The West may consider pulling the plug on financial direct investment to Egypt in light of the recent state-approved military crackdown, but so long as Persian Gulf states continue to throw cash at Egypt, what does it matter?
If anything, the West risks losing its influence and grip on a country going through radical social, economic and political degeneration.
By cutting aid and reducing its power over Egypt, the West almost relinquishes its authority as the supposed “peacekeeper” in the Middle East. US President Barack Obama, together with fellow world leaders, notably German, French and UK officials, have widely condemned last week’s brutal crackdown by the Egyptian military and state against supporters of ousted president Mohamed Mursi and his political party, the Muslim Brotherhood.
After Mursi’s removal, the US carefully refrained from labelling it a military coup as that would mean the White House would legally be required to cut off military aid. But, since the escalation of violence and the subsequent killings of supporters of Mursi and the Muslim Brotherhood, the US is now said to be reviewing the $1.3 billion (R13bn) of aid it provides annually.
The US faces a moral dilemma here: how can financial assistance be given to a military that opens fire on its civilians and a government that sits and watches?
The EU faces the same dilemma. Officials are reviewing relations with Egypt and are said to be considering suspending e5bn (R67bn) of aid the EU promised Egypt after former leader Hosni Mubarak’s removal and the transition of power to Mursi.
Of course, a full suspension will have to be backed by all EU member states, but so far Germany and France have been vocal in their condemnations of the violence in Egypt. In addition, the UK, Denmark and Turkey have all expressed major concern, particularly Denmark as it pulled the plug on its financial assistance.
So, should the current powers in Egypt care if the West suspends aid?
Not really. The West endorses one vision of Egypt: a democracy. It may be a difficult and long path to achieve a functional democratically elected government, but there is little to suggest the country will de-revolutionise and fall into the hands of a dictatorship. If anything, the angst toward Mursi was because Egyptians feared that he was becoming authoritarian and imposing his Islamist views on the public.
This was known to Egypt’s lenders, not only the West but the Gulf states that grew wary of Mursi’s party; note that the Muslim Brotherhood is banned in Saudi Arabia. So, while all the West really wants is a democratic Egypt, on the other side the wealthy Gulf state lenders are happy to see the end of Mursi, with the use of violence being viewed as necessary.
Moreover, once democratic law and order return to Egypt, the West will resume its support, regardless of the violence taking place in the run-up to the elections. In truth, suspension of Western aid is a short-term pain. Importantly for Egypt, Gulf states have provided enough loans to see the country through to the end of 2013.
Even if the West pulls the plug on financial direct investments, the Gulf and other Arab nations won’t. The Saudis have pledged support and approval of the crackdown, which they describe as part of Egypt’s fight against “terrorism and extremism”.
So, that means more loans to fill in the gaps left by the lack of funding from the West. Egypt has secured some $12bn in financial assistance from its Arab neighbours after Mursi’s removal, and it’s likely the country will be able to negotiate more funds in the run-up to new elections.
What’s more interesting here is that Israel may be agreeing with the Gulf states rather than with the US, as cracking down on Islamists and insurgents is in Israel’s interest. The Muslim Brotherhood have claimed responsibility for installing Hamas, but the tension between Islamists and the Egyptian state is a worry for Israel.
However, brutal action by the Egyptian military has effectively ended the chance of reconciliation, which as a result delays the process of installing a newly democratically elected government. This tarnishes Egypt’s economic prospects even more than only a week ago, and foreign investors will have little choice but to stay clear from this deeply troubled sovereign.
* Ishaq Siddiqi is a market strategist with ETX Capital in London.