MATT BRADLEY: U.S. HONES PLANS FOR A BIG BAILOUT OF EGYPT
U.S. Hones Plans for Big Bailout of Egypt
http://online.wsj.com/article/SB10000872396390443571904577629991601055580.html
CAIRO—American diplomats are closing in on an agreement to dole out $1 billion in debt relief to Egypt, part of a gilded-charm offensive that Washington hopes will help shore up the country’s economy and prevent its new Islamist leadership from drifting beyond America’s foreign-policy orbit.
A team of senior State Department economic officials have spent the past week in Egypt’s capital completing the terms of an aid package that President Barack Obama first announced last year after Egypt’s pro-democracy uprising rattled the country’s once-promising economic future.
The money has since sat in policy limbo as Egyptian and American diplomats disagreed over how the Egyptian government would allocate the funding and American politicians hesitated over the prospect of rewarding Egypt’s newly elected Islamist leadership.
As the recipient of $1.3 billion in annual U.S. military aid, Egypt has historically ranked among America’s top security partners in the Arab world. Its peace treaty with Israel has helped buttress regional security for more than 30 years.
But the election in June of Egypt’s new Muslim Brotherhood-backed president, Mohammed Morsi, has called the strength of the old alliance into question. Mr. Morsi selected Beijing last week for his first official trip outside the Middle East, followed by a trip to Iran—moves some observers saw as a deliberate snub to Egypt’s traditional Western backers.
The arrival of an Islamist government followed by political upheaval and disconcerting moves on the international stage fueled questions over the reliability of Mr. Morsi as a U.S. ally. But his efforts at internal stability and his public criticism of Syria’s regime while visiting Tehran last week, which angered his hosts, have helped balance U.S. views of the new Egyptian leader.
U.S. diplomats say American funding for Egypt has been stalled by disagreements over how the government in Cairo will allocate the debt relief. The envoys currently in Cairo are negotiating over slightly less than half the money, which would be paid as a direct cash transfer to Egypt’s budget.
The larger portion, about $550 million, would be doled out in a debt-swap program in which both the U.S. and Egyptian governments would agree on how the money will be allocated.
Despite Washington’s close diplomatic relations with Cairo, the allocation of aid remains a volatile point of contention between the two countries.
Even before the revolution last year, the Egyptian side has taken exception to the various conditions the U.S. government places on the funding. Egyptian policy makers have complained that any direction assigned to economic aid—for example, assigning certain funds to a particular development project—is humiliating, diplomats involved in the negotiations said.
Some U.S. aid has also stoked suspicions among Egyptians. U.S. funding for pro-democracy civil-society groups in Egypt led to a crisis when Egyptian security officials raided the offices of several nongovernmental organizations at the end of 2011, then arrested their staff and accused them of trying to stoke chaos to undermine the government. The seizures and arrests held up U.S. assistance and nearly prompted U.S. policy makers to cancel the annual military aid to Egypt.
The leadership change in Cairo has brought new faces and new political priorities. The revolution and its tumultuous aftermath trampled on Egypt’s economy, and Mr. Morsi’s new government has made fixing the country’s nearly $25 billion budget shortfall its priority.
Two weeks ago, Mr. Morsi, who took office in June, asked International Monetary Fund chief Christine Lagarde for $4.8 billion in low-interest loans. The request followed the long-awaited first installment of a $2 billion loan from the Gulf state of Qatar last month and a promise of $1 billion in direct aid from Saudi Arabia in May.
U.S. officials have spoken positively about the IMF loan, saying it would shore up confidence among international lenders and investors. “Just as importantly, it will provide a foundation for sustained growth and inclusive economic opportunity,” said Robert Hormats, U.S. undersecretary of State for economic growth, in an address in Cairo over the weekend.
Even when not imposing concrete conditions, U.S. officials have stressed the Obama administration’s view that the Islamist government should maintain an inclusive posture toward all segments of Egyptian society. “Progress will only be possible if the talents of all citizens are drawn upon and all have a voice—men and women, all religious groups, and all parts of the country,” Mr. Hormats said.
The aid offers will still strain to meet Egypt’s estimated $12 billion in external financing needs. Last year’s revolution and the subsequent 19 months of political instability have kept tourists and foreign investors at bay.
Egypt‘s Central Bank has bled through nearly two-thirds of its $36 billion foreign-currency reserves to maintain the strength of the Egyptian currency. Many economists say a currency devaluation is inevitable.
Beyond the debt forgiveness and IMF loan, U.S. officials are promoting two financing opportunities: $375 million in financing through the U.S. Overseas Private Investment Corp., a government development finance agency, for loan guarantees for small-to-medium sized Egyptian businesses; and $60 million to help launch such firms through a new U.S.-Egypt Enterprise Fund.
American officials say their efforts are part of a multipronged strategy aimed at glossing Egypt’s profile for international investors.
The debt-relief negotiations come as the White House prepares to send a delegation of some 50 American business leaders to Egypt. The delegation, which is set to include regional Middle East heads from companies such as Boeing Co., BA +0.82%General Electric Co., GE +0.34%Google Inc. GOOG +0.50% and Citigroup Inc., C +0.20% will be led by Mr. Hormats, a former Goldman Sachs Group Inc. executive.
In Washington, some in Congress worry that the Morsi government will abdicate Egypt’s peace treaty with Israel and want to carefully assess Cairo’s future plans. Of particular concern to some lawmakers has been Mr. Morsi and his Muslim Brotherhood’s view toward maximal use of political power.
Mr. Morsi stunned Egyptians late last month when he abruptly fired Field Marshal Hussein Tantawi, the general who had led Egypt’s post-Mubarak transition to democracy, and assumed the legislative and executive power that the army had safeguarded for itself. Egypt’s powerful military has formed the backbone of Egyptian governance since the country’s anti-colonial revolution in 1952.
That came as Mr. Morsi’s presidency was moving to assert control over the media. Brotherhood lawmakers replaced the heads of state-owned newspapers with more malleable editors-in-chief, while public prosecutors charged a popular anti-Brotherhood TV talk-show host with calling for the assassination of Mr. Morsi and a secularist newspaper editor with insulting the president.
—Jay Solomon
contributed to this article.
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