$12 billion in aid for Egypt only temporary boost

CAIRO (AP) -- A promise of $12 billion in aid from wealthy Arab Gulf nations would give Egypt's new military-backed leadership breathing room by paying for vital food and fuel imports. But the benefits would be only temporary, because Egypt's broken economy remains unrepaired.

More than two years of political turmoil, violence and deterioration in security have frightened away tourists and foreign investors. Just as harmful, badly structured subsidies on food and fuel eat up almost a third of Egypt's strained budget.

The most recent round of violence, when more than 50 supporters of ousted Islamist President Mohammed Morsi died in clashes with the military on Monday, is likely to ripple through the economy, spreading doubts over the new leadership's ability to provide stability.

A key demand among millions of people who demonstrated against Morsi was better living conditions. Little improved when he took office a year ago, after poverty, rampant corruption and crony capitalism propelled millions to join the youth-led uprising against President Hosni Mubarak in 2011.

Morsi inherited critical economic problems, and the economy deteriorated further under his one-year rule. The Egyptian currency lost more than 10 percent of its value against the dollar this year, unemployment rose to 13 percent and his government relied on handouts from sympathetic neighboring countries to survive.

This reinforced the impression that Morsi was incapable of governing, according to economic rights expert Amr Adly.

Now Saudi Arabia, Kuwait and the United Arab Emirates, longtime critics of Morsi's Muslim Brotherhood, are stepping up to back his replacements.

The $12 billion in aid, a mix of grants, cash deposits and oil and gas products, will likely be used by the incoming government to try to avert another gas and electricity shortage like the one just before Morsi's ouster nearly two weeks ago.

On Wednesday, Kuwait announced its offer of $4 billion — a $2 billion cash deposit, a $1 billion grant and $1 billion worth of oil products.

A day before, the UAE announced its $3 billion aid package to Egypt, $1 billion of which is a grant and $2 billion of which is a no-interest loan.

Regional powerhouse Saudi Arabia weighed in with the largest aid package — $5 billion, made up of $2 billion to be deposited in Egypt's central bank, $2 billion worth of oil and gas and $1 billion as a grant.

The $7 billion flowing directly into Egypt's central bank is needed to keep foreign reserves from plunging further, after the bank warned they had already reached a "critical level." Reserves stood at just $14.9 billion at the end of last month, less than half of what they were before the political upheaval that began in 2011.

The changes also mean that the tiny but influential Gulf state of Qatar has been sidelined after it showered Morsi's government with around $8 billion in aid over the course of the past year. Qatar is a key backer of the Brotherhood in the region.

Ashraf Swelam, an economist and senior advisor to former presidential candidate Amr Moussa, warned that the billions of dollars in assistance may help Egypt stay afloat for only about six months. That's when parliamentary elections are scheduled, according to a timetable drawn up by the interim president.

"The aid is not enough to cover the financial gap," he said. "The importance of it is that it provides Egypt's economy with a lifeline."

Swelam said the aid is important for Hazem el-Beblawi, the country's newly named prime minister who is also a French-educated economist, because it gives him "breathing space to maneuver" while paying Egypt's debts, subsidies and government salaries for a while.

However, the caretaker government will not likely be able to introduce needed changes to the economy, since it has neither an election mandate nor much time to implement reforms.

Egypt's interim president has promised parliamentary and presidential elections early next year. But the timetable could be derailed by unrest or credible threats that voting could make economic matters even worse.

The Muslim Brotherhood rejected the transition plan, charging it "confirms that those who carried out the coup, the dictator generals, don't respect the will of the people." Refusing to take part in the new government, the Brotherhood has instead called for an uprising against the military.

The rush by some Gulf countries to aid Egypt also reflects key regional support for the military in its power struggle against Morsi's Brotherhood.

The Saudi king praised the military's move, and Anwar Gargash, the UAE's minister of state for foreign affairs, wrote in a commentary posted on Foreign Policy's website that "the rejection by Egyptians of their Islamist government marks a turning point — not only for that country, but for the entire Middle East."

According to Mohsin Khan, a senior fellow at the Rafik Hariri Center for the Middle East at the Atlantic Council in Washington, the money from Gulf nations is aimed at keeping Egypt from collapsing.

"It will not go to improving the economy, but to keep it from being worse. This money is essentially going to shore up the foreign currency reserves," he said. "It will not be used to get Egypt out of the economic downturn it is in. At best in can just stabilize the economy temporarily."

The political quagmire means Egypt is also further away than ever from securing a $4.8 billion loan from the International Monetary Fund. The IMF requires political consensus in the absence of an elected government before signing on to the loan. Morsi's Brotherhood is unlikely to back any initiative by a new government, while liberals have long complained the IMF deal comes with too many conditions.

Khan, who was also head of the Middle East department at the IMF, said that while Gulf aid has surpassed what the IMF could offer Cairo, it fails to send positive signals about Egypt to investors who can create jobs for long-term economic recovery.

"This money from the Gulf countries is viewed by everyone in the market as politically motivated and will not have any impact on foreign investors," he said.