Egypt: Will the Gulf's billions buy the economy more time?

CAIRO, Egypt — A multibillion-dollar aid package from three of the Gulf’s wealthiest nations to Egypt has raised questions over whether the cash will give the country breathing space to carry out much-needed reforms, or simply provide an artificial cushion allowing the interim government to avoid contentious economic decisions.

In a show of strong financial and diplomatic support to the interim government, Saudi Arabia, the United Arab Emirates and Kuwait pledged a combined $12 billion to the North African nation, just a week after the ouster of Islamist President Mohamed Morsi.

The money — which includes $5 billion in deposits and oil products from Riyadh, $3 billion in cash, central bank deposits and energy products from Abu Dhabi and another $4 billion in aid from Kuwait — equates to more than Qatar had offered to Egypt during an entire year under Morsi’s rule. It underscores how the removal of the Islamist administration, favored by the Qataris, was warmly welcomed in Riyadh and Abu Dhabi, where the role of the Muslim Brotherhood in their own countries was viewed with suspicion. 

But the rapid shift in regional political power after last week’s military-backed overthrow has brought into question the role the three oil-rich states will attempt to play in Egypt’s transition. 

“Certainly anyone who pays this type of money would expect to have some influence,” said Samir Radwan, former finance minister who was offered the role of interim prime minister before another ex-finance chief, Hezam El Beblawi, was chosen earlier this week. 

“They are happy to see the Muslim Brotherhood go, but their main concern was that the Muslim Brotherhood does not play a subversive role in those two countries,” he said. “That is the overriding objective in giving aid.” 

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The aid comes at a time when Egypt is in desperate need of cash to curb a slide in the domestic currency and stave off a balance of payments crisis that would see the nation unable to pay for essential imports or service its debt. 

Before 2011, the UAE was one of the top investors into Egypt, but their funds all but dried up after the revolution.

Analysts say the UAE and Saudi may step in to replace the $19 billion of proposed Qatari foreign direct investment over the next few years, now that their contribution is in question. 

Egypt’s business community is now counting on the military to keep to the strict six-month timetable it had laid out. The schedule puts parliamentary elections on target for February, and a presidential vote soon after.

For now, economists say the Gulf cash injection buys time for Egypt, which has been plagued by rising unemployment, nationwide fuel and wheat shortages and inflation that hit its highest level in two years. 

“They will use this income as a buffer to give them breathing space to tackle the key issues,” said Angus Blair, head of Signet Institute, the Cairo-based think tank. 

“Egypt can’t wait. If you look at the numbers, Egypt needs to keep paying for imports and public sector salaries, and you can’t wait another six, seven, eight months,” he said. 

Confidence is now being put into the new interim leaders, particularly 77-year-old former finance minister Beblawi, who was named interim prime minister and was a finance minister in the aftermath of the 2011 revolution. 

“I’m convinced he is a reformer,” Blair said, describing Beblawi. “He will get things done and he is full of energy, and very, very focused,” he said. 

The danger, however, is that the Gulf money makes economic reforms, and in turn an agreement with the International Monetary Fund for a $4.8 billion loan, less necessary. 

In the past, money from Egypt’s Islamist allies, including Qatar, Libya and Turkey, was predominantly used to artificially cushion the budget, allowing the Muslim Brotherhood to delay an economic reform plan. 

Meanwhile, the country has lost out on more technical restructuring help from international bodies such as the IMF. 

“I find it difficult to imagine that this interim government will be willing to push through politically difficult subsidy cuts, even though the leaders will be more willing to recognize they are needed,” said Rachel Ziemba, director of global emerging markets at Roubini Global Economics. 

An IMF loan is still necessary given the need to restructure Egypt's economy and debt, she said. “I'm just not optimistic it'll happen in the short-term.”