need of funds.

According to data compiled by the Center for Strategic and International Studies (CSIS), between January 27 and August 17 international financial institutions (IFIs) approved around $175 billion in COVID-19 funding globally. However, only $15.7 billion (9 percent) of this amount was allocated to Arab countries. While this share of funding is higher than the Arab countries’ share of the developing world’s population, it is strikingly low when considering the humanitarian needs of a region that faces some of the worst displacement crises in the world.

Gulf Cooperation Council (GCC) states, which have historically supported the economies of their Arab neighbors, are struggling with falling oil and natural gas prices. The International Monetary Fund (IMF) projected in July that Middle Eastern energy producers would earn $270 billion less in oil revenues year-on-year in 2020. As Gulf states reduce foreign aid and cut down on expatriate labor forces, pushing down remittances, IFIs could have an even more crucial role to play in propping up more vulnerable Arab economies.

Furthermore, although IFIs are providing emergency COVID-19 aid to Arab countries, the process has been contentious and fraught. One reason is that donors already provide the Arab region with an immense amount of non-COVID-19 aid and would prefer if these existing funds could be reallocated. Another reason is that IFIs want to know that any aid they provide is going to be used as it should be. In the past, IFI support to Arab countries has not always translated into effective service delivery, due to weak governance, high rates of corruption, and lack of transparency and oversight.

These tensions have been highlighted in the IMF’s recent dealings with Lebanon and Egypt. In Lebanon, talks with the IMF over a $10 billion loan have failed to make progress. The devastating Beirut port blast will only place more pressure on Lebanon to move the talks forward. Although the IMF said after the blast that it was willing to help, it emphasized that Lebanon’s institutions need to demonstrate willingness to reform, including restoring the solvency of public finances and preventing capital outflows.

In the case of Egypt, calls for reform have come from outside the IMF. In June, eight Egyptian and international civil society organizations (CSOs) submitted a letter to the IMF executive board pushing for voting to be delayed on a $5.2 billion loan. The groups cited concerns that the funds would not go toward “supporting inclusive growth, improving fiscal transparency, and increasing health and social spending,” and urged the imposition of rigorous anti-corruption requirements. Although the IMF approved the loan as scheduled, the letter underscores how corruption and transparency are increasingly important issues for IFIs to consider when offering support to the Arab region.

As the COVID-19 crisis continues, it will be crucial for IFIs, Arab governments, and civil society to work together to ensure that countries receive the aid they need and that it is distributed effectively. This will require improving the monitoring and transparency of public accounts and finances; ensuring that foreign aid is directed to agreed-upon public priorities; and targeting aid toward the region’s most vulnerable and marginalized populations.

A solidarity fund can address the poverty impact of COVID-19 in the Arab region

Authors: Khalid Abu-Ismail, Senior Economist, United Nations Economic and Social Commission for Western Asia, and Vladimir Hlasny, Associate Professor of Economics, Ewha Womans University in Seoul

Poverty in the Arab region is spiking, and the distribution of wealth is becoming ever more polarized, yet countries’ fiscal authorities are unable to cope with these challenges. COVID-19 confirms that the current growth model in the region is unsustainable: existing public revenue streams have dried up precisely when they are most needed, while private investors line their pockets with speculative gains. The pandemic has also exposed the stark contrast between the region’s unprecedented poverty rates and its high concentration of wealth.

In this way, COVID-19 has highlighted the need for both stronger civic solidarity and for civil society, the private sector, and the state to uplift those who are most deprived. In order to address this need, Arab governments should establish a solidarity fund independent of their existing fiscal redistribution system to help those who have fallen through existing safety nets.

Currently, Arab countries have some of the most unequal wealth distribution worldwide. The average wealth Gini coefficient in Arab countries is 73.6, compared to 73.1 elsewhere. In 2019, the 37 Arab billionaires (all men) owned as much wealth—$108 billion—as the bottom half of the adult population.

Meanwhile, in the absence of effective social protection floors, vulnerability to poverty is high and on the rise in many Arab countries. In 2020, the headcount poverty rate using national poverty definitions is projected to reach 32.4 percent, or 115 million people, in the seven middle-income countries (MICs) and seven less-developed countries (LDCs) in the Arab region. This is 16 million more poor individuals than in the projected pre-COVID-19 regional growth scenario.

In Arab MICs, the cost of closing the poverty gap is estimated at $15.6 billion, while the total wealth of the top national decile is estimated at $1.3 trillion. With perfect targeting of the poor in these countries, an annual levy of just 1.2 percent on wealth would suffice to close their poverty gaps. However, in LDCs and Syria, the top-decile wealth is only $66.8 billion, while the annual poverty gap cost is $29.5 billion, rendering the proposed levy infeasible.

Given the burning economic challenges amid the fallout of the COVID-19 epidemic, Arab governments should establish a regional solidarity wealth fund to address humanitarian needs and food shortages in those countries that are most vulnerable to health and economic emergencies. In addition to alleviating poverty, a solidarity fund would have positive spillover effects. It could dampen rent-seeking and speculative activities, while channeling funds to more productive investments and increasing decent employment and growth.

In conclusion, COVID-19 has underscored the urgency of addressing the Arab region’s growing poverty and extreme concentration of wealth. A social solidarity tax rooted in the well-established Zakat practice could feasibly alleviate poverty and be accepted by the affluent and powerful. Such a social solidarity fund could be a transformative instrument to promote social equity, solidarity, and peace in a polarized region rife with political instability.

       

On November 11, 2016, the International Monetary Fund (IMF) and Egypt signed a $12 billion loan agreement with the aim of “addressing macroeconomic vulnerabilities and promoting inclusive growth and job creation.”¹ Prior to the IMF program, these vulnerabilities included an overvalued exchange rate (and the corresponding rise of a parallel, or black market, exchange rate); foreign exchange scarcity, which severely undermined private sector activity; a dramatic drop in foreign exchange reserves; large fiscal deficits; and a high level of public debt.

Accordingly, key features of the IMF’s three-year Extended Fund Facility (EFF) program have included the liberalization of the exchange rate regime (i.e. floating the Egyptian pound), fiscal consolidation to lower budget expenditures, tax increases, deep structural reforms, and lifting business regulations to spur economic growth. The EFF program was also expected to secure an additional $3 billion from the World Bank, $1.5 billion from the African Development Bank, and $6 billion from bilateral donors.

While the program has technical merits, critical political challenges to its implementation remain, and thus it may fall well short of its goal to lay a foundation that can help transform the Egyptian economy. Lack of investor confidence in President Abdel-Fattah el-Sissi’s government may also upend the IMF-Egypt agreement.

This policy briefing assesses major elements of the IMF-Egypt program by drawing on interviews with key stakeholders.² It argues that Egypt must enact key structural reforms in order to meet the goals of strengthening the business climate, attracting investment, and increasing employment, in particular among youth and women. Following a discussion of Egypt-IMF relations, the briefing offers suggestions for how Egypt can more effectively achieve these goals and deal with the political economy issues that threaten to undermine the program’s economic strategy.

Background to Egypt-IMF Relationship

Leading up to the 2008 international financial crisis and the 2011 Egyptian revolution, Egypt undertook significant structural reforms to facilitate economic growth. Although these reforms had some significant success in increasing economic growth, the government failed to tackle head-on the issues of poverty, high unemployment (especially among women and youth), inequality, and corruption. Such issues were among the main factors behind opposition to the Hosni Mubarak government in 2011. Following the Egyptian revolution, political and regional developments continued to undermine Egypt’s economy. With fewer tourists and less income from the Suez Canal (due to the stagnating global economy), economic growth slowed. Moreover, the government increased public debt to fund its expenditures, but failed to address underlying structural challenges, thus leading to the build-up of macroeconomic imbalances.

As the political climate worsened after the January 25, 2011 revolution, Egypt’s long-standing structural challenges—including high public debt, poorly targeted subsidies, a growing public sector wage bill, over-reliance on food imports, and an overvalued currency—pushed the country to consider an IMF loan agreement. Egypt previously relied on external benefactors, namely Saudi Arabia, the United Arab Emirates (UAE), and Kuwait, to finance its budgetary shortfalls and provide liquidity support to the Central Bank of Egypt (CBE). Saudi Arabia contributed nearly $25 billion to the Egyptian economy between 2013 and 2016.³ But the Gulf States could not be expected to prop-up Egypt’s economy indefinitely without structural reforms.

By mid-2016, as an acute foreign exchange shortage began crippling Egypt’s economy, particularly the manufacturing sector, Cairo formally sought an IMF agreement. Yet, as a precondition to securing IMF approval, Egypt needed to raise $6 billion in external funds, which it did thanks to financial support from the UAE, China, and the G7. Notably, Saudi Arabia, though it had previously supported Egypt, did not contribute to these funds due its disagreement with statements made by President el-Sissi in support of Syria’s President Bashar al-Assad.⁴

The three-year $12 billion IMF loan to Egypt was packaged with a reform agenda that focused on three key areas: monetary, fiscal, and structural reforms. Monetarily, Egypt was to transition to a flexible exchange-rate regime (in which market forces would determine the exchange rate) and contain inflation. Most significantly, this entailed floating the Egyptian pound (EGP). Fiscally, the country was to reduce public debt by cutting fuel subsidies while expanding spending on vulnerable groups like youth and women. Structurally, Egypt was to streamline industrial licensing, provide financing to small and medium-sized enterprises (SMEs), decriminalize insolvency, and simplify bankruptcy laws (see Table 1).⁵ At the insistence of Managing Director Christine Lagarde, the IMF agreement included measures to support women and children through increased funding for daycares and school meals, combined with policies aimed at making public transportation safer and more accessible for women.⁶

 Table 1: Conditions of IMF’s 2016 Loan to Egypt

Statistics from 1996 to 2009 illustrate the consequences of these policies. During these years, annual real economic growth ranged between 2.8 and 6.4 percent in Egypt, but productivity only grew between 0.3 and 3.7 percent on average. The labor force stagnated at around 44 percent of the active population, mainly due to the low participation of women. Unemployment remained close to 10 percent, with much higher rates among women and youth. … Thus, while Egypt’s economy appeared to grow, inequalities and poverty were increasing.⁸ It is important to recall that “Egypt’s economic and developmental ills did not begin after the revolution; they accumulated over previous decades and in fact contributed to the circumstances that brought about the revolution and its demands.”⁷ The IMF-Egypt program that is examined in this policy briefing, moreover, is just the latest round in the institution’s dealings with Egypt. These have long focused, in particular, on policies aimed at reducing inflation, controlling debt, and encouraging investment and liberalization, as evidenced by IMF structural adjustment policies starting in the 1980s. According to Mohamadieh:

The parallels between past and present IMF policies in Egypt are evident: they emphasize the pursuit of economic growth while overlooking (and hence exacerbating) the pressing political economy challenges involved in its pursuit. Egypt may well fall into the same trap again if it does not make key structural reforms to mitigate the constraints and concerns that threaten the successful implementation of the EFF.

Political Economy Challenges Ahead

Despite its aim to right Egypt’s macroeconomic imbalances, the IMF-Egypt program nonetheless sidelines political economy issues and alienates important socio-political groups. This will likely undermine the program’s ability to meet key objectives.

Shokr, for example, argues that Egypt’s policies will have varying effects on different segments of society:

[L]arge sections of Egypt’s variegated middle class will suffer economically, at least in the short term, under the current austerity policies; and those policies benefiting people in the middle and upper classes who are connected to the Egyptian military and its economic activities will accelerate tendencies toward the militarization of the government and its social base.⁹

The El-Sissi government has also silenced opposition voices by jailing activists and members of the Muslim Brotherhood, thus weakening resistance to EFF measures introduced so far, including the floating of the pound.¹⁰ Moreover, the government has blocked over 100 media websites and restricted nongovernmental organizations from activities such as the publication of opinion polls, further curtailing public discussion of government decisions.

With this in mind, the following sections discuss key political economy factors that continue to challenge the effectiveness of the Egypt-IMF agreement.

Monetary reforms: The pound floats and inflation surges

Before Egypt floated its pound in November 2016, black market activity had surged after decades of relative dormancy. Black market exchange rates had become far more favorable than those at banks. Consequently, individuals and companies with hard currency turned to the black market or held out in anticipation of a possible devaluation. This led to dollar shortages across the country.

In response, the Egyptian government limited dollar transfers abroad, which caused hoarding and a further rise in black market rates. More troublingly, Egyptians working abroad avoided formal banking structures for remittance transfers to their home country because these banks had exchange rates that were far less lucrative than the black market or hawala systems (peer-to-peer transfer of money based on trust).

The IMF saw liberalizing Egypt’s exchange-rate regime as key to offsetting these emergent problems, and it did help. Indeed, in the long term, devaluation can also address fiscal imbalances, if managed properly. Egyptian workers’ remittances reached $8 billion in the second quarter of 2017, up by 13 percent.¹¹ Moreover, as of March 2017, remittances were still rising, bankers were reporting that the currency black market had all but disappeared, and banks were enjoying improved dollar liquidity.¹²

However, inflation, which had fluctuated within a range of 8-15 percent between 2011 and 2016, rose to 22 percent in December 2016. Periods of high inflation are generally expected to accompany devaluations. But the EGP depreciated even more than the IMF had anticipated, possibly in part because of “the Fund’s public statements about an awaited devaluation in the days preceding the float.”¹³ Inflation in Egypt remained above 30 percent for much of 2017, “causing deep public concern and hardship.”¹⁴

To be sure, devaluation has increased the prices of basic consumer goods, including sugar, oil, baby formula, and rice.¹⁵ This, in turn, has caused hoarding of goods and profiteering by unscrupulous vendors. Egypt also remains highly dependent on imported input goods that go into the production of local drugs. With devaluation, medicine prices—some of which are necessary to treat chronic diseases—have risen substantially.¹⁶

Finally, the EFF emphasized that the liberalization of Egypt’s foreign exchange system would spur investment and exports.¹⁷ Foreign financial and direct investment have risen since the floating of the pound.¹⁸ However, investors still want to see better management of Egypt’s overall economy. Measures to increase transparency and strengthen Egypt’s public financial management—including efforts to bring investment practices into conformity with international best practices—face obstacles. They may be hampered by the el-Sissi government’s chronic lack of accountability in its spending of public funds, and the persistence of rampant cronyism, which continues to plague the Egyptian political system. Moreover, potential investors are concerned that Egypt’s domestic debt remains at around 95 percent of GDP and its budget deficit in the fiscal year that ended in June 2016 was 12.2 percent of GDP.¹⁹

Fiscal reforms: Revamping subsidies and adding taxes

The IMF program aims to address Egypt’s budgetary deficit by reducing government spending, including on subsidies, and boosting revenues. So far, the government has implemented cuts to fuel subsidies in an effort to comply with EFF terms to decrease spending, with the result that in June 2017 fuel prices increased by up to 50 percent.²⁰ Cuts to fuel subsidies, it was argued, were also needed as they did little to benefit the poor.²¹ However, this only seems to have exacerbated the burdens of average Egyptians – many, for example, struggle to manage such a huge increase in fuel prices at a time when the cost of living has risen significantly due to devaluation.²²

Another focus is on improving how Egypt’s subsidies are allocated, including through changes to the country’s smart card system. Smart cards were introduced in 2014 to help regulate subsidized goods and services, and eliminate corruption in their purchase and distribution.²³ However, though the smart card program is a step in the right direction to help ensure that subsidies reach Egypt’s most disadvantaged, interviews with civil society groups in southern Egypt have revealed that many poor, illiterate, and undocumented Egyptians are not able to apply for smart cards.²⁴ As Egypt has an illiteracy rate of 25 percent and perhaps as many as 7 million unregistered nationals, it is little wonder that “77 percent of the top spending bracket have smart cards entitling them to subsidized goods, while 82 percent of the poor do not benefit from Egypt’s social insurance program.”²⁵ The smart card system also continues to be plagued by corruption and fraud.²⁶

Moreover, under the IMF plan, smart card holders were granted an increased subsidy of 21 EGP per person (up from 12), but this hardly covered the inflated prices of essential goods.²⁷ Increases were enacted again in June 2017 to 50 EGP. However, inflation has remained high at around 30 percent, even after declining from its July 2017 peak, thus limiting the benefits stemming from subsidy increases to smart card holders.²⁸ The Egyptian government has distributed “gold cards” in its most impoverished areas to those without or on waiting lists for smart cards, but allowances were slashed in March 2017, sparking protests in the poorest parts of Egypt. In response, the government increased quota allowances to gold card suppliers.²⁹

In order to help ease the adjustment process brought on by EFF reform, “[a]bout 1 percent of GDP in fiscal savings will be directed to additional food subsidies, cash transfers to the elderly and low-income families, and other targeted social programs,” including, for example, subsidies for children’s medicine.³⁰ The government also plans to expand key social safety net programs, including Takaful and Karama, which have been established in 2015 and will be expanded by 200,000 households in 2017/18.³¹ Again, however, it remains to be seen whether such measures will be able to mitigate the adverse impacts of Egypt’s high inflation, particularly given Egypt’s comparatively low social spending and the El-Sissi government’s lack of accountability.

In addition to curtailing overall spending on subsidies, Egypt also reduced public sector expenditures under the IMF agreement in August 2016. Due to wage bill reforms, the public sector wage bill has seen a consistent annual decline as a percent of GDP from 8.1 in 2014/15 to 5.3 in 2017/18.³² However, reforms to reduce the wage bill were already enacted as part of the 1991 IMF loan agreement, casting doubt on the effectiveness of these latest cuts.

Meanwhile, to increase revenue, the government introduced a value-added tax (VAT) and new fees, in addition to selling telecom licenses and land.³³ The VAT charged 13 percent on most goods and services in FY 2016/2017, and is to be increased to 14 percent in 2017/18.  Such policies largely ignore the plight of Egypt’s poor. According to a Cairo University statistics professor, Heba al-Laithy, for example, the VAT policy will likely increase the percentage of Egypt’s population that is poor (living on less than $26 per month) from 27.8 percent in 2015 to at least 35 percent.³⁴ Notably, this comes after Egypt reduced the tax rate for its top income bracket from 25 percent to 22.5 percent in 2015—a tax break for the richest Egyptians.³⁵

Structural reforms and inclusive growth

The 2016 IMF program also made changes to business regulations with the intention of attracting foreign investment and helping smaller firms scale up. Before this, starting a business in Egypt was complicated, involving lots of regulations and administrative red tape. Those arrangements squeezed out smaller enterprises and protected larger industrialists, allowing more entry points for corruption at different ministries.³⁶ A new investment law—another precondition of the IMF loan—minimized those regulations, but it continues to provide free or highly discounted land for certain projects, which contributes to government corruption and cronyism.³⁷

The IMF program’s improved bankruptcy laws, currently under review in Egypt’s parliament, would simplify bankruptcy and liquidation procedures, and should make it easier for investors to come to the country—as will easing the conditions on industrial licensing.³⁸ Still, there are doubts that these reforms will be sufficient to attract foreign investment. Three private sector experts interviewed for this brief, for example, believed IMF projections for foreign investment were too optimistic.³⁹

According to bankers, foreign investors are concerned about “‘execution risk.’ While IMF monitoring of Egypt’s adherence to its economic reform program may inspire confidence in the government’s commitment, some still fear that social pressures arising from high inflation, the cap on public sector wages, and subsidy cuts could cause the authorities to let up on reforms.”⁴⁰ One analyst said IMF monitoring makes Egypt’s reforms more credible, but there is some concern that barriers to reform are chiefly political.⁴¹

Similarly, interviewees believed that IMF projections of 5-6 percent GDP growth in the medium term were too ambitious.⁴² Domestically, access to credit remains an issue. While foreign companies have capital, domestic companies remain dependent on local agencies that suffer from Egypt’s lack of regulatory transparency, corruption, heavy-handed management of economic concerns, and continuing market inefficiencies, all of which are likely to impede investment and growth.⁴³

There continues, in particular, to be investor concern regarding existing agreements between the government and private investors (power purchase agreements, or PPAs). Investors worry that in disputes with local authorities the Egyptian legal system will not be impartial. Egypt’s lack of checks and balances became most evident after the April 2017 decision to give the president the authority to appoint heads of judicial bodies, thus further eroding investor confidence in Egypt’s judiciary. Consequently, a number of foreign investors who had entered PPAs are leaving Egypt.⁴⁴

More broadly, some investors’ hesitation is declining. In May 2017, Egypt sold a higher than anticipated number of Eurobonds ($3 billion) to North America and Europe, and at lower interest rates than was garnered a few months earlier, which suggests the lessening apprehension of foreign investors.⁴⁵ However, as Rachel Ziemba, Managing Director at Roubini Global Economics noted in April, “Egypt’s IMF program and devaluation were [a] necessary but insufficient condition to return investor confidence.”⁴⁶

Aside from attracting investment, the IMF program seeks to address Egypt’s low growth and high unemployment by providing specialized job training programs for youth as well as measures to increase women’s participation in the labor force.⁴⁷ Numerous studies have demonstrated the economic benefits of having more women enter the labor force, particularly in the Middle East and North Africa (MENA) region, which has the lowest rates of female employment in the formal sector.⁴⁸ Yet, a 2013 U.N.-commissioned study found that 86.5 percent of Egyptian women surveyed felt unsafe using public transportation, which remains a key barrier to realizing their full economic potential.⁴⁹ EFF measures to enhance safety on public transportation and to provide more public nurseries should help more women enter and remain in the workforce. However, only $14 million of the $12 billion IMF loan will be allocated to improving such infrastructure for Egyptian women, a figure that seems unlikely to significantly improve current conditions.

The well-armed elephant in the room

There is one major aspect of Egypt’s economy that the IMF program does not address, but will be crucial going forward: the role of the military. Military involvement in the economy was initially undertaken to fill the absence of private investment in Egypt; yet the institution continues to encroach upon the country’s economic sectors, and has been cited as another area of concern among investors.⁵⁰

In 2012, Major General Mahmoud Nasr said that the military’s share of Egypt’s budget was 4.2 percent and that its enterprises earned $198 million per year.⁵¹ But this significantly underestimates the scale of the military’s involvement in Egypt’s economy. As verifiable data is difficult to come by, analysts estimate that the military accounts for anywhere from 5 to 40 percent of Egypt’s GDP.⁵² As Zeinab Abul-Magd notes:

The Egyptian military owns business enterprises that are in almost every sector and produce an extremely wide area of services and goods. It runs hotels, sea resorts, and apartment buildings along with lavish villas. It owns cement, steel, jeep, fertilizer, home appliances, pasta, and other factories; runs gas stations; and constructs toll highways.⁵³

The military’s role is not only large, but privileged. In December 2015, President El-Sissi issued a decree “permitting the military to form companies or partnerships for land ownership with local or foreign investors, [and] giving the Armed Forces a share of the revenue when the company is sold and enabling them to retain ownership of the land.”⁵⁴ Meanwhile, another law exempts nearly 600 military businesses from real estate taxes.⁵⁵ Military-run businesses have also received subsidized loans through state-owned banks, distorting market forces.⁵⁶

For many, including potential investors, the array of businesses run by the military is particularly disconcerting. Cairo-based business people noted that domestic investors are not willing to pursue capital expansion when generals might compete with private enterprises.⁵⁷ After all, in a corruption-riddled country, competing with the military comes with major risks.

Policy Recommendations

The following recommended policies would help ensure the successful implementation of the IMF-Egypt Program and mitigate some of its negative consequences. This may require Egypt to further coordinate with the World Bank and other aid agencies to help address some of the political economy challenges noted above.

Increase transparency—Even for the military

The fact that many Egyptians continue to question where and how the billions of dollars received from Gulf backers since 2013 has been allocated highlights the lack of transparency and accountability of government spending in Egypt. The government has spent a great deal on megaprojects, such as Suez Canal development, that appear to serve political goals, including projections of grandeur, more than economic ones. The government therefore needs to improve the transparency of public expenditures and explain their economic benefits to instill greater public and investor confidence in the government and the IMF program.

In addition, the Egyptian military’s purchase of private assets remains a deterrent to domestic and foreign investment, as “the private sector…fears it will not be able to compete with such a powerful and politically-connected institution.”⁵⁸ Such interventions in the private sector—particularly when they do not clearly relate to military need or expertise—create market distortions. An overall lack of political and legal oversight of the military’s economic activities can also lead to increased investor disquiet. For example, audits of military enterprises are performed internally. Moreover, concerns over the military’s selective implementation of IMF program conditions persist, in particular the cutting of public spending on basic goods while expanding the military’s dominance of key economic sectors, including agriculture, construction, and pharmaceuticals.⁵⁹

Egypt needs laws and political mechanisms in place to ensure a more equitable balance between economic and military institutions. For example, the government should establish an external committee to oversee the military’s economic role. Otherwise, instilling investor confidence in Egypt beyond the current, somewhat improved level, may prove difficult.

Progressive taxation

Income taxes are difficult to collect in a predominantly cash-based society with a large informal sector. Egypt, however, can increase tax revenue and help address income inequality through introducing forms of taxation that have progressive effects—where the tax rate increases along with earnings or wealth. These can include taxes on property, capital gains, and luxury items.

Egypt introduced a 10 percent capital gains tax on listed shares on the stock market in 2014, but halted it in May 2015. The IMF pressed Egypt to reinstate the tax, citing the potential for strong revenue growth over the long term.⁶⁰ Official estimates projected that the tax would bring in a minimum of 4 billion EGP per year.⁶¹ However, in June 2017, the el-Sissi government extended the suspension of the capital gains tax, and instead imposed a stamp duty, that taxes each stock exchange transaction.⁶²

Egypt also lacks administrative capacities regarding property registration, which thwarts efforts to collect property taxes and capital gains taxes on real estate profits. This is important as real estate holdings are a major component of wealth in the Middle East. IMF technical assistance could assist Egypt in finding more effective ways of collecting property taxes. The example of Greece, which was also under an IMF agreement and had high rates of tax avoidance, could be helpful.

Increase social protection of poor

According to the IMF’s first review of the EFF program, “energy subsidy reform, wage restraint, and the new VAT have all contributed to reducing the fiscal deficit and helped free up space for social spending to support the poor.” Yet, the IMF review also recognizes that these measures will not be enough to protect vulnerable groups as Egypt moves forward with its reform program.⁶³

Cuts to food subsidies, moreover, have proven problematic. Bread riots, which erupted in March 2017 in Alexandria, Giza, Kafr el-Sheikh, and Minya, echo those of January 1977, when, seeking to follow IMF advice, Egypt similarly reduced food subsidies.⁶⁴

The unrest underscores the need for Egyptian authorities to more clearly communicate to citizens the reasoning, purpose, and benefits of such measures, particularly when dealing with staples of such social and cultural importance as bread.⁶⁵

With this in mind, and to better support Egypt’s poorest families, the authorities intend “to expand cash transfer programs and increase semi-cash allowances under the food subsidy program.”⁶⁶  However, the Egyptian government should also focus on increasing quotas and allowances to gold card holders in the most impoverished areas. Moreover, it should increase fines and revoke vendor permits for those who abuse the food subsidy system. Addressing the source of this abuse without making cuts to the subsidy system is imperative to ensure the most vulnerable Egyptians are protected.

Vulnerable Egyptians’ access to much-needed prescription drugs is also a key cause for concern throughout the country. The prices of medicines increased significantly due to devaluation of the pound. A national strategy to effectively mitigate this negative impact of the EFF program is required to prevent Egypt’s poor from undue suffering.

Invest in women to increase economic growth

The IMF program’s focus on increasing women’s participation in the labor force could raise the living standards of many women and encourage growth in the Egyptian economy. Yet, the total invested into social protections for women—funds to improve public facilities, such as nurseries, to allow women to actively seek jobs, for example—pales in comparison to the total IMF program: just 250 million EGP in 2016/2017 and 500 million EGP in 2017/2018.⁶⁷ The funds allocated for things like improving the quality of childcare and access to safe public transportation only amount to 0.2 percent of GDP, and are low compared to total investments.⁶⁸

Moreover, underlying problems that remain unaddressed will likely impede any progress made under current EFF provisions to invest in women. These issues include a lack of legal definitions of sexual harassment, a corresponding lack of data on reported assaults, and lack of training for police and prosecutors in dealing with sexual assault cases.⁶⁹ Investing in these structural problems should thus be a top government priority.

Conclusion

The IMF’s three-year Extended Fund Facility program in Egypt will provide an infusion of much-needed funds to help the country deal with some of its macroeconomic issues. However, despite the program’s technical merits, political economy challenges remain which cannot be ignored. As it stands, the program will likely not achieve the economic growth it promises, and will do little to address the poverty, inequality, and corruption that continue to lay a heavy burden on Egypt.

The policy recommendations above are necessary in order to help Egypt mitigate the adverse consequences embedded within the IMF-Egypt program. Such reforms will not be easy: government red tape, the suppression of oppositional voices, and a persisting lack of transparency in policy decisions will continue to hinder efforts to improve Egypt’s struggling economy. Enacting these recommended policies will therefore require a deep commitment by stakeholders to making critical changes to Egypt’s current social and political environment.