“America is behind the chaos,” blared a red headline on the front page of state-run Al-Gomhuria newspaper last week. The Muslim Brotherhood said U.S. money was being spent “to destroy Egypt and ruin its society.” The dispute over the prosecution of employees at U.S.-based NGOs, accused of breaking rules on foreign financing, has opened the deepest rift for decades between the military allies. It’s happening as the government prepares to submit an economic program to parliament that will be the basis for its application for a $3.2 billion IMF credit.
Egypt needs the money to help an economy in stagnation since last year’s uprising against Hosni Mubarak. Tourists and investors have stayed away and the central bank, seeking to avert a currency crisis, spent more than half its reserves. Bond yields rose this month amid investor concern that a worsening dispute with the U.S. will complicate efforts to raise funds.
The rift “adds fuel to the fire and can negatively affect the conditions under which Egypt might obtain an IMF program,” said Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt. “The IMF is still very much dominated by the U.S.”
$11 Billion Needed
Finance Minister Momtaz El-Saieed said this month that Egypt needs $11 billion to “fund economic reforms.” Prime Minister Kamal el-Ganzouri has repeatedly said that Egypt hasn’t received money pledged by western and Arab countries. Foreign reserves (EGIRES) plunged to $16.4 billion in January, covering little more than three months of imports.
Yields on Egyptian dollar bonds maturing in 2020 rose to 7.31 percent last week, up 57 basis points since Jan. 26, when the State Department said several U.S. citizens had been questioned by Egyptian judges. Yields surged to a record 8.79 percent earlier last month before retreating when the government reversed course and announced it would apply for IMF loans that it rejected last year.
Americans charged in the case include Cairo staff from the National Democratic Institute and the International Republican Institute, non-governmental organizations allied with the Republican and Democratic parties. Sam LaHood, son of Transportation Secretary Ray LaHood, was among them. Barred from traveling, several took refuge at the U.S. Embassy compound.
Egyptian leaders say they can’t intervene in what is a matter for the judiciary. El-Ganzouri said Feb. 8 he won’t bow to U.S. pressure even at the expense of aid.
The U.S. has given Egypt some $2 billion a year on average, mostly to the military, since it signed a peace treaty with Israel in 1979, and promised extra assistance to back the transition to democracy after Mubarak’s fall. The U.S. warned that the NGO dispute may threaten aid.
The Muslim Brotherhood, whose bloc won almost half the seats in parliamentary elections ending last month, hailed what it said was the government’s “patriotic” position.
Mohamed Morsi, who heads the Brotherhood’s political party, said in a video on the group’s website that annual U.S. aid is linked to the treaty with Israel, and suggested that cutting it could lead to a review of the accord.
This week’s newspaper headlines cited Planning and International Cooperation Minister Fayza Aboulnaga telling investigators about the threat from U.S. NGOs. A holdover of Mubarak’s regime who survived successive Cabinet purges, Aboulnaga is widely seen as the driving force behind the case.
“At a time when Egypt needs as much international assistance it can get, this assistance is threatened by the very existence of Fayza Aboulnaga at the top of that ministry,” said Shadi Hamid, director of research at the Brookings Doha Center in Qatar. “Perhaps she doesn’t realize the irony: attacking NGOs for receiving American funds, while her government receives more than $1.3 billion in aid annually.”
Aboulnaga said she was being subjected to a campaign of defamation, according to the Cairo-based Al Masry Al Youm newspaper. She told Bloomberg in Cairo last week that the NGO dispute won’t affect Egypt’s “strategic relationship” with the U.S. or talks with the IMF.
Asked about concern that Egypt’s dispute with the U.S. may affect its loan prospects, the IMF said in an e-mailed statement that “the success of the authorities’ economic program hinges critically on broad political support from a cross-section of stakeholders in Egypt, as well as financial support from multilateral and bilateral development partners.”
Donors Await IMF
A holdup in the IMF loan could block other sources of support.
“Many donors are waiting for an IMF deal to be put in place first,” said Michael Cirami, who helps manage $12 billion at Boston-based Eaton Vance. “It’s hard to envision the U.S. participating as a donor while at the same time U.S. NGO workers are being charged.”
The case highlighted resentment among Egyptians at U.S. backing for Mubarak and other autocratic Arab regimes, and perceived favoring of Israel over Palestinians.
Seven in 10 Egyptians surveyed by Gallup in December oppose American economic aid to Egypt, and a similar percentage opposes the U.S. sending direct aid to NGOs, the research company said this month. Aid from international institutions was more popular, with half of respondents in favor.
Mohammed Hassan, a Salafi cleric, has called on Egyptians to replace foreign aid with money they raise themselves. Television channels should dedicate airtime to drum up donations, he told the Al Nahar channel.
“Egypt is capable by the grace of God and of its men abroad and children at home to do away with U.S. aid which has became a cause for humiliation,” Hassan said.
Some investors don’t expect the NGO dispute will have much bearing on IMF talks.
“We believe these two issues are completely separate,” said Rami Sidani, the Dubai-based head of Middle East and North Africa investments at Schroder Investment Management. “The army is trying to restore the relationship with the U.S., so we are not expecting any escalation.”
The government may need to clear other hurdles. Egypt turned down a similar loan arrangement with the IMF in June when the ruling generals said they didn’t want to burden future generations with debt.
The erosion of reserves since then has made Egypt’s financial needs more acute. Another change, though, is the election of the first post-Mubarak parliament, which will need to approve an IMF loan agreement.
Essam el-Erian, a leader of the Brotherhood’s party, says his group may vote against it, unless it is convinced there are no alternatives. He said Egypt should trim spending, and cited the risks of borrowing abroad.
“Look at Greece,” el-Erian said in an interview. “Everybody is telling it what to do.”