With a stalemate in Lebanon, a blocked process in Tunisia, and an unrealistic deal with Egypt, the International Monetary Fund (IMF) struggles to meet its mandate of macroeconomic stability or ensuring states are able to independently finance their budgets without resorting to emergency lending in the Middle East and North Africa. The fund is not alone in its struggles. The World Bank also wrestles with contentious projects including controversial public-private partnerships and ineffective cash transfer programs that fail to reach millions of people in need.
However, the lack of success of the two Bretton Woods institutions—the IMF and the World Bank—is unsurprising to anyone familiar with their work which, despite a mea culpa in 2016, remains heavily reliant on a handful of austerity policies.
This is somewhat of a twist of fate as these twin institutions, which were created through the Bretton Woods Conference on July 1, 1944, did not initially set out to assist in the development of struggling economies. Rather, the World Bank’s initial mandate was to reconstruct Europe after World War II, and the IMF’s original mandate was to keep the Gold Exchange Standard. However, as Europe finished its reconstruction and Nixon ended the Gold Exchange Standard in 1971, the twin institutions looked toward the hottest new sector to invest their large amounts of funds into: development.
However, the policies they have pursued since this shift in mandate have had a less-than-stellar record. Rather than assist countries in promoting inclusive sustainable economies, cuts to public spending prevented countries from using public investment to stimulate growth and foster a productive labor force. Instead, the over-reliance on private sector-led growth has regularly failed to bear fruit and deliver growth, leaving countries such as Egypt and Tunisia with worse balance of payment problems, a floundering economy, higher public debt, and, in the case of Egypt, a contracting private sector as well. Elevated debt pushes these countries to seek more loans from the IMF and projects from the World Bank, conditioned by increasingly harsher austerity policy. And so, the vicious debt cycle continues.
As it stands, there are no successful IMF program graduates in the MENA region, only repeat offenders. Since the Arab uprisings, Tunisia had two IMF programs with a third under discussion last year until President Kais Saied halted talks. The IMF board approved Egypt’s fourth program this year since resuming engagement in 2016. Jordan and the IMF finalized a staff-level agreement in May of this year for a third program since the 2012 program. The lender of last resort has not delivered sustainable solutions with its borrowers. Yet, despite the mountain of evidence on the failure of their policies, on their 80-year anniversary, the Bretton Woods Institutions show little signs of changing.
A sad score sheet
Driven in large part by IMF programs, public expenditure as a percentage of GDP in Egypt fell by 10 points in the last decade—from 31.3 percent in 2014 to 21.1 percent in 2024. Meanwhile, interest payments as a percentage of public expenditure increased by more than 10 points during the same period, from 24.7 percent to 37.5 percent. As such, austerity measures, coupled with the rising public debt led to the prioritizing of interest repayment over social spending, all amid dwindling public revenues. The cuts to social spending have not gone without severe consequences for the population where one in three people live below the poverty line.
The same austerity-driven consequences can be found in Tunisia. Young female labor force participation—already low—has steadily declined beginning with the wave of privatization triggered by the IMF in the 1990s, losing over 10 points since 1991. Meanwhile, food insecurity increased by 10 points since 2015, coinciding with the lifting of subsidies on energy and some food products.
Despite the IMF’s insistence that these “painful” public spending cuts are necessary to address the countries’ balance of payment problems, the policies have failed to achieve any sort of macroeconomic stability. After decades of IMF programs, inflation reached a three-decade record of 9.3 percent in 2023 in Tunisia, while hitting a historic high of 37.4 percent in September 2023 in Egypt. The debt-to-GDP ratios are also historically high under these programs.
However, the failure of these policies is to be expected.
Emptying the coffers of the state
One of the major arguments of the IMF and the World Bank is that countries do not have the revenues or fiscal space to sustain their current budget. As a consequence, they must make cuts to spending. Ironically, it is the conditionalities of these international financial institutions that prevent countries from collecting the necessary resources to invest in social expenditures and enact measures capable of stimulating growth at times when the economy is struggling.
For instance, in its zeal to cut spending, rather than having a targeted approach where they diagnose where there is an excess of public employees (if any), the IMF imposed blanket hiring freezes in Tunisia, preventing the government from much-needed recruitments in sectors including healthcare and education. As such, the country’s tax administration, which by the IMF and the World Bank’s own diagnosis is underfunded, remained understaffed and lacked the human resources, equipment, and training necessary to properly oppose and prevent the rampant tax fraud in the country.
The IMF also repeatedly negotiated for the Tunisian government to lower its corporate income tax. The IMF’s logic is that more corporations in the informal sector would be incentivized to integrate into the formal sector. Theoretically, this would widen the tax base—meaning the number of entities being taxed—and increase tax resources in the medium term. It is also meant to encourage investment, which would ultimately lead to job creation.
The opposite happened. Lowering the corporate income tax from 30 percent to 25 percent in 2014 caused revenues to drop by half in two years, and Tunisia only recovered its pre-2014 levels in 2021. Meanwhile, revenues from personal income taxes continued to grow, creating unequal burden-sharing between corporations and households when contributing to the national budget (Figure 1). In addition to decreasing tax revenues, the tax cut also failed to stimulate investment or create jobs, ending up simply as a gift to corporations.
These tax cuts for corporations and rich households came in direct opposition to the IMF’s own advice. For instance, in a 2023 report, the IMF stated that personal income taxes were underutilized in the region and that these tax rates could be raised and used as a lever to increase public revenues. The paper pointed out that most of the income from rich individuals in Egypt are exempt from taxes. Even when these types of income are not exempt, they are often taxed at very low rates. Examples include the flat 5 percent tax on dividend (sale of company shares) income in Egypt, the 5 percent interest income tax in Jordan, and the 10 percent dividend income tax in Tunisia. Similarly, the report also acknowledges that taxes on labor (primarily salaries) have gotten less progressive, with fewer exemptions for the lowest earners, and lower taxation rates on higher income.
Despite this diagnosis, there is little to no trace of policies addressing these issues in IMF or World Bank programs, including the recent Egypt program, or the staff-level agreement for Tunisia’s aborted program in 2022.
Even when these policies exist, they are often not prioritized in program negotiation or implementation. Instead, during implementation, the emphasis is put on public spending cuts and regressive tax revenue from VAT.
Preventing growth and prosperity
In advanced economies and after economic and financial crises such as in the US and EU, the IMF and the World Bank both encouraged public spending for years during crises, even cautioning against the risks of “premature fiscal consolidation”, a rebranding of the term “austerity.” Yet, when it comes to lower-income countries such as Tunisia, Egypt, or Jordan, this advice is reversed, as states are asked to step away from the economy to leave the space to private sectors that the World Bank itself characterizes as full of cronyism, corruption, and predation. The diverging advice and conditionalities put on Global South and Global North countries remain largely unexplained by the IMF.
By advocating for austerity, the Bretton Woods institutions not only ignore the multiplier effect of public investment, but also (once again) go against their own advice. A 2020 IMF report emphasized the need to increase social spending in MENA countries. It stated, for example, that a child born in Tunisia in 2018 would be twice as productive in the future if they enjoy a complete education and full health, than if they did not. The report went on to declare that “better social protection and public services could help address today’s most pressing issues: low and not sufficiently inclusive growth, elevated social tensions, and weak trust in the government amid domestic security pressures and regional instability.”
Despite identifying the need for robust inclusive social protection, the Bretton Woods institutions have sought to dismantle existing universal protection schemes to replace them with inefficient ones. For instance, the IMF systemically tore down universal subsidy programs in Egypt, Lebanon, and Tunisia, while the World Bank financed schemes to replace them with targeted cash transfer programs. The latter has proven to be exclusionary of the poor and other vulnerable groups. For instance, the World-Bank-backed AMEN program in Tunisia only covers 8 percent of the population, while the poverty rate sits at over 16 percent. So, assuming no inclusion errors, it excludes 50 percent of the poor. Similarly, Egypt’s Takaful and Karama program and Lebanon’s Emergency Crisis and COVID-19 Response Social Safety Net Program both have an exclusion rate of over 50 percent, meaning that over half of the poorest in those countries do not benefit from these programs. All these policies prevent the creation of inclusive social protection for an increasingly vulnerable population and block both short- and medium-term inclusive economic growth.
A sordid past and a bleak future
With all the evidence of the failure of their policies to promote any sustainable inclusive growth in the region, can we expect the Bretton Woods Institutions to adjust their models and assumptions, in order to better inform better conditionalities and policy recommendations? The short answer is no. These institutions remain deeply attached to an inefficient neoliberal model based on a small state and private sector-led growth, a model they themselves have critiqued.
The IMF is currently in the process of evaluating its fiscal policy. However, despite acknowledging the importance of these socioeconomic issues to the overall health of a country’s economy, the Fund decided to limit the scope of this evaluation, excluding discussion on the impact of these policies on inequality, climate, and gender.
The World Bank also plans to continue with the same failed policies. In its recent gender strategy draft, the Bank revealed its intent to continue with the targeted cash programs, public-private partnerships, and similarly failed policies.
One urgent question needs to be put forward: Can the region, with all its economic crises, its security dilemmas, and its social unrests, really afford another 80 years of the Bretton Woods institutions and their austerity policies before anything changes?
Sahar Mechmech is the Inclusive Economies Manager at TIMEP. She specializes in issues of economic justice as it intersects with inequality, gender, and climate.