NEW YORK – A glance at Egypt’s public finances reveals a disturbing fact: the interest that the country pays on its foreign loans is larger than its budget for education, healthcare, and housing combined. Indeed, these debt-service costs alone account for 22% of the Egyptian government’s total expenditures.
The impact has become impossible to ignore. With growing political uncertainty and a slowing economy, Egypt is likely to witness decreasing government revenues, increasing demands for urgent spending, and rising interest rates on government borrowing. This could lead to a fiscal catastrophe for the government at the very moment when the country is attempting a complicated political transition.
Egypt’s public debt is around 80% of GDP, very close to the 90% level that economists Kenneth Rogoff and Carmen Reinhart identify as a harbinger of slower growth and heightened vulnerability to financial and fiscal crises. Egyptians need only glance north, at the European debt crisis, to understand they should sort out their debt problem now, rather than waiting until it reaches Greek proportions.
This debt was incurred during the 30-year reign of the deposed president, Hosni Mubarak. In international law, debt that is incurred without the consent of the people, and that is not used to their benefit, is referred to as “odious”; as such, it is not considered transferable to successor regimes. The reasoning is simple and logical: if someone fraudulently borrows money in my name, I am not expected to pay it back, and neither should a country’s population when an unrepresentative leader borrows in their name and to their detriment.
For three decades, Mubarak’s borrowing only enriched him and his ruling clique while impoverishing and repressing the rest of Egypt. Corruption was rife, but not just the covert type: public money was openly used to support many businesses under flimsy pretexts like “fostering economic growth” and “creating employment.” Along with regulatory capture, this harmed competitiveness, market openness, and Egypt’s small and medium-size businesses.
The beneficiaries of this largesse are now mostly sitting in prison awaiting trial. The rest of Egypt, however, only felt this money in the form of an ever-expanding state apparatus that solidified Mubarak’s rule, crushed dissent, and repressed millions. When Egyptians rose up against Mubarak in January, they were confronted by weapons paid for with borrowed money.
Is it fair to expect Egyptians to continue paying for their previous repression and impoverishment at the hands of Mubarak and his cronies? Since this money clearly benefited Mubarak but not his people, should it not be Mubarak, rather than his victims, who is held responsible for it?
The type of regime Mubarak was running had been clear for many years, and it was also clear how the money was being used. A prudent lender should have considered these facts before making the loans. So the banks and international institutions that lent money to Mubarak should bear the responsibility of their choice to bankroll his repressive regime.
The new Egypt should make a clean break with Mubarak and his creditors, and let them sort out their business among themselves without involving the Egyptian people. The Egyptian government’s only role should be to help liquidate Mubarak assets for repayment should the need arise.
This would be not only fair, but it also would teach an important lesson to those who bankroll dictators – a lesson that is likely to have an immediate positive impact worldwide. Lenders to a repressive regime will no longer expect these debts to be repaid by its successors, immediately making lenders worldwide careful about lending to them.
An Egyptian precedent would bring awareness and sobriety to an entire generation of lenders that is not accustomed to considering this type of risk, and that may even be unfamiliar with the doctrine of odious debt. Repressive regimes would find it harder to borrow, which would, in turn, make it harder for them to repress their people, and make it easier and cheaper for responsible and legitimate governments to secure important funding when they need it.
Transferring liability for foreign debt to Mubarak should not have negative economic consequences for Egypt in the long run. This move should not be understood as a move towards fiscal recklessness, but as a one-time break from it. With a smaller debt burden and interest payments, Egypt’s fiscal position would improve significantly, and threats to economic growth would recede. Foreign lenders’ resulting caution would prevent future Egyptian governments from irresponsibly saddling their populace with debt.
Perhaps most importantly, the days of borrowing to build a large state security apparatus would be gone for good – worldwide. For the sake of Egyptians and people living under tyranny everywhere, Egypt’s government must take a brave stand.
Saifedean Ammous is Visiting Scholar at the Center for Capitalism and Society in Columbia University and Lecturer in Economics at the Lebanese American University.