US to handout Egypt $1 billion aid – source

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US Secretary of State Hillary Clinton meets with Egyptian President Mohammed Mursi. Photo – AFP

A senior US official said on Tuesday the Obama administration is close to a deal with Egypt’s new government for $1 billion in debt relief,  part of its bid to help Cairo shore up its ailing economy.

American diplomats and negotiators for Egypt’s new Islamist president Mohamed Mursi – who took office in June after the country’s first free elections – were finalising an agreement, the official said.

Progress on the aid package, which had languished during Egypt’s 18 months of political turmoil, appears to reflect a cautious easing of US suspicions about Mursi and a desire to show economic goodwill to help keep the longstanding American-Egyptian partnership from deteriorating further.

The United States was a close ally of Egypt under ousted autocratic President Hosni Mubarak and gave $1.3 billion in military aid a year to Egypt plus other assistance.

Washington, long wary of Islamists, shifted policy last year to open formal contacts with the Muslim Brotherhood, the group behind Mursi’s win. The Islamist leader formally resigned from the group after his victory.

Analysts say that one way the United States could influence the direction of policy in Egypt, a nation at the heart of Washington’s regional policy since a peace treaty was signed with Israel in 1979, would be through economic support as Cairo tries to stave off a balance of payments and budget crisis.

Obama first pledged economic help for Cairo last year. Obstacles remained to completing the debt relief deal – which is reported to involve a mix of debt payment waivers and complicated “debt swaps” – and it was not immediately clear when an agreement might be announced.

But even as the negotiations proceeded in Cairo, Washington has also signalled its backing for a $4.8 billion loan that Egypt is seeking from the International Monetary Fund and which it hopes to secure by the end of the year to bolster its stricken economy. IMF chief Christine Lagarde visited Cairo last month to discuss the matter.

Egypt’s military-appointed interim government had been negotiating a $3.2 billion package before it handed power to Mursi on 30 June. Mursi’s government then increased the request.

“The objective … is to improve stability, to restore confidence with a view to encouraging investors to invest and create jobs, to reduce the financial burden of very high financing terms,” Lagarde said after meeting top officials on 22 August.

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