It is being reported that the US government has decided to withhold aid to Egypt for reasons of human rights.

On Tuesday, August 22, the Washington Post cited an unnamed ‘administration official’ as stating that the US was denying Egypt $65m in military aid and $30m in economic support fund aid, while withholding an additional $195m in military aid.

According to this source, US Secretary of State (foreign minister) Rex Tillerson had informed Egypt’s Foreign Minister Sameh Shoukry of the decision by telephone, saying that the withheld aid would be blocked in a bank account until Egypt showed progress on ‘key priorities’ in the areas of human rights and the legislation regulating non-governmental organisations (NGOs).

The anonymous official, apparently in the State Department, expressed “serious concerns regarding human rights and governance”.

Egypt responded on Wednesday, August 23, via its foreign office. The statement said that the decision reflects “poor judgement of the strategic relationship that ties the two countries over long decades” and “lacks an accurate understanding of the importance of supporting Egypt’s stability”.

Shoukry also cancelled a meeting he had been due to have with Jared Kushner, senior adviser (and son-in-law) to US President Donald Trump. Kushner is in the region to meet various actors, including Mahmoud Abbas of the Palestinian Authority and Egypt’s President Abdel Fattah Al-Sisi. The meeting with Sisi went ahead as planned on Wednesday, reportedly with Shoukry present.

The NGO regulations in question were signed into law in late May. Foreign NGOs will have to pay start-up fees amounting to E£300,000 and need to renew their permits on a regular basis.

Organisations not hitherto considered NGOs are required to register as such with the ministry for social affairs, and can be directed to work in ways required by the State. Members of NGOs that break these rules can be fined up to E£1m or face five years in jail terms.

The 46,000 or so NGOs operating in Egypt have one year to comply or face dissolution by court order. Rights organisations in Egypt and abroad objected strenuously to the new rules; Mohamed Zaree of the Cairo Institute for Human Rights Studies called the law “the worst in history.” Zaree has already been charged with “receiving funds from foreign entities to harm national security.”

Egypt represents an important strategic ally of the US due to its shared border with Israel and the fight against Islamist extremism as well as Egypt’s control over the Suez Canal. The US has provided Egypt with a substantial amount of aid inflows for decades in order to support Egypt’s military and, to a lesser extent, the economy.

Nevertheless, US aid has been on a declining trend. The Congressional Research Service (CRS) reported that US assistance to Egypt amounted to an estimated $1.46bn during 2016, of which almost 90% was allocated to Foreign Military Financing (FMF).

Since these aid inflows for the FMF are restricted for purposes related to counterterrorism and border, Sinai and maritime security, the decline in aid inflows and withholding of additional military assistance could weaken the military’s capacity to defend these areas.

In terms of foreign reserves, we anticipate that the recent decision may result in a slight weakening of Egypt’s foreign reserve level should the US decide to reduce aid further.

That said, the decline in aid inflows is expected to be offset by strong financial support from the International Monetary Fund (IMF) and other multilateral organisations.

The current upward trajectory in foreign reserves is expected to continue provided the country’s reform progress under the $12bn IMF loan programme remains on track. Gross international reserves increased by $11.8bn from end-2016 to $36bn by end-July, while foreign reserves rose to $32.6bn.

Egypt is expected to receive further loan disbursals from the World Bank and IMF towards the end of this year, which will further boost reserve levels.

We doubt the State Department’s decision really has anything to do with human rights. We think the important matters here are the NGO law, the arms business and Washington politics.

NGOs have certainly been used, as in most countries, as fronts for spying, and the US seems to be trying to maintain that space for its intelligence services as well as for Islamist NGOs, with which it tries to have neutral relations.

These organisations are often sponsored by US allies like Qatar and Turkey.

The US obviously wants Egypt to use its military aid to buy American weapons, but in recent years Cairo has bought expensive weapons systems from Russia and France, and this will have raised hackles in the US arms industry (which has weighty influence over American politicians). The aid suspension may aim to press the Egyptians to realign their sourcing decisions.

The issue of domestic US politics is more difficult to evaluate but Mr Tillerson’s State Department is understaffed, and this might be a bold move to claw back influence from the White House and Mr Kushner, who is not popular in government circles.

As noted above, we have little reason to believe that the suspension will significantly impact the level of reserves: reserves are currently increasing because of a rise in external debt rather than substantial aid inflows. Any economic impact will be marginal.

This article was written by François Conradie, Head of Research and Nadene Johnson, Economist at NKC