HEADLINE, OCTOBER 27, 2011: Egypt had its government bond ratings cut for the third time this year by Moody’s Investors Service, which cited ongoing economic weakness’ after the revolt that ousted President Hosni Mubarak. (Bloomberg)
Prior to the fall of the Mubarak government Egypt was receiving more United States foreign aid (civilian and military) than any country except for Israel. From 1979 forward, it had averaged slightly more than $2 billion annually since the signing of the Camp David Accords that accomplished a peace between Egypt and Israel. The amount of U.S. Foreign Military Financing has varied very little from year to year, however, funds made available in economic assistance, and generally channeled through the U.S. Agency for International Development (USAID), have slowly declined since 1998.
Foreign Military Financing (FMF) commonly averages slightly more than $1.3 billion per annum and the payment itself has remained sacrosanct as both the Pentagon and Foggy Bottom have agreed that FMF provides the very base on which a very cordial relationship is founded. Egyptian leaders put it more succinctly: They have called the FMF “untouchable compensation” for the continuation of peace with Israel.
FMF has allowed Egypt to be both the recipient and purchaser of U.S. military hardware, much of which is sophisticated materiel. It has included jet aircraft, Apache helicopters, aerial surveillance aircraft, and armored personnel carriers.(“http://www.state.gov/r/pa/ei/bgn/5309.htm) The Egyptian military also purchases equipment directly from U.S. defense contractors and in excess of the annual FMF payment. Regarding economic assistance, the funds provided annually, though substantial, amounts to less than $10 per capita, and the huge Public Law 480 food program administered by USAID provides a very small though still significant percentage of the Egyptian populace’s daily caloric consumption.
Over the years the Egyptian aid program has been lashed both by the GAO and various civilian critics for its focus on military sales and seemingly[probable} disinterest in human rights. On the average, USAID funds which were targeted to support Egyptian Non-Governmental Organizations(NGO) devoted to the building of democracy and “good governance” has averaged slightly more than $24 million per annum from 1999 to 2009. The reason why the program has faltered seems clear: A 2007 U.S. Embassy cable published through Wikileaks notes that President Mubarak was “deeply skeptical of the US role in democracy promotion.” Thus, the Egyptian government allowed USAID to fund only those Egyptian NGOs registered with the government. And USAID funding was circumscribed because the government generally refused to either cooperate with or allow Egyptian NGOs to take part. And while the George W. Bush administration had “threatened to link” FMF to progress in political participation and human rights, nothing came of that; likewise, prior to the initiation of a series of early 2011 protests in Cairo’s Tahrir Square, the Obama administration had itself shown little interest in pushing the issue.
As a consequence of the mass protests in early 2011 President Hosni Mubarak was driven from office in February 2011. With the Egyptian economy plunged into turmoil, USAID noted an opening and announced in March 2011 that it was ready to fund Egyptian Non-Governmental Organizations (NGO) that previously had been exempted from project aid consideration. The result was that many Egyptian NGOs “flocked” to the AID office in the hope of qualifying for funds. A month later, it was reported that USAID had already programmed $105 million in support of such groups. In response, the Egyptian government (the military that ruled in the interim following the fall of the Mubarak government) slammed the USAID move.” It claimed that funding pro-democracy groups without submitting to government supervision “violated existing Egyptian laws.” (Che de los Reyes, “Amid its Refusal of US Aid, Egypt Accepts Funds from World Bank,” http://www.devex.com, 15 August 2011.)
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As the Egyptian economy continued to deteriorate, in late May it was reported that Egypt was to receive a large infusion of aid from the World Bank, and Cairo was to receive some $4.5bn in assistance over the next two years. (See BBC 24 May 2011 “Egypt and Tunisia to get $6 billion from World Bank.”) World Bank President Robert Zoellick freely admitted that it was the Bank’s desire to support the “Arab Spring”; according to Zoellick, Bank funds would be “made conditional on the countries’ progress in modernizing their economies.”
The World Bank action was taken in conjunction with an announcement that the European Bank for Reconstruction and Development (EBRD) was planning to provide up to $3.5 billion (2.5bn euros) a year to an as yet amorphous Egyptian government. Still, the “wholesale geographic reorientation” of its mandate from Eastern Europe to the Arab World would require the approval of “all of its 63 members”– which, given the precarious state of the European economy in general, was highly unlikely.
The ante was then upped by the government of Qatar, which announced that it would provide “up to $10bn in investments in Egypt.” With that announcement the Egyptian economy — or what was left of it — was counting on an infusion of (1) $10bn from Qatar; (2) $4.5bn in new loans from the World Bank over two years (added on to the existing $1.2bn in World Bank support); (3) $1bn debt forgiveness by the United States, and an additional $1bn in loan guarantees; (4) $4bn aid package from Saudi Arabia; (5) Perhaps something from the EBRD; (5) A multi-billion dollar International Monetary Fund loans with terms to be agreed upon.
Due to the collapse of the Egyptian economy, and in particular the tourist sector, Egypt’s financing needs seemed to be growing exponentially. “Elevated demands of the people after the revolution were adding to pressure on the budget, and Finance Minister Samir Radwan predicted that Egypt could anticipate a financing gap of $10-12 billion in 2012. The World Bank announced on May 24 that over the next two years it would make available to Egypt $4.5 billion in loans and grants. Its program was intended to improve government transparancy, boost employment, and in effect would help meet the demands of hundreds of thousands of protestors who had brought Mubarak down. The funding included $1 billion for budget support for 2011, and another $1 billion in 2012. It was still unclear, however, if the IMF was also prepared to provide the funds needed to help Egypt over the hard times ahead. The Qatar government announced that it was prepared to purchase Egyptian government bonds in order to help fund its deficit, but that welcome announcement was followed by silence in the European banking community and in the United States. Both were faced with immense economic problems of their own.
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In late June 2011 Egypt Finance Minister Samir Radwan announced that that the government budget deficit would be cut from 11 to 8.6% of gross domestic product. In cutting the budget Radwan announced that Egypt was no longer interested in an IMF loan. In effect, Radwan scrapped plans for a $3 billion package quietly agreed to only the month before.
Radwan’s surprise announcement caused an immediate flurry of activity. Once it was confirmed that Egypt had rejected the IMF offer the cards were reshuffled. As the World Bank and international donors usually followed the IMF lead, the World Bank was quick to respond that if there were no IMF program the Bank would have “to take stock of plans to lend to Egypt.” (Reuters, Washington dateline, June 26 2011.) The situation was clarified, at least momentarily, when it was announced that Radwan had just received from Qatar a $500 million for budgetary support, and Saudi Arabia had offered a similar amount.
In August devex.com <http://devex.com> , an internet site devoted to international development issues and followed closely by the worldwide NGO community, reported that both Egypt and the World Bank had changed course; Egypt had decided to accept the World Bank’s $2 billion assistance package. The World Bank seemed pleased and allowed that the funds were, “expected to benefit government employees, modernize the country’s railway and irrigation system, and improve the country’s power sector.
As for the United States, USAID was playing a small but important part in the Egyptian mis-en-scene. It had offered an initial $165 million. None of it would be directed to political parties, yet much of it would be channeled through “civil society groups” and in support of pro-democracy activity. Nonetheless, according to Devex the Egyptian military “remained resolute” in its decision not to accept the USAID package. The military remained determined to manage foreign aid funds throughout the interim government interregnum, and it promised that it would not permit the funding of Egyptian civilian entities not under its control. To make its point, once the U.S. offer was rejected the interim government ordered an investigation of Egyptian NGOs involved with USAID. It seems that the impasse was likely responsible for the abrupt departure of USAID Director James Bever in August; in the aftermath of Bever’s departure the US embassy in Cairo issued a strongly-worded defense of its aid program. It did so as Egyptian inspectors continued a general probe of foreign funding and their specific complaints that Egyptian NGOs were receiving illegal and direct funding from abroad, especially from the United States.
In response to the Bever departure, Ambassador Anne Patterson noted that the United States had distributed $40 million to Egyptian NGOs since the revolt that ended Mubarak’s rule. Such funding was, the U.S. embassy claimed,a continuation of past programs and stressed that the United States had, “always included in its assistance programs funding to strengthen and expand Egypt’s civil society,” Then, throughout September, the Embassy noted numerous signs of “anti-Americanism” within the interim government. However, it appeared that the historic and cordial ties that bound the Pentagon and the Egyptian military were still strong, at Foggy Bottom caution prevailed. The Devex report closed on an optimistic report, noting the Washington Post had allowed that, “Despite the tiff, observers do not see any lasting harm to U.S.-Egypt relations.” It was underscored that those relations were bound by close links formed in the years following the Camp David Accords. Egypt was anticipating its democratic elections to be held sometime in late 2011, but given a deteriorating economy the Post cautioned, “It is hard to tell though, how that will influence the situation of civil society groups in the country.”
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On October 27, in a move that surprised practically no one, the Moody’s Investors Service dropped Egypt’s bond ranking to B1, “four levels below investment grade.” This was its third reevaluation in 2011, and followed a one-notch downgrade in March. Only a week prior to the announcement Standard & Poor’s Ratings Services had downgraded Egypt’s debt rating one notch to BB-, three steps below investment grade. It noted the problems associated with government debt, and the political instability in Egypt itself. Even earlier in October Fitch Ratings provided a warning that the Egyptian economy would not revive, “until its political future becomes more certain.”
Moody’s stated that its downgrade was a result of growing government debt and political turmoil. It noted that Egypt was “relying on weekly sales of local-currency debt to fund 90 percent of its budget deficit in the [fiscal] year that ends in June.” Meanwhile, the Ministry of Finance’s borrowing costs had approached “the highest levels in almost three years.” It was selling one-year treasury bills, “at an average yield of 13.854 percent, 341 basis points higher than the last sale before the start of its uprising in January.” While the nation’s fiscal deficit was growing, the Egypt central bank report that foreign reserves had already fallen $12 billion in 2011. And really most troubling, and despite Minister Radwan’s effort, Moody’s expected the budget deficit to widen from a planned 8.6 percent to more than 10 percent of gross domestic product in the fiscal year through June 2012. Moody’s noted that the diminution in foreign exchange reserves combined with an uncertainty over transition to a stable, civilian government had undermined investor confidence.
Moody’s finishing touch was the belief that “political conditions remain unsettled,” and the transition to a stable, civilian government was unclear. Not surprisingly, it concluded, “the outlook remains negative.” (Bloomberg News reports, October 27, 2011.) In fact it was so negative that the government had been forced to revive discussions with the IMF regarding a $3 billion loan — the same loan it had rejected in June!
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How the economic uncertainty will impact on Egypt-U.S. relations remains unclear. However, one thing is certain. Washington will do most anything to ensure the survival of something approaching the status quo ante-Tahrir. It certainly can predict by now that there will be attempts to tinker with the Camp David Accords once a civilian government comes to power in Cairo. Fortunately, another military confrontation with Israel seems unlikely thanks in part to the Pentagon-Egyptian military relationship, which seems as sound as ever. The annual FMF payment, and access to U.S. military hardware, are hardly trifling benefits — even though the Egyptian military may be tempted to do some tinkering of its own in what was once a demilitarized Sinai Peninsula. Regarding economic assistance, Egypt can certainly count on the staying power of USAID; Egypt aside, it would have to be dragged kicking and screaming from the scene before it would ever think of closing a USAID Mission. Anywhere. USAID will always trot out the argument that it has hundreds of millions of dollars in the “pipeline” — project dollars already appropriated but yet to be spent — and it must hang around to see that funds are spent wisely and projects completed.
In sum, the only thing the Pentagon and Foggy Bottom have to fear is the success of Muslim Brotherhood candidates in the November elections. But that is another topic for another time.
* J. Millard Burr, a Fellow at the Economic Warfare Institute, authored with Robert Collins, Alms for Jihad,,Revolutionary Sudan and many other publications, and is a former State Department official.