POLITICS-EGYPT: US Aid To Egypt Could Weaken Economic Reforms

By Cam McGrath Reprint | | Print |

Cam McGrath

CAIRO, Jan 17 2002 (IPS) - Washington announced earlier this month that it was accelerating aid to Egypt to support economic reforms, but the decision could weaken the Cairo government’s resolve to carry them out.

USAID Director Willard Pearson said the U.S. government was accelerating the disbursement of 959 million U.S. dollars in economic aid to help Egypt continue with its economic reforms.

“This accelerated assistance package aims to shore up confidence and give the government a bit more of a cushion on which to proceed with its economic agenda,” he said.

Egypt launched an economic reform programme in the early 1990s aimed at privatising state-run enterprises and liberalising its markets.

A three-year economic slowdown, nagging liquidity shortage and rising unemployment rates have hampered the government’s efforts to carry out these reforms. Adding to its problems, the repercussions of Sept. 11 events have sapped more than two billion U.S. dollars from the country’s tourism industry, Minister of Tourism Mamdouh el-Beltagui said.

Washington has not offered Egypt any new aid. Instead, the 959 million U.S. dollar grant is part of the two billion U.S. dollars in economic and military aid that the U.S. has offered Egypt each year since the 1978 Camp David Accord in which Egypt became the first Arab state to make peace with Israel. While the military element of this aid, worth approximately 1.3 billion U.S. dollars, is conditional on Egypt maintaining peace with Israel and supporting efforts to secure a wider peace in the region, the economic element has its own requirements.

Up to 400 million U.S. dollars of this economic aid is designated for USAID-sponsored development projects, though the actual amount disbursed each year depends upon the progress of these projects.

Another 200 million U.S. dollars is provided through the commodity import programme, whereby it must be used to purchase U.S. goods. The remaining 200 million U.S. dollars is given in cash grants only when Egypt meets the conditions of its economic reform programme.

Egypt’s failure to meet the reform conditions laid out by Washington over successive years has resulted in a substantial backlog of economic aid that has been allocated, but never disbursed.

According to U.S. sources, 579 million U.S. dollars released on December 31 as part of the 959 million U.S. dollar aid package came from this backlog of undisbursed aid. The remaining 380 million U.S. dollars, to be distributed within four months, includes 230 million U.S. dollars from this backlog and 150 million U.S. dollars from economic aid already scheduled for release in the current fiscal year.

A USAID press release said the economic aid was being disbursed “in recognition of Egypt’s reform efforts,” but there is little to suggest that this is really the case. The main reasons behind Washington’s decision to withhold aid – the slow pace of privatisation, failure to devalue the currency and excessive market regulations – still exist.

The disbursement may actually slow reforms, as it could be perceived as a signal that the Bush administration is happy with Egypt’s economic performance. Certainly the Cairo government has done little since the aid’s disbursement to suggest that it has stepped up the pace of reforms.

The Central Bank’s limited currency devaluation on Monday, touted as a reform measure, “will have no real effect on dollar demand,” argued Sallah Kasseb, manager of a Cairo-based foreign exchange firm.

He said the devaluation, which readjusted the official exchange rate of the Egyptian pound from 4.50 pounds per US dollar to 4.51 pounds per US dollar, was “just an attempt to fool donors into believing that the government was serious about devaluing the pound.”

The black market rate remains around 5.0 pounds per US dollar, suggesting the Central Bank still has a long way to go.

The government also failed to impress observers when at the start of the year it announced that it would lift its 15-year ban on clothing imports to conform with World Trade Organisation (WTO) regulations. While the ban was kept in place, new customs tariffs and strict regulations were imposed on garments imported under a quota system.

In essence, rather than restrict clothing imports directly, the government is seeking to impose an hyper-inflated tariff rate that has the same effect. Economic analysts fear this same sort of trickery is being used to give the impression that Egypt is proceeding with its economic reform programme when in reality little progress is being made.