Egypt’s $1.5 Billion U.S. Aid Questioned Amid Crackdown

U.S. lawmakers are questioning whether to continue sending $1.5 billion a year in aid to Egypt, setting the stage for cuts or conditions that may weaken relations, jeopardize Egypt’s peace treaty with Israel, and hurt U.S. defense companies.

The political turmoil in Egypt, with the Muslim Brotherhood coming to power through elections, coincides with intense pressure on Congress to cut federal spending. While Egyptian aid is tiny relative to the budget deficit, foreign aid has never been popular with lawmakers since polls show that voters favor cutting what they think is a costly program.

“It is becoming increasingly difficult to make the case for assistance to the Egyptian government,” said Senator Patrick Leahy, the Vermont Democrat who heads the subcommittee that oversees spending on foreign operations.

The issue is gaining attention as Egyptian President Mohamed Mursi has sought to quell protests with force, following other moves that raised U.S. concerns -- his anti-Semitic comments, opposition to Western intervention in Mali, and temporarily asserting broad governing powers. Still, reducing or threatening to reduce aid may not encourage Mursi to moderate and could backfire, said analysts such as David Schenker of the Washington Institute for Near East Policy.

U.S. aid has been a key lever of influence with Egypt for decades, helping solidify relations with its military leadership, connect with the Egyptian public through development projects, and maintain preferential Suez Canal transit for American warships. Egypt regarded aid as part of the deal when it made peace with Israel through the U.S.-brokered 1978 Camp David agreement.

‘Strings Attached’

Congress will have to examine the enormous changes in Egypt as lawmakers set aid levels for the next fiscal year, said Representative Frank Wolf, a Virginia Republican on the House Appropriations Committee. At the very least, he said, it’s clear that tougher standards will have to be applied to any U.S. funds for Egypt.

“At a minimum, we need to have strings attached,” Wolf said.

Referring to the Islamist political party Mursi helped lead before he ran for president, Wolf added: “This is a Muslim Brotherhood government. These are not democratic reformers.”

More than 50 people have been killed in demonstrations that broke out in Egypt on Jan. 25, two years to the day after protests began that led to the downfall of then-President Hosni Mubarak.

The Obama administration expressed some ambivalence about Mursi as the violence spread.

‘Jury’s Out’

“The jury’s out,” outgoing Secretary of State Hillary Clinton said Jan. 29 on Fox News. “I’ve been around long enough, so it’s not what somebody says; it’s what they do. And some of what he’s done we have approved of and supported; and some of what he’s done, like abrogating a lot of power unto himself personally, reinstating emergency law provisions that had been a hallmark of the Mubarak regime, are very troubling.”

Egypt this year receives $250 million in economic assistance and $1.3 billion in military aid. Even before the recent unrest, U.S. lawmakers have shown some reluctance to provide funds to Egypt without imposing conditions.

In a measure approved by the House appropriations panel last year, the secretary of state would be required to provide reports about how Egypt’s aid is being used and on human rights compliance. Senate legislation sponsored by Leahy required the administration to certify that Egypt’s government was promoting freedoms and rights before aid could be released.

Aid Released

A provision of Leahy’s bill allowed Clinton to waive that requirement on national-security grounds, which she did in March to release the aid. That action avoided a U.S. election-year disruption in arms sales that might have cost thousands of American jobs and as much as $2 billion in contracting penalties for the U.S. government.

Any new U.S. threat to cut aid may be undermined by changes in Egypt since Mubarak was ousted in February 2011, said Khaled Elgindy, a fellow at the Brookings Institution, a Washington policy group.

He said that Congress also threatened Mubarak with aid cuts. The difference now is that Mursi isn’t the nation’s commander-in-chief as Mubarak was, Elgindy said, so cutting military aid wouldn’t necessarily punish the government leadership.

Military Establishment

The military “has come to some sort of relationship with the Brotherhood, but it’s exempt from scrutiny and not under Brotherhood control,” said Elgindy. “These are two different entities and relationships. Mursi doesn’t have total control over the military establishment, and at the same time the military establishment is not the one that is violating the people’s rights on the ground.”

Schenker of the Washington Institute agreed that aid cuts are “not an arrow we have in our quiver to try to dissuade this government in Egypt from making bad decisions.”

Further, cutting military aid would have U.S. domestic consequences. Egypt’s $1.3 billion in annual in U.S. military aid must be spent on American goods.

The Egyptian military uses those funds to buy from companies such as General Dynamics Corp. (GD) of Falls Church, Virginia, which makes M1A1 tanks that are assembled outside Cairo, and Lockheed Martin Corp. (LMT) of Bethesda, Maryland, which builds F-16 fighter jets.

Under the financing agreement with Egypt, the U.S. government would be required to pay contractors’ termination fees for canceled contracts. Cutting military aid to Egypt would hurt U.S. companies and taxpayers, Schenker said.

Serious Look

“You have taxpayers on the hook for contracts we cancel, if we wanted to stop those F-16s,” he said.

Instead, Congress should re-examine the way aid to Egypt is structured, Schenker said. “We have to take a serious look at how the U.S. foreign assistance to Egypt is administered,” he said. “Even if we modify that today, it will take years.”

Representative Tom Cole, an Oklahoma Republican and a member of the House Appropriations Committee, suggested shifting some of the military aid to economic aid.

“A good case can be made that some of this should be redirected to economic aid,” Cole said in an interview. “The problems with the domestic economy there is creating some of the tensions we see right now. Tourism, for instance, has taken a terrific beating.”

Egypt’s unemployment rate is projected to hit 14 percent this year from about 9 percent in 2010, and credit risk is rising, according to data compiled by Bloomberg. The central bank kept interest rates on hold yesterday despite the country’s weakening currency.

Egypt’s Help

Cole said he appreciates that Egypt has done things in return for U.S. aid -- such as permitting American warships to go “to the front of the line” in the Suez Canal and cooperating on intelligence matters. Cole said Mursi also helped negotiate a resolution of Israel’s November military operation in the Gaza Strip, which was launched in response to Palestinian rocket fire.

Even so, the Egyptian leader’s rhetoric on Israel and his government’s anti-democratic steps warrant increased conditions on aid, he said.

While foreign assistance is less than 1 percent of the U.S. federal budget, the American public’s concern about domestic programs being cut is another factor, he said.

“I’m sorry, we have a political reality in this country, just like they have in other countries,” Cole said.

Religious Freedom

Religious freedom should be a factor in any conditions, said Cole, citing violence and discrimination against Copts, Egypt’s native Christians.

Wolf recently met with young bloggers from Cairo and would like to see freedom of expression added to the list.

“There’s reason to both question the level of aid to Egypt, and to put some restraint on there,” Cole said.

“We need assurances that the American Embassy is going to be protected and that American nationals aren’t going to be unnecessarily harassed,” Cole said. “I want to work with the Egyptians, but I don’t think carte blanche on aid is the appropriate policy given some of the developments in the last year.”

To contact the reporters on this story: Nicole Gaouette in Washington at ngaouette@bloomberg.net; Laura Litvan in Washington at llitvan@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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