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Mon 9 May 2011 04:12 PM

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US set to cancel $1bn Egypt debt

Egyptian, US officials finalising an aid package to help Egypt service its $3.6bn debt

US set to cancel $1bn Egypt debt
US Secretary of State Hilary Clinton holds talks with her Egyptian counterpart Nabil al-Arabi. The US is in talks to cancel Egypts $3.5bn debt

The US may cancel up to $1bn of debt owed to it by Egypt as part of a wide-ranging aid package designed to help the Arab state recover from the economic impact of the recent revolution.

Sources at the US Administration told the Washington Post newspaper the debt deal was part of a larger aid package, which will also include trade and investment incentives.

Recent violent anti-government demonstrations, which ousted former president Hosni Mubarak after nearly three decades in power, has left the Egyptian economy in disarray.

The Arab world’s most populous state has forecast that the state deficit will widen to 9.38 percent of gross domestic product (GDP) for the 2011/12 fiscal year.

Egypt’s $3.5bn debt to the US costs it around $350m a year to service. Egyptian finance
ministers visited Washington last month in a bid to restructure the loan.

An official at the US State Department told the paper economic assistance to Egypt was “fundamental to our capacity to support their democratic transitions”.

While the US is engaged in “intense policy formulation”, the official said full details of economic package had not been finalised and would need US Congress approval.

US
undersecretary of state for economic affairs Robert Hormats has travelled to Egypt to discuss the format of the aid package and whether it will involve an
outright cancellation of part of the debt, loan swaps or a straightforward aid
package.

Additional
support will also be offered by the Overseas Private Investment
Corporation, a US government agency which has pledged an additional $2bn in loans,
loan guarantees and risk insurance to US firms who invest in the MENA region.

Economists say a decline in tourism, consumption and business activity since unrest swept Egypt has hit tax revenues, which make up about 60 percent of government income. The government has also boosted social spending in response to protestors' demands for jobs and higher wages.

The draft budget due to be presented to the cabinet foresees revenue of EP342.6bn ($57.6bn) and spending of EP500.7bn, the country’s finance minister Samir Radwan said last month.

Egypt has said it is seeking $10bn in funding from international lenders and rich nations to help it cope with the fallout from the mass protests that toppled Mubarak.

The country's economy contracted an estimated seven percent in the first quarter. The International Monetary Fund forecast Egypt’s economy will expand one percent this year, well below its long-term average, after a 5.1 percent expansion in 2010.

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