“The perfect crime is the one that’s not illegal.”
– Greg Palast, Vultures’ Picnic
The year 2011 was a long one of indecision between the new government in Egypt and the international financial institutions (IFIs) over new loans. Because lending from the World Bank and the International Monetary Fund (IMF) previously came with politically unpopular conditions, such as cuts to subsidies and higher sales taxes, the post-Mubarak government had difficulty signing on. As it now stands, the loans once offered and declined may be back on the table because, as we come up on the one-year anniversary of the fall of the Mubarak government, Egypt continues to need financial support. A quick look at the last “Financial Sector Policy Loan” signed between the Mubarak government and the World Bank, together with a review of the corruption that tainted high office in Egypt shows the new government’s current dilemma.
The program document for the last Financial Sector loan includes references to new laws and presidential decrees issued to insure the effectiveness of the “sound” new financial policies adopted by Mubarak & Sons. Because the new laws were in place, according to World Bank specialists, the Bank would lend the Mubarak government $500 million in a single tranche, disbursed in July 2010, to help strengthen the financial sector. This payout followed two earlier disbursements of $500 million each in 2006 and 2008, through the first and second loans in this series.
One of the new laws put in place as part of the reform was Law No. 10 of 2009, approved by the People’s Assembly of Egypt (Summary), which gave the President the wherewithal to create by decree the “Egyptian Financial Supervisory Authority” (EFSA). Under this provision, Mubarak directed the “Authority” to report to the Minister of Investment, Mahmoud Mohieldin, identified in the document as the Competent Minister. The powers of the new Authority were sweeping: supervision of non-bank financial markets and instruments, including the capital markets, the stock exchange, insurance services, mortgage finance and financial leasing (See Article II and III of Summary).
The Board of the new Authority was responsible for drafting all of the supervisory and inspection rules for the institutions falling under the jurisdiction of the Authority. The Board itself would be composed of a Chairman and two deputies, as well as six other members with expertise in the non-banking financial sector, all of whom would be nominated by the Competent Minister, Mahmoud Mohieldin. These nominations would then be approved by the Prime Minister, Ahmed Nazif, who is currently incarcerated in Egypt for corruption.
After establishing the Authority, Mubarak & Sons then issued Presidential Decree 192/2009, further stipulating that the operations and decisions of the Board of the Authority were final and not subject to any outside administrative authority of higher standing (See Decree summary, p. 2).
The World Bank loan that followed the publication of Presidential Decrees 191 and 192 was the third in the series mentioned above, begun after the ascension of “Gamal’s Trio,” the Ministers appointed and promoted by Hosni Mubarak’s son Gamal: Rachid Rachid (Minister of Trade), Yusef Boutros Ghalli (Minister of Finance), and Mahmoud Mohieldin (Minister of Investment). These officials are now, respectively, in jail, in exile, and in a senior management position at the World Bank.
Egypt under Mubarak was a longtime recipient of significant foreign aid and IFI lending, and all of what went wrong cannot be attributed to the past few years and loans. Beginning in the 1990s, Mubarak opened Egyptian markets to imports, lowered tariffs, lifted capital controls, and privatized state-owned enterprises (SOEs). Because his government was increasingly weakened by corruption, however, these policies had little positive impact on the population. Quite the opposite, in fact. The cuts imposed to comply with IFI conditions eliminated the public sector jobs and subsidies people needed to subsist, without creating an economy strong enough to produce private sector jobs. In the end, it was a wholesale rip-off. Repeatedly, after the fall of the government last February, whistleblowers came forward with documentation of the dramatic under-valuation of the government’s goods as they were sold to insiders, friends, relatives and cronies. At the center of many of these charges was the “Competent Minister”: Mahmoud Mohieldin.
Curiously, the ‘crony capitalism’ of Mubarak & Sons did not dampen the World Bank’s appraisal of the country’s prospects at all. Just nine months before the whole thing went to hell, the Bank’s economists wrote:
Egypt has made substantial progress in its financial sector. The reformist cabinet (Boutros Ghalli, Rachid and Mohieldin) that took office in July, 2004 set a major agenda of macroeconomic and financial sector reforms. An integral component of this comprehensive reform program was a financial sector reform program endorsed by the President in September 2004. This program aimed at increasing private sector participation, diversifying intermediaries and savings instruments, and attaining a more efficient and sound financial sector that can, in the medium term, contribute to sustained economic growth, poverty reduction and overall prosperity for Egypt.
It was not to be. The cronies grabbed everything in sight and much of what they did was now lawful. The sound new policies gave Mohieldin, for one, the power to influence/control the privatization of public and private sector pensions, as well as the settlement of non-performing loans of state-owned enterprises (SOEs) through land swaps. These exchanges opened the door to numerous insider investment deals. In addition, the “Competent Minister” acquired the authority to appoint cronies and relatives to high-level management positions in soon-to-be privatized SOEs. All of this with no credible oversight or accountability, even as everyone concerned preached about transparency and good governance.
There was a time, long ago, when the word “reform” generally meant that things improved for most people, but this is not really true any longer. For the people of Egypt, economic reforms meant the wholesale loss of public sector jobs (i.e. steady work) and new taxes on “micro-enterprises” to offset high-end tax cuts. This meant that, after you lose your street-paving job and you’re reduced to selling combs on the corner, the government is taxing your sales. Also, because SOEs and public services have been privatized, you have to pay fees for things you used to get for free, like kindergarten and penicillin. You might think that because the government sold its assets, it could continue to fund services, even though private, at least for awhile. You would be wrong. The new Director of the Egyptian Center for Economic Studies told James Grimaldi of the Washington Post, that, although state assets worth nearly $100 billion were sold after 1991, only $10 billion or so from the sales found its way to the national treasury.
Nonetheless, under the financial sector reforms paid for by the World Bank’s largesse, Mohieldin increased Foreign Direct Investment (FDI) in Egypt dramatically after 2004, so there must have been new jobs created that way, right? Well, no, actually, the FDI was to buy up Egyptian SOEs, so that money was used to fire people not hire them.
One thoughtful 19th century economist once observed that the ruling class does not see the approach of its own demise, and that was certainly the case in Egypt – and in Washington. But this week, it seems we’re about to run through this tired exercise again. An IMF delegation is headed for Cairo to talk about a new $3.2 billion loan on offer. The government needs the loan because foreign investment has fallen off. Foreign investment has fallen off because of political instability. Political instability continues because the previous financial reforms cut subsidies and taxed the poor, while allowing a small circle of cronies to drain the national treasury.
To break this cycle, the corruption must end and the people guilty of it must be held to account. Asset recovery would also help. But a new loan promoting the same “sound” financial reforms as the previous ones would be criminal.
Bea Edwards is Executive Director and International Director for the Government Accountability Project, the nation’s leading whistleblower protection and advocacy organization.