Activists ask if the EBRD is good for Egypt

27 July 2011, Daily News Egypt

CAIRO: As the European Bank for Reconstruction and Development (EBRD) moves closer to expanding its operations into Egypt, activists have questioned whether such a move would be beneficial for the country.

Striking a similar tone that pressured Egyptian authorities to reject IMF and World Bank (WB) assistance earlier this year, some civil society groups cast doubt on whether the EBRD and other international financial institutions can bring socially just economic development to Egypt and support the country’s transition towards democracy.

However, leaders from the EBRD, African Development Bank (AfDB), and European Investment Bank (EIB) stress that they work much differently than the IMF and the WB, and target their financing not towards general budget support for the government, but at specific projects and the private sector.

As a result, these institutions appear well situated to increase their operations in Egypt because, unlike the IMF and WB, there is no “negative stigma” associated with them in Egyptian public sphere, Magda Kandil, Executive Director of the Egyptian Center for Economic Studies, told Daily News Egypt.

According to Kandil, Egypt’s ruling military council and transitional government rejected IMF and WB loans because they may have calculated that the political risks of accepting such negatively perceived loans were too high.

The EBRD, after a few years of build-up, expects to be investing close to €1 billion annually in Egypt, the majority of which should be focused on developing small and medium sized enterprises, Erik Berglof, EBRD chief economist, explained to DNE.

Egypt, a shareholder and founding member of EBRD since its creation in 1991, officially requested in May 2010 to become eligible for EBRD investments.

In March 2011, the internal process EBRD goes through to examine Egypt’s request “was accelerated after the events early this year,” said Anthony Williams, EBRD’s head of media relations.

Normally, all EBRD shareholders must approve a new country to become a recipient of the bank’s investments, a process, according to Williams, that can take several years, for it requires parliamentary approval from each country.

In order to bring operations to Egypt as fast as possible, the bank is proposing the creation of a special fund “using its balance sheet more effectively without additional capital from outside,” Berglof said, adding that investments could start by early 2012.

In addition to focusing on lending SMEs, done mainly by channeling funds to local banks to pass on to SMEs, EBRD has also identified food security, water management, and energy efficiency as priorities in the Egyptian marketplace, he explained.

One key objective of the bank, which was established to help transition post-communist countries into free-market oriented economies, is to promote democracy in Egypt by attaching certain political criteria to its loans.

“For countries to become countries of operations, they must fulfill certain political criteria, including a commitment to democratic principles,” William said.

“The EBRD invests in order to support the process of economic transformation, to strengthen economies and to help in the creation of long-term sustainable economic growth. By supporting such economic change the EBRD also aims to support an environment of political openness,” he added.

Like EBRD, AfDB, a project focused investment bank that has lent about $6 billion to Egypt since the 1970s, is in talks now with the Egyptian government to determine what type of assistance the country currently needs, Jacob Kolster, the bank’s regional director, explained to DNE.

At the moment, the bank has a total of $2 billion invested across 20 projects in Egypt, he said, 55 percent of which is directed towards improving the country’s energy infrastructure.

However, much more can be offered, and the bank is “prepared to do everything it can in terms of financing instruments” to help Egypt weather its current crisis, he said, explaining that an additional $1.5 billion can be invested within the next two years.

“We came in March and provided the government with many options for AfDB support. We offered a broad range of products, such as power plants, solar energy projects, agricultural and irrigation projects, and even an airport project in Sharm El-Sheikh. We have a very rich portfolio of investment projects that can be brought to fruition very quickly.”

However, activists question whether these loans are in the best interest of Egypt.

A statement released in June signed by 15 Egyptian NGOs, for example, expressed “doubt that the [EBRD] can actually assist in a transition period for the cause of justice, development, and peoples’ rights.”

The statement questioned the continuation of failed economic policies under the previous regime, and called on future loans to “address the factors impoverishing people in Egypt.”

The author of the statement, Kinda Mohamadieh from the Arab NGO Network for Development, told DNE that Egypt should be very cautious about working with these banks, because they, by the banks’ own accounts, have a mixed record of promoting development.

The banks also tend to place emphasis on certain sectors, which can skew the “balance in the economy,” she added.

“Oftentimes they put so much emphasis on the energy sector. We’re not sure that local corporations or people actually benefit from these loans. We don’t know if these loans improve Egyptian energy efficiency, or the European partners involved in them.”

Petr Hobl, international affairs director at Bank Watch, an organization established to monitor activities of international financial institutions, questioned the entire premise of these banks’ missions, arguing that their real goal is to “make sure European companies and governments gain unrestricted access to new markets and natural resources.”

In addition, Hobl argued that international banks’ employment of “public-private partnerships has proven to be ineffective in a number of countries.”

“In these projects, profits are privatized, but the risks remain public. The real costs are frequently hidden from the public,” he said, “The people of Egypt should look for their real intentions.”

Both Hobl and Mohamadieh also contend that regardless of the efficacy of foreign loans, the transitional Egyptian government has no right to sign such long-term agreements.

According to their argument, because the interim caretaker Egyptian government was not democratically elected, it does not truly represent the will of the people, and has “no right” to make long-term, or even short-term financial commitments that Egyptians must pay for eventually.

Kandil, however, rejects this argument.

“I think it’s like somebody who is walking with one foot and shooting themselves in the second foot. From an economist’s perspective, the money is needed.”

Kolster from AfDB called it “almost borderline irresponsible for the transitional government not to take a decision” with regards to foreign loans, especially when the country is in dire need of improving its energy infrastructure, following last summer’s power shortages.

He did acknowledge, however, that it would not be appropriate for a transitional government to make further decisions in regards to privatization policies.

“You want to move towards privatization eventually, and get out of the whole circuit of vested interests between political and business power structures, but you don’t want to do this overnight. You have a checkered history of privatization policies in Egypt.”

Building on this, EBRD’s Berglof added that Egypt experienced economic reform that “went wrong,” because some industries were “controlled by business elites who do not always have interest in continued reform.”

Kandil believes that economic policymakers in Egypt and their international bank partners “must integrate activists’ concerns into the process and build consensus around decisions.”

Ultimately, the demands of civil society actors for social justice are inherently linked to the economic development activities of international financial institutions, she continued.

“You cannot attain social justice without economic development. You have to develop the economy, and you have to initiate projects that involve some financing going directly towards social justice [issues] like housing, water, and infrastructure. This is social justice.”

For Kandil, the best way to move forward “is to strike a compromise.”

“Activists demand that there will be consensus building, which is what we’ve been asking the government running the country to do. Build channels for consensus building,” she said.