Rights groups urge IMF to demand transparency for Egypt military’s firms before releasing more funding

The International Monetary Fund (IMF) should demand the Egyptian government disclose financial information about military-owned businesses as part of required reporting on state-owned enterprises, before releasing the next tranche of funding under an ongoing loan program, Human Rights Watch, Cairo Institute for Human Rights Studies, and the Freedom Initiative said on Monday in a letter to the IMF Board.

The groups said the financial dealings of businesses owned by military agencies, which mainly produce civilian goods, are completely shrouded from public view, making them ripe for corruption and undermining civilian oversight of the funding for Egypt’s military, which is responsible for serious abuses.

“Since 2016, the IMF has approved $20 billion of lending to Egypt, with an ostensible goal of bringing much-needed reform to the government’s opaque financial dealings,” said Sarah Saadoun, senior business and human rights researcher at Human Rights Watch. “During that time, the increasingly expanding military businesses have continued to operate in secrecy, while the IMF has given military-owned businesses an effective pass on its transparency requirements.”

In September 2020, the IMF approved a $5.2 billion Stand-By Arrangement to Egypt, to be paid out in three tranches over a 12-month period. The loan comes on the heels of a $2.77 billion emergency loan approved in May, and at the end of a three-year $12 billion program that was approved in 2016. One of the three objectives of the current program is to “implement key structural reforms to strengthen transparency, governance, and competition,” building on the 2016 loan program.

On November 19, IMF staff completed their review of the government’s compliance with terms of the loan, before disbursing the next payment, including a requirement to publish a report on state-owned enterprises (SOEs) “with complete detailed financial information disclosure for FY2018/19 on all SOEs.” The review noted no problems with the report published by the Egyptian government even though that report does not appear to include any of the dozens of mega companies owned by the Defense and Military Production Ministries, which are the main entities that oversee military-owned businesses.

The IMF Board should insist that Egyptian authorities include military-owned businesses in all transparency requirements that apply to SOEs, the human rights groups said in the letter.

Egypt’s military has emerged since the 1980s as a significant and growing economic actor, spanning several civilian sectors as diverse as infrastructure, imports, chemical manufacturing, and production of food and household appliances. But since the military takeover in 2013, the expansion of military businesses has been unprecedented. Although the military economy “captures a disproportionate share of public revenues,” it operates in near total secrecy, most likely masking “inefficiencies and hidden losses,” according to a comprehensive 2019 report published by the Carnegie Middle East Center. The military most likely uses thousands of young men as unpaid labor through the country’s mandatory conscription system, according to over a dozen interviews Human Rights Watch conducted with former conscripts and experts.

The Carnegie Middle East Center report noted that “[t]he bulk of the formal military economic sector does not fall within the remit of Egypt’s audit and anticorruption agencies, whether de jure or de facto.” However, “anecdotal evidence, insider accounts, and public revelations … indicate extensive and routinized corruption within at least those parts of the defense sector concerned with procurement and supply, licensing civilian functions of any kind, and public contracting and services.”

In 2018, the IMF adopted guidelines on improving its approach to stemming corruption, seeking to correct its past reliance on euphemisms, or avoiding the subject altogether. The new approach expects IMF staff to “candidly” address corruption in member countries, and condition lending on governance reform where warranted.

Yet, the Stand-By Arrangement approved in August does not explicitly reference the military’s growing role in the economy, or the risk of corruption and mismanagement due to a lack of oversight – repeating a flagrant omission in the 2016 program. It also does not include reforms critical to eliminating corruption, such as restoring the independence of Egypt’s Central Auditing Agency.

At the same time, countering the pernicious growth of the military’s economic activities is clearly central to both IMF programs. Like the current program, the one approved in 2016 had the objective of “strengthening competition, improving governance, limiting the scope for corruption, and reducing the role of the state;” and included specific requirements to erode the military’s competitive advantage, such as related to land use. Publication of financial information about state-owned enterprises, included under both programs, is also a key requirement to advance this goal.

However, the IMF allowed the Egyptian government to exclude military-owned businesses from the SOE report it prepared under the previous program, and it appears ready to do so again. The IMF Board should not allow any repeat of this omission, the organizations said.

Transparency and accountability in military-owned businesses are key to addressing corruption and mismanagement, which squander precious public resources that could otherwise be invested in securing rights such as health care, housing, food, and social protection. The economic crisis brought on by the Covid-19 pandemic, heightens the need to curtail corruption and wasteful spending to maximize state support for those in need.

This is especially true for the IMF in Egypt, since the country’s 32 million people – a third of the total population – who live below the official poverty line, were already reeling from IMF-driven reforms. Conditions under the 2016 program precipitated a rise in cost of living that increased poverty and made it even harder for people to afford food and other necessities.

Since the Covid-19 pandemic began, IMF Managing Director Kristalina Georgieva has articulated a vision for rebuilding economies to be fairer, and fighting inequality in a way that includes “zero-tolerance of corruption.” The IMF has a heightened responsibility to include and strictly enforce measures to fight elite corruption in countries where IMF-led reforms have burdened the rights of people experiencing poverty, the organizations said.

Public oversight over the military’s economic activities is also critical for maintaining civilian control, and holding military officials accountable for abuses. In a report on Indonesia, Human Rights Watch research has found that “the more a military’s revenue and spending are outside civilian government control, and the more funds it raises itself, the harder it is for civil authorities to engage in meaningful oversight of the military.”

Human Rights Watch and other groups have extensively documented abuses by the Egyptian military, as well as the government’s unwillingness to hold those involved accountable.

“The IMF has asked tens of millions of financially struggling Egyptians to accept painful reforms for the sake of balancing the government’s budget,” Saadoun said. “If the IMF really wants to ensure these reforms are meaningful and sustainable, the least it could do is take seriously its commitment to fight corruption among the country’s elite, including its military.”

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