The decision to write off $1 billion of debt owed to it by Cairo will help the Obama administration shore up relations with the Arab Spring nation more than it will benefit the country's troubled economy.

 

President Mohamed Mursi faces many challenges to get Egypt's finances into shape, but high foreign debt isn't one of them. Interest payments eat up one quarter of public spending but the burden stems from high domestic debt. Egypt's total external borrowing was just $35 billion or less than 15 percent of GDP, as of June 2011.

 

A more efficient form of aid would be for the United States to redirect ongoing financing for Egypt's military to investment in infrastructure and job creation. Washington has maintained Egypt's annual military funding of $1.3 billion, refraining from using this as a leverage to force the generals to speed up handover to civilian rule. Over three decades, the US has provided over $70 billion to Egypt's military. They, in turn, are estimated to control a large share of the economy, which suggests they could fund themselves.

 

US politicians are divided on the aid. There have been several attempts over the years, within Congress, to attach conditions to military aid, and withhold, reduce, or redirect payments. In March, US Secretary of State Hillary Clinton waived new legislative conditions related to Egypt's democratic transition, in order to allow aid to keep flowing.

 

Military aid has benefited US strategic interests by buying priority access to the Suez Canal and to Egyptian air space, as well as support for Middle East peace. Egypt's military view the payments as "untouchable compensation" for making peace with Israel, according to documents published by Wikileaks. The aid also supports US defence equipment manufacturers, as the funds must be spent on American hardware and services.

 

Debt relief is a token gesture to keep the US on the right side of the new Islamist president but the country's influence in Egypt is waning. Around $5 billion in aid has been delivered to Egypt within the last year by neighbouring Gulf states. As President Morsi begins writing his own foreign policy, questions over US financial assistance to Egypt will grow louder. - Reuters

* The author is a Reuters Breakingviews columnist. The opinions expressed are her own