Helping Egypt solve its economic woes

THE well-publicized economic woes of President Mubarak's Egypt demand immediate attention in both Cairo and Washington. The United States has a big stake in Egypt. The recipient of more than $19 billion in assistance in the last dozen years, Egypt continues to share the US strategic interest in the stability of the Middle East and Africa. Egypt and the US also share a commitment to dialogue, not war, as the way to settle disputes with Israel. Continued support for Egypt is crucial to its struggle to establish a modern democracy and to the success of a peace process.

Egypt's economic problems relate in part to subsidies, price distortions, a rigid state-controlled economic structure, and a bloated bureaucracy. Other, more immediate problems are beyond Egypt's control. These include a decline in world oil prices, remittances from Egyptians working abroad, Suez Canal revenues, and tourism earnings. Oil price declines alone have reduced Egypt's income some $150 million a month.

These important sources of Egypt's foreign exchange helped create a $4 billion current-account deficit last year and made it difficult for Egypt to meet payments on its $35 billion foreign debt. Egypt is close to being a year behind on its debt payments to the US. It is a situation that may trigger the Brooke Amendment, automatically cutting off all US assistance to Egypt.

The US and its assistance programs are part of Egypt's problem and part of its solution. The country has come to rely on US assistance and is now too dependent on it. Some Egyptians resent what has happened. Twenty years ago, Egypt fed itself; today it imports close to half its food. Economic aid has enabled Egypt to avoid harsh economic choices and delay developing a clear strategy for economic reform, thus amplifying distortions in the economy and creating production disincentives. Since 1979, Egypt has also received large amounts of military hardware from the US, imposing a different burden. Many of those military loans were contracted at high interest rates, some at close to 14 percent, with penalties for late payments. All this means debt payments due the US in 1986 of more than $900 million, which just about cancels the $1 billion in economic assistance provided to Egypt in 1986.

What the US needs at this time is a frank and productive economic dialogue with Egypt, and the flexibility in US programs to respond quickly to Egypt's economic problems. We cannot maintain the current cycle of giving aid to Egypt and taking it back in debt payments.

Three current efforts are noteworthy:

The Egyptians are working on a strategy for comprehensive economic reform and discussing it with the US, other donors, and international financial institutions. The US must insist on this process and work for its early implementation. A sustained dialogue with Egypt is essential in an effort to achieve comprehensive reform. Without it, the temptation will be to find an easy way out and to gut or delay reforms.

The US is examining what might be done about Egypt's large military debt to the US -- something between total debt forgiveness (out of the question) and the status quo. Either through the government or private banks, it might be possible to adjust the high interest rates on some of Egypt's military loans.

Some effort should be made to adjust the US economic aid program to Egypt so that some of the money can be disbursed quickly after Egypt takes encouraging action. We should tell Egypt that if it gets rid of distortions, such as subsidies that sap its economic strength, the US will provide funds to cushion the impact. This approach worked with Israel and others, and it can work in Egypt. Such cash transfers, however, should not be at the expense of the several successful development projects that have benefited both the people of Egypt and the US image there.

There is no panacea to the dilemmas the Egyptians face. They require tough economic decisions by Egypt's leaders. Yet, the US must recognize that this important relationship needs special attention today. It is threatened by economic hardship, general malaise in the Mideast, and potential political dilemmas inside Egypt. US policymakers may have reached an impasse on dealing with Mideast conflicts, but it would be a serious mistake to treat our Egyptian friends with the same neglect.

Rep. Lee H. Hamilton (D) of Indiana is chairman of the Subcommittee on Europe and the Middle East of the House Foreign Affairs Committee.