A pledge of 12 billion dollars in aid from Gulf States to Egypt has revived hopes of a closer relationship between the Middle Eastern neighbours. Following the toppling of Mohamed Morsi and the declaration of a new roadmap for Egypt, a number of Persian Gulf States rushed to provide economic aid.

A pledge of 12 billion dollars in aid from Gulf States to Egypt has revived hopes of a closer relationship between the Middle Eastern neighbours. Following the toppling of Mohamed Morsi and the declaration of a new roadmap for Egypt, a number of Persian Gulf States rushed to provide economic aid.

“The financial packages provided by Persian Gulf States are intended to rebuild relations that deteriorated last year,” says Dr. Hisham Ibrahim, professor of economics and finance at Cairo University, stressing that the aid would ease the pressure on the country’s public budget and would considerably revive the economy.

Kuwait for example, declared that it would provide a four billion dollar aid package, in the form of a two billion dollar deposit in the Central Bank of Egypt (CBE), a one billion dollar charitable contribution and one billion dollars’ worth of oil and donations in kind. The UAE also said it would provide Egypt with a one billion dollar donation and a two billion dollar interest-free loan in the form of a CBE deposit.

Saudi Arabia joined the giving mood too, saying it would provide Egypt with a five billion dollar aid package –again in the form of a two billion dollar CBE deposit, two billion dollars’ worth of oil products as a donation and one billion dollar in cash.

Rebuilding relations

“The Gulf’s politically oriented aid is in essence economic, since Egypt needs economic assistance in order to stabilize politically,” said the head of the economic section at the Al-Ahram Al-Arabi newspaper, Hamdi Jamal.

“Without such aid which will consolidate economic stability, there will be no political stability.” Jamal believes that the former regime completely ignored the Persian Gulf states, especially the UAE and Kuwait, and went to Iran instead, which is the UAE’s strategic adversary. So the deposed president’s administration failed to appreciate the dimensions and priorities of Egypt’s foreign policy.

“The new pledge of generous economic aid is a reward for changing a regime whose interests were in conflict with the interests of the Persian Gulf states,” says economic expert Dr. Faraj Abdulfattah. “

The Persian Gulf States had refrained from providing aid to Egypt since they opposed the Brotherhood’s policies. And after the brotherhood’s regime was ousted, Gulf aid arrived given that all causes of disagreement ceased to exist.”

Warnings against increased internal debt

Experts warn however that the incoming aid, which has already started to arrive according to CBE governor Hisham Ramez, should be handled carefully. Others are worried about a potential dependency on foreign aid. “We expect the external debt to GDP ratio will reach 22% after receiving the Gulf aid, compared to 15.1% last June. I therefore call upon the government not to totally depend on foreign aid, especially since the country has huge internal debt,”Professor of Economics Rashad Abdo, at the American University in Cairo, told Correspondents.

This financial aid, concurs Jamal, will put a burden on the country’s budget if it is used to ease the deficit or to purchase basic needs and core commodities. He believes that the CBE should use the aid to improve its reserves of hard currency and to encourage opening new documentary credits to positively benefit from that aid, especially since it is interest-free.

A kiss of life

The new economic aid to Egypt from its neighbors is giving birth to lots of debates about how it should be spent. “The aid should be invested in new economic projects to stimulate growth and create jobs in order to reduce unemployment rates,” explained Former President of Sadat Academy for Management Sciences Dr. Hamdi Abdulazim.

“These loans and donations will considerably improve the CBE’s reserves of hard currency, which will consequently help stabilize the exchange rate of the dollar, lower the prices of imports, and prevent Egypt’s credit rating from being downgraded by international rating agencies,” he added.

Muhsen Adel, an economic analyst, says the aid will give the country a chance to catch its breath. “Egypt needs to quickly stabilize its economy by restoring the previous levels of tourism and investments,” says Adel.

Adel calls on the government to search for economic alternatives, such as collecting tax arrears, rationing spending, developing a stimulus plan to invest bank deposits in safe alternatives, reviewing non-active assets, reopening inoperative factories and turning the Suez Canal into an international economic zone for logistical services to boost trade and growth.