Arab Gulf States Promise to Prop Up Egypt’s Failing Economy

Saudi Arabia and the United Arab Emirates promise to provide much needed cash for Egypt’s interim government.

Arab Gulf states pledged up to $8 billion in financial aid to Egypt on Tuesday, signaling their support for its army’s removal of Islamist president Mohamed Morsi from office last week. Adli Mansour, the former chief justice who was installed by the military as acting president, named former finance minister Hazem el-Beblawi premier on the same day.

Saudi Arabia offered $3 billion in cash and loans as well as $2 billion worth of fuel. The neighboring United Arab Emirates promised a $1 billion grant and a $2 billion loan.

Egypt desperately needs the money while it is running a $32 billion annualized trade deficit and running out of food and fuel supplies. Investment and tourism have also dwindled since the start of the “Arab Spring” uprising more than two years ago. The government’s shortfall expanded to the equivalent of 11.5 percent of economic output while it tried to ameliorate the crisis but Morsi made little progress on securing a loan from the International Monetary Fund that could have helped, balking at its demands for fiscal consolidation.

The Arab kingdoms were expected to extend a helping hand as soon as Morsi was overthrown. With the exception of Qatar, they despise his Muslim Brotherhood which came to power after mass demonstrations in early 2011 forced their ally and veteran president Hosni Mubarak to step down.

The Saudis in particular regard the Muslim Brotherhood warily because it questions the monarchy’s legitimacy and is increasingly a competitor for leadership in the Sunni Muslim world. They have backed the second most popular Islamist party in Egypt instead, al-Nour, which supported the coup but threatened to pull out of the transitional government over the weekend when Mansour was due to nominate Mohamed ElBaradei as interim prime minister — a man the Saudis also mistrust because, in their view, he downplayed the Iranian nuclear threat while he headed the International Atomic Energy Agency. Iran and Saudi Arabia are locked in a struggle for regional hegemony.

al-Nour had no objections to Beblawi, its deputy leader told Bloomberg News in a telephone interview. “El-Beblawi is a technocrat, economist and a nonpolitical figure who’s able to move forward the process of national reconciliation,” he said. ElBaradei will become vice president instead with foreign policy responsibilities.

Beblawi criticized Morsi’s economic policies in an interview with Daily News Egypt last month. “During the past year, there were some economic diseases that needed to be addressed but weren’t,” he lamented. “Most dangerously was the budget deficit that is on the rise along with the balance of payments deficit, the increasing levels of foreign debts and the absence of transparency in handling all this.”

Beblawi recognized that fuel subsidies, which account for between a fifth and a quarter of public-sector spending, are “unsustainable” and urged Egyptians to “understand that they must accept some of the consequences.” It suggests that he might seek to reduce the subsidies where the Muslim Brotherhood wouldn’t for fear of losing popular support.

The subsidies benefit wealthier Egyptians more than the poor, few of whom own cars. The World Bank’s chief economist for the Middle East and North Africa estimates that the richest 20 percent of Egyptians take in more than half of fuel subsidies. However, many poor Egyptians also depend on subsidized LPG to cook food while millions of Egyptian farmers rely on cheap diesel to fuel their irrigation pumps.

The Muslim Brotherhood only wrecked more havoc to the economy by imposing capital and price controls that contributed to high inflation — forcing Egyptians to turn to the black market for affordable goods. “In the face of the Brotherhood’s wrongheaded economic policies, official inflation and price statistics took leave of reality and the black market quickly became a source of material support that the Muslim Brotherhood’s government could not provide,” Steve H. Hanke wrote at the libertarian Cato Institute’s blog on Monday.

The interim government must do better. Especially when Muslim Brotherhood supporters continue to take to the streets to protest the coup, it can ill afford to underperform which would tarnish its credibility and perhaps by implication the army’s as well.