Egypt: IMF, FMF and the MFO

 

 

 

by J. Millard Burr

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23-Aug-12

EGYPT: IMF, FMF AND THE MFO


"President Barack Obama himself, among other personnel from the US administration, promised Egypt $2 billion in the form of debt swaps and credit guarantees in 2011, shortly after Mubarak was unseated. These promises, however, have yet to materialise."  ("US ambassador discuss[es] assistance to Egypt," Ahram Online, Cairo, 17 August 2012.)

IMF TO THE RESCUE

     On 15 August the Egyptian Finance Minister Momtaz El Said met with U.S. Ambassador to Egypt Anne Patterson to discuss previously promised U.S. foreign aid funding.  Also discussed were Egypt government efforts to restore Egypt’s national economy and prospects for an International Monetary Fund (IMF) loan.

     Regarding the IMF loan, Patterson agreed that given the political stability it was a "good time" for Egypt to resume negotiations with the IMF. In fact, new negotiations were pending and on 22 August IMF Managing Director Christine Lagarde was to visit Cairo to re-open discussions that were initiated shortly after protests erupted across Egypt in January 2011.

     In May 2011 the Egyptian economy was in free-fall.  To halt the decline Egyptian officials had entered talks with the World Bank and it appeared that Egypt was about to receive a major infusion of financial aid.  Ostensibly, Cairo was to recieve some $4.5bn in assistance over the next two years, and World Bank President Robert Zoellick himself stated that it was indeed the Bank's desire to support the "Arab Spring."  According to Zoellick, Bank funds would be made conditional on Egypt's willingness to modernize its economy." (BBC, 24 May 2011 "Egypt and Tunisia to get $6 billion from World Bank.")

     Egypt-IMF talks then stalled in June—at a time when the IMF seemed poised to approve a $3 billion loan.  During a time of great political uncertainty in Egypt an arrangement seemingly had been reached that would achieve an orderly devaluation of the Egyptian pound and attack the problem of a growing budget deficit. But Egypt backed off and no final agreement was reached. In December 2011, talks were resumed but once again stalled.  And as the months passed analysts felt that to have the required effect on the Egyptian economy the IMF would have to fund much more than the $3 billion originally considered.  

     The army's Military Council, which was really in charge of the talks, admitted that it was responsible for postponing an agreement. The military leadership did not want to be condemned for what they thought would be a very unpopular move. Yet, as it lingered, in December 2011 Moody's downgraded Egypt's credit rating. The move occurred shortly after Egypt's leadership (or what passed for it) rejected the IMF's $3 billion credit arrangement first broached in June 2011. As General Mokhtar al-Mullah told reporters in December 2011,"The easiest thing would have been for the military council to accept the loans from abroad, give it to Egyptians to live a better life, and then hand over power and the Egyptian people would have been responsible to repay these debts."

     By 2012 the cost of domestic borrowing had increased, and foreign reserves were reduced by half.  Egyptian exports fell, and the crucial tourist industry continued its downward slide.  When the budget deficit reached 11% of gross domestic product, devaluation of the Egyptian pound had to be considered whether the military liked it or not. Today, Most economists are aware that the Egyptian economy is a mess, and to be effective an IMF package would now need to be somewhere in the range of $10-15 billion.

     In advance of the Patterson-El Said meeting it had been announced by Abdallah Shehata, economic advisor to President Mohammed Morsi, that his government was preparing an entirely new program for the forthcoming IMF negotiations.  It would emphasize "social justice," something that undoubtedly would appeal to Washington, to Secretary of State Clinton and Ambassador Patterson.  El-Said explained that with regard to the "low-income sector" the government intended to "minimise the socio-economic gap between citizens.”  An organization dominated by urbanites and professionals, it is hard to see what the Muslim Brotherhood (Ikhwan al-Muslimun) can do to better the lives of millions of farm families—the poorest of the poor. A land reform law of 1953 limited individual holdings to no more than 200 acres. Second and third agrarian reform laws further limited the area of landholdings.  With no land to play with, it is likely that the Ikhwan will introduce more subsidies, placing more pressure on an already overburdened budget.
 
FOREIGN AID

     At his meeting with Patterson El Said admitted that the issue of greatest immediate importance was the missing funds that had been promised by Saudi Arabia, Qatar, the UAE and Kuwait.  El Said noted that his government was daily expecting the arrival of a half billion dollars (of two billion that had been promised) from Qatar. In addition, a major tranche of funds promised by Saudi Arabia was said to be in the pipeline. As for the others, who could guess?

     With regard to United States economic assistance, following the meeting Ambassador Patterson informed the press that a U.S. State Department delegation would arrive in Cairo by the end of August.  Discussions would be held on the latest political and economic developments, "and the means of providing Egypt with funds, especially after the appointment of Egypt's new government." (Ahram Online, 17 August 2012)

     Prior to the fall of the Mubarak government, Egypt annually received more United States foreign aid (civilian and military) than any country except for Israel. It has averaged slightly more than $2 billion per annum since the signing of the Camp David Peace Accords.  The amount of American Foreign Military Financing (FMF) has varied very little from year to year, and funds devoted to economic assistance, and generally channeled through the U.S. Agency for International Development (USAID), has slowly declined since 1998.

     FMF that averaged more than $1.3 billion per annum allowed Egypt to receive U.S. military hardware.  Inter alia, it has included jet aircraft, Apache helicopters, aerial surveillance aircraft, and armored personnel carriers.  The Egyptian military could also purchase equipment directly from U.S. defense contractors in excess of the annual FMF payment.  Both the Pentagon and Foggy Bottom have argued that FMF provides the cornerstone to a very cordial relationship, and Egyptian leaders called the FMF "untouchable compensation" for the continuation of peace with Israel.  Just how the Morsi government with its recent change of military leadership stands on the issue of U.S. military aid is presently unclear.

      From news reports following their meeting one could assume that Ambassador Patterson gave assurances that Washington had already reached a decision, and aid to Egypt would continue without conditions.  And given the tenor of Egyptian news reports that followed, one might easily assume that U.S. economic assistance might even be enhanced.
 
MILITARIZING THE SINAI

     As a result of the disorder during Egypt's "Arab Spring", on 28 January 2011 an Egyptian military communiqué ordered the national police to relinquish their posts while the army restored order throughout the nation.  In short order, many police departed the Sinai and that region devolved into chaos. Conditions were so hectic that Israeli Prime Minister Benjamin Netanyahu, fearing the increase of arms smuggling into Gaza, "agreed to let Egypt deploy 800 additional troops to the Sinai" to fill a power vacuum in the area.  This occurred even though, "the two countries' peace accords stipulate the peninsula should be demilitarized." (Bradley and Mitnick, "Bedouin Arms Smugglers See Opening in Sinai, The Wall Street Journal, 5 February 2011.)

     Six months later, Israeli forces reportedly checkmated what it called a "spectacular" border attack conceived by an Al Qaida affiliate.  Hatched within the Gaza Strip, the plot was to be the fourth in a series of attacks on Sinai gas pipeline that supplies Israel with 35% of its need (and Gaza with all its gas).  On 14 August three Egyptian army brigades of 1,700 men, an equal number of police, and 3,400 security personnel, backed by tanks and personnel carriers, drove across the Sinai and into the Mediterranean towns of El Arish and Sheikh Zuweyid. Once those towns were occupied the convoy continued on to Rafah, an Egyptian town bordering with  Gaza.  An Egyptian military communiqué reported that the occupation force had gained control of a region that had been lost to lawless and terrorist elements.  Unfortunately, despite the occupation the attacks on the gas pipeline continued.  

     Ironically, it was then little noted in the media that the movement of Egyptian forces into the eastern Sinai was yet again a contravention of the Camp David Accords and Article 2, Annex I, which defines the limits of responsibility (the "Security Arrangements") in the various geographic zones.  Whether Israel (and the United States) agreed to what was a violation of the terms of the 33-year-old peace treaty has never been clarified.  Still, It has been reported in the Israeli press that the military appendix to the Accords was modified after the situation in Sinai began to deteriorate; it apparently allowed for the addition of seven additional Egypt military battalions in the Sinai. If true, it is assumed that the United States, which is a guarantor of the agreement, agreed to the increase.  

     In effect, by 2012 the Egyptian army has remilitarized the eastern Sinai—a sector it had been excluded from for more than three decades. The military continued to claim that its move was in response to the presence of 2,000 well-organized and heavily armed Islamist gunmen and a passel of smugglers that threatened the peace. Left unsaid was the reality that the Egyptian military felt that the number of rebels was obviously more than the existing Multinational Force and Observers (MFO) present in the Sinai could handle.

 QUO VADIS MFO

    As an addendum to the 1978 Camp David Accords, in August 1981 the United States, Egypt and Israel signed a Protocol to the Camp David Treaty of Peace establishing the Multinational Force and Observers (MFO). The MFO mission was required to implement the security provisions of the Egyptian-Israeli Treaty of Peace and prevent any violation of its terms. The agreement placed strict limitations on the presence of Egyptian military and police in the Sinai Peninsula.

     The MFO role was initiated in April 1982, the same day that Israel returned sovereignty of the Sinai to Egypt. Under Article 2, Annex I, of the Peace Treaty the Sinai Peacekeeping Zones were delimited.  The Peninsula was divided into three geographically defined zones" In Zone A, located just to the east of the Suez Canal, Egypt was allowed to quarter a mechanized infantry division with a total of 22,000 troops; Zone B, to the east of A and an area comprising the second third of the Sinai, allowed Egypt to emplace four border security battalions and civilian police.  Zone C, which was the most problematic of the three, was located between Line B and the Egypt-Israel border. In Zone C, only the MFO and the Egyptian civilian police were permitted.  In that zone three battalions of MFO were quartered at two bases: MFO headquarters with two infantry battalions (Colombia, Fiji, etc.,) at North Camp was located south of the Mediterranean town of El Arish; an American battalion was quartered at South Camp north of Sharm el Sheikh, now a well known tourist destination.
 
RECENT DEVELOPMENTS

   In Israel it was reported on 19 August that the government of Israel had asked Egypt to withdraw armored vehicles—including tanks and armored personnel carriers—that had "entered the Sinai in force ten days earlier in contravention of the peace treaty between the two nations." Apparently, their deployment had only been admitted "retroactively." (Gil Ronen, Arutz Sheva)  The Egyptian response to the demand was seen in Israel as an indication of how relations with the Morsi government would proceed.

     Two days later Al Ahram, Egypt's state-run media megaphone, "dismissed the matter as a fabrication of the Israeli news media and said that the move had been fully coordinated with the Israeli military." (Isabel Kershner, AP, 21 August 2012)  Israeli news reports that followed claimed that the Israeli cabinet had authorized the use of Egyptian helicopter gunships, but the movement of a mass of tanks into the Sinai was neither approved nor coordinated with Israel. There next followed an even more disturbing report: Egyptian Anti-Aircraft Missiles were sighted in Sinai. (Gil Ronen, Arutz 7, 20 August 2012)  If true, it was a dangerous provocation because their deployment could only be intended for use against Israeli aircraft.  Meanwhile, in Washington, which is a tripartite member of the Camp David Accords and should be concerned with the deteriorating conditions in the Sinai, nothing of substance has been revealed either in Foggy Bottom or the Pentagon.

CONCLUSION

     From its beginning the MFO has been assiduous in protecting its image as a neutral entity devoted to keeping the peace in the Sinai.  It is not, however, a fighting force.  And under present conditions it is incapable of continuing its peacekeeping role envisioned for it by the 1982 agreement. In the slipstream of the military intrusions that began in early 2011, the MFO raison d'etre has been shattered.  The pier on which Egypt-Israel peace was moored has now been washed away.  To keep the peace today a multinational force would require heavy weapons and armored vehicles.  

     It is presently unclear what the United States, Egypt, or Israel expect of the MFO.  It is likely, however, that Egypt's Morsi will expel it soon unless something like U.S. foreign assistance would change Ikhwan thinking.  For the Muslim Brotherhood a foreign presence on Egyptian soil is no more welcome than the American military presence in Saudi Arabia was welcomed by its Islamist populace.   

     It would only seem logical that before the United States begins to consider any new foreign aid package—and the renewal of the annual billion-dollar stipend that is paid to the Egyptian military—there should be a new tripartite agreement that responds to what has now become the creeping remilitarization of the Egyptian Sinai.  For more than a quarter-century U.S. assistance to Egypt has been predicated on the willingness of Cairo to keep the peace with Israel. Now, however, with a sea-change in the both the government of Egypt and in its armed forces leadership, it is time to discern what Egypt's intentions for the Sinai are.  Certainly, a decision must be reached regarding the MFO.  A decision should be made as soon as possible regarding the role that institution should play in the Sinai, or whether its presence in its current form is necessary. 

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