Via STRATFOR (subscription required), an interesting report on Egypt’s economic woes:

Cairo’s growing dependence on financial assistance from neighbors underscores just how desperate Egypt’s economic situation has become. The worry now is that Egypt could collapse politically and economically, and that the ensuing instability could spread westward across the Maghreb and eastward across the Sinai Peninsula. As the United States and Western countries become increasingly unwilling to foot the bill for Egypt’s issues — and as the United States depends more on regional allies to manage conflicts — Egypt’s neighbors will struggle to maintain the financial support needed to keep Egypt stable.

Economic Intervention

Egypt’s precarious economic situation, exacerbated by domestic political instability, has become serious enough to warrant the intervention of Qatar and of neighboring North African states such as Libya and Algeria. A day after Egyptian Armed Forces Chief of Staff Sedki Sobhi traveled to Libya and signed an agreement outlining military cooperation between the two countries, Egypt’s state-run MENA reported that Libya had granted Egypt an interest-free loan of $2 billion. The loan will reportedly be paid back over the course of five years after a three-year grace period. Meanwhile, Qatar pledged $3 billion in aid to Egypt on April 10, and International Monetary Fund representatives are in Egypt to discuss a possible $4.8 billion loan.

Egypt has been negotiating with the International Monetary Fund for months. Before it will authorize the loan, the International Monetary Fund wants Egypt to make serious changes in the way its economy functions, most important of which is reducing government spending by eliminating or significantly reforming energy subsidies. But Egyptian President Mohammed Morsi’s government has thus far proved unwilling or unable to meaningfully tackle subsidy reform. Egypt has considered implementing ration cards for bread and cooking fuel within the next few months, but previous attempts to do so have been delayed. Recent price increases on butane gas cylinders are not significant enough to satisfy the International Monetary Fund.

In the absence of a finalized loan, Egypt has relied on money and resources from neighbors, including Qatari donations totaling $8 billion, Algerian butane exports and Libyan oil — as well as the reported $2 billion loan from Tripoli. Only a loan by the International Monetary Fund could spur Western investment back into the country, but regional aid and energy deals can at least postpone Egypt’s day of reckoning.

Qatar is offering Egypt significant financial aid as part of its strategy. Qatar hopes to use its abundance of natural gas and its status as the world’s largest exporter of liquefied natural gas to assert itself in regional foreign policy and wield power disproportionate to its small size. Despite the Muslim Brotherhood’s domestic challenges and uneasy partnership with the Egyptian military, Qatar recognizes that the Muslim Brotherhood in Egypt is the strongest, most coherent political force in the country. Doha is thus betting that its financial support will translate into influence within the Muslim Brotherhood. And unlike other Gulf Cooperation Council states, Qatar doesn’t have to worry as much about an internal Islamist threat, allowing it to develop relationships with groups like the Muslim Brotherhood.

The Libya Dynamic

Libya’s recent support of Egypt is more anomalous. The two have had periods of tense relations since each achieved independence from Britain. Former Libyan leader Moammar Gadhafi came to power through a coup in 1969 and admired then-Egyptian President Gamal Abdel Nasser, who himself came to power through a coup in 1952.

But after Nasser’s death and the 1973 Yom Kippur War, the relationship between Egypt and Libya became contentious. Gadhafi thought little of Egypt’s next president, Anwar Sadat, and his increasingly friendly relationship with Israel. In addition, Gadhafi was frustrated with Egyptian laborers working in Libya and was scared of potential Egyptian encroachment on Libya’s energy assets in its eastern regions. Libya and Egypt fought a small border war in 1977, and relations remained sour until 1989 when former Egyptian President Hosni Mubarak eased relations with Gadhafi. In 2011, after the Egyptian military ousted the Mubarak regime, Egypt supplied limited amounts of armor, training, food and medical supplies to the Libyan rebels, who eventually overthrew the Gadhafi regime.

Smugglers are active along the Libya-Egypt border, and weapons from Libya have been smuggled into the Gaza Strip and Syria. The border has also seen varying degrees of low-level unrest, including Egyptians protesting new rules for visas for travel to Libya and Egyptians crossing illegally into Libya. But this kind of unrest is the worst that Libya has to bear from Egypt, since a huge stretch of desert buffers the states from full-scale conflict. Libya is more afraid of a breakdown of order in Egypt and the potential consequences on an already fragile political environment in Tripoli and Benghazi.

Libya has no shortage of its own problems. The central government still doesn’t exercise full control over oil and natural gas production sites, state funds are needed for economic development and the weak General National Congress has had to work with a patchwork of militias, warlords and energy companies to maintain daily governance of the country. But Libya has managed to achieve some degree of stability by maintaining relationships with the disparate centers of power active in the country. And if Libya did in fact extend a loan to Egypt (it should be noted that the General National Council denied similar reports from March 25), it represents two things for Libya: its ability to offer aid to a country normally seen as more powerful, and its desire to prevent a potential collapse of the larger country.

Regional Limitations

Regional actors have limited options for helping Egypt overcome its economic challenges. Egypt’s population growth is outpacing the country’s economic opportunity, and Egypt’s size and influence has generally precluded neighbors from projecting much influence into the country. Qatar’s financial aid presents an opportunity for Doha to build its own sphere of influence in the region. But Egypt’s problems are more tangible for North African neighbors, such as Libya, who would be directly affected by instability within Egypt and along its borders.

Egypt faces an old dilemma: Cairo must impose a lower standard of living or attract foreign aid. For now, Egypt has been able to scrape by with its dependence on the latter. But eventually, the Muslim Brotherhood-led government will need to bring order to Egypt’s domestic political environment and demonstrate the ability to make tough economic reforms. If the government fails to do so, it will risk being constantly at the whim of regional allies or external powers, who might one day run out of money or patience with Cairo