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Politics hinders aid to Arab Spring economies
Over a year since the Middle East's revolts began, countries hit by unrest are having trouble obtaining the foreign aid they badly need to rebuild their economies and ease social problems
Reuters, Wednesday 27 Jun 2012
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Tahrir protests
A recent protest in Cairo's Tahrir Square (Photo: Reuters)

When Saudi Arabia withdrew its ambassador to Cairo in late April, yields on Egyptian Treasury bills rose and stock prices slipped as investors feared Egypt would be cut off from billions of dollars of Saudi financial aid.

The diplomatic row, triggered by street protests in Cairo against Saudi Arabia's arrest of an Egyptian lawyer, was quickly patched up. The ambassador returned to Cairo within a week and a few days later, Saudi Arabia placed a $1 billion, eight-year deposit in Egypt's central bank.
 
But more than a year after the start of the Arab Spring uprisings around the Middle East, the incident showed how countries hit by the unrest face uncertain prospects for obtaining foreign aid, which is badly needed to rebuild their economies and ease social tensions.
 
The international community, including the biggest Western economies and wealthy Gulf Arab oil exporters, pledged tens of billions of dollars of assistance last year. But only a small fraction of that sum has actually been handed over; in some cases, aid flows appear to be blocked or slowed by politics, economic policy or tight state budgets.
 
"There is no such thing as a Marshall Plan for the MENA (Middle East and North Africa) region," said Alia Moubayed, senior economist for the Middle East at Barclays Capital in London, referring to the U.S. aid scheme which helped Europe recover after World War Two.
 
"Resource-rich Arab countries are channelling their financial support directly to Arab Spring countries in need based on their own economic and political strategic interests."
 
At a May 2011 summit in France, leaders of the Group of Eight major nations pledged some $40 billion of aid, mostly cheap loans, to Egypt and Tunisia over an unspecified time period. There was to be $10 billion in bilateral aid from individual G8 states, $10 billion from wealthy Gulf nations, and $20 billion from multilateral lenders such as the World Bank.
 
In September, the G8 almost doubled the promised sum, adding Morocco and Jordan to the list of aid recipients. Separately, rich Gulf countries decided last year to establish a $20 billion fund to give Bahrain and Oman grants of $10 billion each over 10 years for development and social projects.
 
The donors have strong geopolitical reasons to promise aid: if the Arab Spring economies cannot generate enough growth and jobs, political instability there could worsen and spread to other countries, engulfing the entire region.
 
So far, however, actual flows of money to needy nations have been much smaller than they hoped. Scattered loans and grants have been forthcoming, but generally in the form of a few hundred million dollars here, $500 million there - not nearly enough to solve the severe budget and balance of payments problems faced by Arab Spring countries.
 
Moubayed estimated that of $60 billion of economic aid pledges made to impoverished Arab nations last year, around $15 billion had actually been disbursed.
 
Egypt, for example, was hoping last year for aid flows of well over $10 billion to rebuild its sliding foreign exchange reserves and plug its budget deficit. It has received no more than roughly half that amount; talks on a $3.2 billion loan from the International Monetary Fund have been inconclusive.
 
Bahrain said last week that the $20 billion aid fund announced by its wealthy neighbours over a year ago had not yet been capitalised, though it still expected to receive an initial allocation soon.
 
Some businessmen and economists say the international community risks disaster in the struggling economies of North Africa if it does not do more to help them.
 
"Lacking a comprehensive long-term plan for Arab Spring economies may lead to dangerous consequences, and this could have many political, economic and social effects, including the possibility of a reversal of the situation to even worse than before," said Adnan Ahmed Yousif, chairman of the Union of Arab Banks and president of Bahrain-based Al Baraka Banking Group.
 
One reason for donors' slowness to stump up money lies within the Arab Spring countries themselves. Distracted by domestic political tensions and messy transitions to democracy, governments have been unable to promise economic policies that would convince donors their funds would be well spent.
 
Masood Ahmed, IMF director for the Middle East, told Reuters in May that to secure an IMF loan, Egypt needed to do more to reform its economic policies, find other revenue sources and secure support for the loan across its political spectrum.
 
Another obstacle to aid is that demand for it is emerging during a global financial crisis. For cash-strapped governments in Europe and the United States, following through on pledges is becoming increasingly difficult.
 
One way around this problem is providing loan guarantees rather than direct aid; the U.S. Treasury said in April it was giving Tunisia as much as several hundred million dollars in guarantees to help that country borrow in international markets. Assuming Tunisia eventually pays back its borrowing and the guarantees are not activated, Washington will be able to help the country without stumping up a significant amount of money.
 
But global markets are too weak for countries to obtain much of their funding in this way, so delays in loans and grants from the West are damaging.
 
"Calls for a Marshall-type plan come at a time when the economies and financial systems of the U.S. and the eurozone are experiencing a debt crisis, and they are not in a position to provide the necessary funds for such a plan," said Yousif.
 
For Gulf Arab donors, the problem is not tight budgets; high oil prices over the past year have left governments flush with cash. Instead, political considerations may be making countries such as Saudi Arabia and the United Arab Emirates cautious about extending aid, analysts said.
 
In the eyes of conservative Gulf Arab governments, the success of Islamist groups via elections in Egypt, Tunisia and Morocco could pose an ideological and diplomatic threat. Deposed Egyptian president Hosni Mubarak was a longtime ally of Gulf rulers; the rise of Egypt's Muslim Brotherhood, which this week secured the Egyptian presidency, may embolden fellow Islamists seeking revolutionary change around the Middle East.
 
So while the Gulf governments have a strong incentive to provide enough aid to prevent Arab Spring economies from collapsing, they also have an incentive to dole out the aid slowly in relatively small amounts, thus retaining political leverage over the recipients.
 
Ali Zbeeb, legal advisor to the Union of Arab Banks, which lobbies for the industry around the region, said that because of continued political instability in some countries, Arab and Western donors had begun reevaluating their aid pledges.
 
"No one is willing to inject cash into a system that creates fundamental differences with the donor - this would backfire and defeat the purpose of such support," he said.
 
The United Arab Emirates announced about a year ago that it would provide $3 billion of aid to Egypt, but the funds have not yet been transferred, according to an Egyptian source familiar with the matter, speaking anonymously because of diplomatic sensitivities. A senior UAE official said late last year that his government was still discussing the delivery mechanism.
 
Since government-to-government aid is having only mixed success in solving the problems of Arab Spring economies, many analysts think the private sector needs to become more involved.
 
International Finance Corp, a unit of the World Bank, has invested $3 billion in the Middle East and North Africa since the Arab Spring began, said regional director Mouayed Makhlouf.
 
Instead of handing over large amounts of cash to needy governments, the IFC concentrates on providing loans, equity investments and advisory services to private companies, with a special focus on the small to medium-sized enterprises which are effective in creating jobs.
 
The private sector also featured prominently in one of Egypt's biggest deals since the Arab Spring: a $3.7 billion financing package announced this month that will allow Egypt Refining Co to build a petroleum refinery on the outskirts of Cairo. The deal, assembled by private equity firm Citadel Capital, included private investment funds, Egypt's government, state-owned Qatar Petroleum and multilateral lenders.
 
Ultimately, analysts said, Arab Spring economies will need to find ways to lure more foreign direct investment to fill the gap left by limited foreign aid.
 
"The reality is that external support is unlikely to be sufficient. Further reforms to improve the business environment, increase education levels and attract FDI into the region will also be crucial to the overall development effort," said David Cowan, Africa economist at Citigroup. 




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