The Media Line Staff
Tel Aviv, Israel (TML) – Western powers and their allies in the Middle East hope to grease the wheels of democracy and political stability as they begin to release billions of dollars in loans and other financial aid to the region’s Arab Spring economies.
The economies of countries like Egypt, Tunisia and Jordan are facing a near-perfect storm of political unrest combined with negative growth and rising prices for imported energy and food. But the emerging aid pipeline may be clogged by domestic opposition inside donor countries. Recipients may balk at the conditions placed on much of the aid.
Aid could ease the way for Egypt and Tunisia to evolve into Western-friendly democracies as well as give a boost to beleaguered friends like Jordan’s King Abdullah. Without it, deteriorating economic conditions risk strengthening the hand of already powerful Islamic movements and undermining public confidence in the free markets and private business that economists say are needed to ensure long-term prosperity.
“These countries, particularly Egypt, face a financial hole and their economies have come to a standstill. The way out is to spend money which their governments don’t have,” said Paul Rivlin, author of Arab Economies in the Twenty-First Century. But the recipients will have to show they are taking the right political and economic measures. “The U.S wants to draw them back into a Western orientation. But the political systems in these countries may draw them elsewhere.”
Egypt, as the biggest of the Middle East’s troubled economies and the country most likely to set the direction of the region political, is the focus of the aid.
The International Monetary Fund (IMF) kicked off the effort May 12, saying it would respond to Egypt’s request for as much as $12 billion. That amount has since has been lowered to $4 billion. But in the meantime, U.S. President Barack Obama last week offered to forgive some $1 billion in Egyptian debt and. Egypt is reportedly close to an agreement with the World Bank to receive loans worth $2.2 billion.
But the biggest largesse of them all may come from Saudi Arabia, which on Saturday pledged $4 billion in the form of soft loans, deposits and grants, the Egyptian Middle East News Agency (MENA) reported, citing Field Marshal Mohamed Hussein Tantawi, the head of Egypt’s ruling military council, as saying.
Egypt won’t be the only beneficiary of international aid.
On Saturday, the European Bank for Reconstruction and Development (EBRD), which was formed to smooth eastern Europe’s transition to free market democracies, is working on a program that may eventually lead to investment of as much as 2.5 billion euros ($3.5 billion) a year in the Middle East. The EBRD said it is considering a request by Egypt to become a country of operations. Morocco, another EBRD shareholder, has also expressed an interest in qualifying, it said.
On Monday, the Group of Eight (G-8) – a forum for many of the world’s biggest economies – will discuss how they can contribute to modernizing the economies of the Middle East, without pledging dollar amounts for assistance. A special session will be devoted to Tunisia and Egypt.
Tunisia plans to attract $5 billion a year in foreign aid, loans and private investments over the next five years during meetings at the G-8 summit, Finance Minister Jelloul Ayed said in an interview with The Wall Street Journal Friday. Tunisia would apply for a $500 million standby loan, possibly from the World Bank.
Obama told a visiting King Abdullah that he would provide Jordan with several hundred millions of dollars in aid, channeled through the Overseas Private Investment Corp. (OPIC). Obama said the funds would “leverage ultimately about $1 billion for economic development in Jordan.”
Rivlin said Washington will lead the aid drive and should America judge that the Arab Spring economies aren’t meeting its conditions it “will be difficult” for Europe and international institutions to provide it either.
The Arab Spring economies are in bad shape by almost every measure. The five countries hit hardest by turmoil will show a combined drop in economic output of about 2.3% this year, according to figures based on a forecast by the Institute for International Finance (IIF) released in early May.
Egyptian Finance Minister Samir Radwan estimates his country’s budget deficit will top 10% of gross domestic product in the coming fiscal year, up from a previous forecast of 7.9% and has to borrow to cover the gap. Its official foreign currency reserves have fallen to $28 billion, but some economists think the drop is bigger than being report.
Uri Dadush and Marwan Muasher, from the Carnegie Endowment for International Peace, expressed concern that it will be difficult to convince the leaders of Egypt and other recipient countries to undertake the economic reforms needed to rekindle economic growth and enable them to eventually get off aid.
So far, the transitional governments of the region, as well as veteran leaders trying to retain power, have increased subsidies for consumer goods and promised to create jobs, all at a cost to badly strained budgets and economic efficiency. But Dadush and Muasher add that the bigger problem may be convincing Arab public opinion that free markets are beneficial.
“Change in the Middle East is about refusing an autocratic political system and calling for democracy – without a clear vision for what economic system should be put in place,” they wrote in the National Interest on April 13. “There is a significant possibility that the governments that ultimately emerge out of this crisis will renounce previous economic reforms as misguided.”
Indeed, many analysts think Egypt won’t agree to the economic reforms the IMF typically demands in exchange for its aid, such as subsidy cuts, for fear that they will spark another round of mass protests like the kind that brought down President Husni Mubarak in February.
“For understandable political reasons, the Egyptian government says that it is unthinkable to cut subsidies for food or energy. But can the IMF simply extend a loan without any conditionality? I doubt it,” Gideon Rachman wrote in the Financial Times last week.
Back at home, both American and European leaders will have to make a case for sending billions of dollars overseas at a time when they are experiencing severe economic difficulties of their own. Europe is trying to put out debt fires in Greece, Portugal and Ireland.
In the U.S., President Barack Obama is battling Congress over increasing the country’s debt ceiling. He faces opposition from a Republic-controlled House of Representatives to helping countries whose allegiance to America is more in doubt as long-time pro-Western despots are replaced by governments whose views are yet to be fully articulated.
The U.S. budget is weighed down by $14 trillion in debt as the White House and Congress fight over raising the national debt ceiling.
“Considering our own national debt, we cannot afford to forgive up to $1 billion of Egypt’s debt,” Elena Ros-Lehtinen, the chairwoman of the House Foreign Affairs Committee, said last Thursday. “The U.S. should only provide assistance to Egypt after we know that Egypt’s new government will not include the Muslim Brotherhood and will be democratic, pro-American and committed to abiding by peace agreements with Israel.”
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