The Obama administration announced Friday its plan to transfer $450 million in cash to help Egypt’s new Muslim Brotherhood-dominated government cover its massive budget deficit, which is estimated somewhere between $12 billion and $23 billion. U.S. Representative Kay Granger (R-TX) immediately objected and threatened to prevent the dispersal of previously-appropriated funds claiming, “I am not convinced of the urgent need for this assistance.”
Reasonable people can disagree about the effectiveness and wisdom of foreign aid, but Granger’s comment conveys a dangerously misinformed view of Egypt’s economic reality and the possible effects of its further deterioration on U.S. interests in the region.
The Egyptian economy has been staggering since the revolution brought tourism and investment to a near standstill almost two years ago. A smaller tax base caused by sluggish economic activity has led to a massive budget deficit, while a precipitous drop in foreign currency reserves has caused a balance of payments deficit. According to the twin deficit hypothesis, Egypt is on the path to severe and sudden currency depreciation, despite President Morsi’s repeated and emphatic insistence to the contrary.
Furthermore, severe droughts in U.S. and Russia this year threaten the world’s food supply. This would sharply affect Egypt, which imports 60% of its wheat and 40% of its food. Oil and gas shortages earlier this year have already taken their toll on a population that consistently hovers around the poverty line.
There is no silver bullet for Egypt’s economic woes, which are tied up in the failed economic policies of the past regime and the culture of corruption that pervades an overwhelming amount of the public and private sectors alike. There is no way to avoid some of the pain and struggle that lies ahead, as befits a country trying to remake itself. Yet to deny that the situation is urgent is simply irresponsible.
The current U.S. aid package comes as part of a larger effort by the international community to stabilize Egypt’s economy. Negotiations for a $4.8 billion loan from the International Monetary Fund are expected to be completed in November; more than half of the current aid is contingent upon economic and budgetary changes stipulated by the IMF. The $450 million is part of Obama’s $1 billion pledge to Egypt made in May 2011; the rest of that money is expected to take the form of loans or loan guarantees to local businesses. Obama also promised to cancel $1 billion of debt owed to the U.S.; those negotiations are ongoing.
In addition, several Gulf states are investing heavily in Egypt’s future. Saudi Arabia pledged this summer to deposit $1 billion in Egypt’s central bank to help stabilize the balance of payments. Qatar says it will pitch in $2 billion.
It’s understandable that the U.S. is nervous about the direction Egypt is headed in after the riots at the U.S. Embassy in Cairo earlier this month. But withdrawing from the scene is a strategic misstep that pushes Egypt further into the arms of the well-funded and religiously-inspired Saudis and Qataris. It also equates the actions of a few extremists with an entire population that for decades has been a friend of the United States and an important ally in the Middle East.