Administration planning $1 billion debt relief for Egypt

The Obama administration has decided to provide about $1 billion in debt relief for Egypt, a senior official said Saturday, in the boldest U.S. effort yet to shore up a key Middle East ally as it attempts a democratic transition.

The aid would be part of a major economic aid package that also includes trade and investment incentives, officials said. It is intended to help stabilize Egypt after demonstrations forced out longtime President Hosni Mubarak on Feb. 11.

While the Obama administration has been preoccupied of late with the war in Libya and protests in Syria, it sees Egypt as even more critical for U.S. interests. Washington has long regarded Egypt as a moderating influence in the Middle East. With one-quarter of the world’s Arabs, Egypt could emerge as a democratic model in the region — or, if its revolution fails, a locus of instability or extremism.

Economic assistance for Egypt and Tunisia is “fundamental to our capacity to support their democratic transitions,” a senior State Department official said on the condition of anonymity. He said that officials were in the midst of “intense policy formulation” but that the economic package wasn’t finished. Parts of it will need congressional approval.

The largely peaceful uprisings in Egypt and Tunisia have battered the countries’ economies. Tourism has collapsed; interest rates have jumped. Economic growth in the two countries is expected to plunge as much as four percentage points from last year, according to the International Monetary Fund. The squeeze comes as those nations’ interim governments are trying to create jobs to satisfy the young protesters’ demands.

“We are at a crossroads here,” said an Egyptian official who has been involved in talks with Washington, and who spoke recently on the condition of anonymity. “If we go wrong, it will be too late [for the United States] to come later and say, ‘We’ll start helping now.’ ”

The Egyptian finance and planning ministers visited Washington last month to seek forgiveness of the country’s $3.6 billion debt. Egypt pays about $350 million a year to service the debt, which it incurred buying American farm products.

In recent weeks, Egyptian officials have been frustrated by the lengthy U.S. interagency process to consider economic aid, and a cool reaction from a Congress ensnared in a budget-cutting battle. On Saturday, Ambassador Sameh Shoukry said through an aide that Egypt appreciated the U.S. efforts but would not react to news of the debt relief until his government was formally notified.

Robert Hormats, the U.S. undersecretary of state for economic affairs, is in Egypt to discuss what form the relief would take: outright debt forgiveness, loan guarantees or debt swaps, which would convert the loan into aid programs, the senior administration official said.

The administration has had “quiet consultations” with lawmakers who would need to approve the assistance, and is trying “to anticipate the questions and concerns in this budget climate,” said the senior official, who like others spoke on the condition of anonymity because the assistance has not been announced.

So far, lawmakers have had mixed reactions on increasing aid to the countries transformed by the “Arab Spring.”

Sen. Joseph I. Lieberman (I-Conn.) has co-sponsored a bill with Sens. John F. Kerry (D-Mass.) and John McCain (R-Ariz.) to create an economic enterprise fund for the new democracies, similar to the one set up for Eastern Europe after the fall of the Berlin Wall. It hasn’t yet made it through committee.

“To me, it’s very important to try to move quickly with something so that the modernizing forces in Egypt know that we’re on their side, and Tunisia too,” said Lieberman in a telephone interview late last month.

Rep. Dana Rohrabacher (R-Calif.) said at a recent hearing that the United States can’t afford to provide aid as it did in the past.

“The stakes [in the Middle East] are very high ... but so is our level of deficit spending,” he said.

Some lawmakers want to delay action until they have a better sense of who comes to power in the countries undergoing revolutions.

A senior congressional aide said the administration had floated the idea of debt relief during negotiations on the fiscal 2011 budget. It did not receive serious consideration, he said, because Congress was trying to avoid adding expenditures, and the administration did not make a strong push for it.

Since the uprisings, the Obama administration has offered Egypt $150 million for economic development and democracy-building, and Tunisia $20 million. But that money was cobbled together from unspent 2010 funding for those countries.

A U.S. government agency, the Overseas Private Investment Corp., has also pledged up to $2 billion in loans, loan guarantees and risk insurance for U.S. firms investing in the Middle East and North Africa, on top of an existing $2.6 billion.

The U.S. government is urging allies in the Persian Gulf and Europe to contribute to the fledgling democracies.

“So far the amount of money contributed [by the West] has been peanuts,” said one Western diplomat, speaking on the condition of anonymity. “We need a big scheme for helping Egypt and Tunisia. If things don’t turn out the right way in the region, the results could be very bad for all of us.”

A delegation from the Tunisian American Chamber of Commerce also traveled to Washington in March to discuss aid for their country’s transition. Tunisia’s finance minister, Jalloul Ayed, followed recently.

“I found a lot of enthusiasm and readiness to help,” Ayed said in an interview. Nonetheless, “that particular help has not yet been very clearly defined in financial terms.”

Staff writer Joby Warrick contributed to this report.