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Egypt's Crisis Threatens Foreign Aid

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Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, Stratfor cannot guarantee their complete accuracy.

As violent clashes continue between Muslim Brotherhood supporters and Egyptian security forces in the wake of Wednesday’s deadly crackdown, many of Egypt’s donors are publicly debating whether to suspend aid in a sign of protest against the military’s heavy-handed tactics.

European Union diplomats will be meeting Monday to discuss potential economic punitive measures against Egypt while several U.S. Congressmen are calling for legislation to suspend aid. There will be a lot of speculation over aid cutoffs setting off an even bigger economic implosion in Egypt, but the hype needs to be placed in perspective.

From 2009 to 2011 foreign aid accounted for about 1.5 percent of GDP annually. As the economy deteriorated from prolonged political unrest since the January 2011 uprising, Egypt’s dependency on foreign aid has naturally increased. If Egypt were to secure the roughly $14 billion in aid it’s been promised so far this year, its dependency on foreign aid would amount to about 5.5 percent of its GDP.

The total percentage of aid may sound limited on the whole, but it does play an important role in providing cash flow to the government to cover energy imports and monthly payments. This aid flow is important for Egypt to calm financial markets and thus lower its borrowing costs. It also helps ensure the unity and stability of the country’s most powerful institution, the military, which carries substantial economic clout and is a major aid recipient.

There is a low probability that Egypt will see a significant suspension of foreign aid. To make that case, we need to break down the current aid flows and understand the strategic interests informing those decisions.

The United States has historically been Egypt’s biggest donor, with $1.55 billion in total aid earmarked for the next fiscal year. With most of that aid going directly to the military - making up a quarter of Egypt’s defense budget - this aid package is now coming under scrutiny.

Though it has concerns that the military is going too far, the United States was relieved to see the military reassert itself against the Muslim Brotherhood in Egypt. The military in Egypt is the only institution capable of holding the state together. The United States has a strategic interest in ensuring the military remains unified and in control, that the military uses that control to help reinforce its peace treaty with Israel and facilitate a potential peace deal between Israel and the Palestinians. U.S. aid helps ensure privileged access through the Suez Canal for American vessels. Plus, steady military aid agreements are significant source of revenue and jobs for the U.S. defense industry (especially in times of sequestration) since all military aid is marked for procurement, upgrades, or maintenance of U.S. equipment

The United States will engage in symbolic moves to distance itself from the military’s actions, such as canceling military exercises and postponing weapons transfers. However, it is unlikely to compromise its strategic relationship with the military through an aid cutoff.

Over the past year, Gulf aid – in the form of financial aid and energy shipments - has been rising significantly. Saudi Arabia, the UAE and Kuwait are happy to see the Muslim Brotherhood suppressed and will continue to fund the military in meeting this strategic objective. Qatar, which earlier gambled its aid on the Muslim Brotherhood succeeding, is now recalibrating its position. Overall, we expect Gulf aid to Egypt to continue with the military in power.

Not counting bilateral aid, the European Union as a whole is a much smaller contributor, with roughly $600 million going to developmental projects over the past three years. Aid suspension on the EU level would not have a significant impact on Egypt economically, but if the EU in coordination with all 28 members, implemented sanctions, that would be another story. The EU is Egypt’s largest trade partner, with 24 percent of Egypt’s exports going to Europe. Though not as heavily invested as the United States, Europe shares similar strategic interests as the United States in maintaining the military’s strength, ensuring access through the Suez and keeping the peace treaty with Israel in check. EU-wide sanctions against Egypt are unlikely.

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