SPECIAL REPORT EGYPTIAN ECONOMY APPROACHING ANOTHER CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A005400050003-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 21, 2016
• Document Release Date: July 11, 2008
• Sequence Number: 3
• Publication Date: August 26, 1966
• Content Type: REPORT

CENTRAL INTELLIGENCE AGENCY
26 August 1966
OCI No, 0304/66B
Copy No.
EGYPTIAN ECONOMY APPROACHING ANOTHER CRISIS
SPECIAL
DIRECTORATE OF INTELLIGENCE
State Dept. review completed
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EGYPTIAN ECONOMY APPROACHING ANOTHER CRISIS
Egypt's mounting financial difficulties again
are coming to a head, and some changes in economic
policy probably will occur within the next few
months. The impending crisis has been postponed
for several years, but another easy reprieve seems
unlikely. An austerity program announced last
winter was never fully implemented, the foreign
trade gap is growing, overdue debts are mounting
rapidly, and renewed pleas for debt relief are fall-
ing on deaf ears throughout the world.
An International Monetary Fund (IMF) team is
currently in Cairo for talks that may set the stage
for currency devaluation and a serious austerity
program. Otherwise Egypt will face a complete loss
of world confidence in its ability to service its
foreign debt. An IMF-sponsored program would be
of limited duration, permitting Egypt to renego-
tiate pressing debts and perhaps leaving the door
open for eventual resumption of overspending.
The Communist countries seem to be encourag-
ing Cairo to undertake the financial reforms recom-
mended by Western creditors and institutions.
Indecision in Cairo
Both President Nasir and
Prime Minister Muhyi al-Din re-
peatedly have stressed the need
for cutting consumption, reduc-
ing imports, and facing the eco-
nomic facts. On 1 December,
Muhyi al-Din announced a series
of austerity measures that were
widely commended as realistic
steps to reduce the threat of
economic instability. In the
intervening nine months, however,
only minimal action has been
taken, and the situation has
been greatly aggravated by hesi-
tancy and indecision. Some sort
of jockeying for power between
Muhyi al-Din and more radical
factions also may be involved.
The prime minister obviously
recognizes the problems and un-
derstands what should be done
but thus far has been-unable to
take resolute action, perhaps
because Nasir has not given him
full support.
Egypt's financial diffi-
culties stem from three inter-
related factors.. Excess imports
and other foreign expenditures,
financed by increasing reliance
on short-term and medium-term
borrowing, have brought about a
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serious and continuing shortage
of foreign exchange. Government
policies have failed to produce
an expected shift in total ex-
penditures away from consumption
toward domestic savings and in-
vestment. Also, the growth of
population has greatly exceeded
the level anticipated. Because
Nasir always has chosen to seek
immediate political or ideolog-
ical gains before long-term eco-
nomic improvements, economic mat-
ters have been ignored as long
as possible.
Muhyi al-Din's austerity
program, announced only two months
after he took office, was de-
signed to meet these problems.
The major points were selective
price and tax increases, cuts in
government expenditures, and a
new emphasis on population con-
trol measures. The attack on
rising consumption involved both
higher prices to reduce disposable
income, and higher customs duties
to :reinforce restrictions on con
sumer imports. Concurrently, the
government announced plans for a
free zone at Port Said, and offi-
cial pronouncements indicated a
new and more welcoming attitude
toward private foreign invest-
ment. Shortly thereafter, the
second stage of the nation's de-
velopment plan was extended from
five to seven years, thus reduc-
ing the annual requirement for
foreign exchange and bringing the
revised plan somewhat closer to
the country's production capabil-
ities.
Although the regime has a
history of backing away from un-
pleasant dec:Llsions, it appeared
serious about the new price and
tax policies. in the previous
few years, several austerity
measures were':Lntroduced, then
quickly withdrawn when resistance
mounted. Stringent import con-
trols, meat rationing, and other
measures adopted in the fall of
1964, however, were maintained.
Moreover, Nasir took pains to
associate him6elf with the new
program and r6peatedly stressed
the urgent nerd for austerity.
Progress in 1960-64
In a sense, Egypt is a vic-
tim of its own success. Its
over-all record of economic
growth since becoming a republic
in 1952 has been good, and the
1960-64 period, in particular,
was marked by substantial prog-
ress. For the first time in the
twentieth century, economic ex-
pansion outpaced population
growth. During the period of
the first development plan (July
1.960 - June 1965), gross do-
mestic product increased at an
average annual rate of almost six
percent, whereas population in-
creased at a rate of almost three
percent. Gain.,, in agricultural
output kept up with population
growth, while! industrial pro-
duction expanded by about nine
percent a yea?t.
Together, economic growth
and welfare programs brought
about a more equitable distribu-
tion of income and social bene-
fits than in prerevolutionary
times. Certain aspects of this
growth were h4rmful, notably
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employment of unneeded bureau-
crats and production workers and
investment of scarce funds in
prestigious but unprofitable
projects. Everything considered,
however, the accomplishments of
the Egyptian economy are greater
than those of most other under-
developed countries.
.Progress, nevertheless, has
been expensive. Spending in ex-
cess of current income began
under King Farouk and accelerated
under the Nasir regime, as mount-
ing debts testify. Gold and for-
eign exchange holdings sank from
$1.4 billion in 1948 to $972 mil-
lion at the end of 1951, Farouk's
last full year in power. By the
early 1960s, they had been de-
pleted to little over $200 mil-
lion, and Cairo was forced to
resort to high-cost commercial
borrowing to finance imports
needed to maintain the pace of
growth. As current expenditures
abroad came to exceed current
receipts by almost $300 million
annually, foreign debt service
claimed a third of the foreign
exchange available each year.
Large chunks of foreign exchange
were spent to build and support
industries that may never break
even.
As the foreign exchange po-
sition deteriorated, strains in
the domestic economy also became
more severe. The regime spent
heavily to build hospitals and
schools, to introduce new welfare
programs, and to expand the armed
forces. A cumbersome bureaucracy
was created to run newly nation-
alized enterprises. Government
expenditures exceeded revenues
by progressively larger amounts,
and deficits were covered by
borrowing from domestic banks.
The resulting increase in the
money supply created inflation-
ary pressures. Controlled do-
mestic prices did not adjust to
changes in demand, consumer im-
ports rose, and a black market
developed. Consumption grew
more rapidly than production,
absorbing domestic funds needed
for investment. Moreover, the
over-ambitious development plan
called for investment funds in
excess of the combined amounts
available from domestic and for-
eign sources.
By late 1964, new sources
of credit were nonexistent, and
a number of stopgaps were adopted.
These measures, added to the
strains created by the forced
pace of growth, made 1965 an
especially disappointing year
and led to the antagonizing re-
appraisal undertaken by the
Muhyi al-Din government.
Slowdown and Austerity
The fiscal year which ended
on 30 June 1965 differed from
the preceding years in a number
of important respects. After
two successsive years in which
annual growth approached eight
percent, the FY-1965 increase
was less than five percent. The
lag in growth stemmed partly
from the austerity program but
was aggravated by bureaucratic
errors. The major factor was an
expansion of industrial output
by only four percent--less than
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half the annual average of the
preceding four years--primarily
because of shortages of imported
raw materials, intermediate
products, and spare parts result-
ing from stringent import con-
trols imposed in 1964 to combat
the foreign exchange drain. Con-
struction, which in preceding
years enjoyed a considerable
speculative boom, actually de-
clined. Expansion of the serv-
ices sector, which includes the
huge bureaucracy, also slowed
somewhat from the previous year.
Of the major economic sectors,
only agriculture enjoyed a rela-
tively good year.
Nevertheless, improvements
were registered in some basic
areas. For the first time in
years, the foreign trade gap was
narrowed--from $407 million in
FY 1964 to $303 million in FY
1965--and net borrowing from
abroad was reduced. The over-all
balance-of-payments deficit fell
from $89 million to $28 million,
with improvements registered in
both current and capital accounts.
Consumption, including defense,
increased only slightly in ab-
solute terms, absorbing a smaller
share of total output than in
each of the preceding three
years. Consequently, a greater
portion of total output was avail-
able for investment. Moreover,
with government borrowing from
domestic banks cut by almost 80
percent, the money supply in-
creased only slightly.
Deterioration in 1966
In spite of the brave-sound-
ing pronouncements of December,
available data suggest that the
gains made in 1965 are being
lost in 1966. The need for
greater austerity is clear, and
the reasons for slowing the tempo
of economic expansion are com-
pelling, but Cairo apparently
was jarred by the 1965 slowdown
and has reverted to its earlier
ways. The trade gap is growing
again, the government has stepped
up its borrowing from domestic
banks, gold and foreign exchange
holdings are at an all-time low,
and government expenditures are
rising. Despite increased
spending, growth of the economy
in FY 1966 probably remained at
or below the low level of FY
1965.
The foreign exchange short-
age is more acute than ever. The
trade deficit for the first
eight months of FY 1966--through
February, the latest month for
which figures are available--
was almost 20 percent larger
than for the same period of the
previous year and ran ahead of
the record level of FY 1964. In
the 12-month period ending 30
April, gold and foreign exchange
holdings of the Central Bank
dropped $25 million to an all-
time low of $170 million. For-
eign exchange reserves in cash
stood at $23 million in mid-July,
a time when they are usually near
their yearly peak. This was $5
million below the July 1965 level.
The bilateral trade debt, pri-
marily to Communist countries,
totaled $198 million in mid-July,
--an increase of $67 million in
12 months, despite unusually
heavy exports to bilateral trad-
ing partners during the period.
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On the domestic front, in-
'flation has been given further
impetus by increased deficit fi-
nancing of larger government ex-
penditures. During the first
11 months of FY 1966, the gov-
ernment's debt to domestic banks
increased by over $313 million--
or $5 for every $1 increase in
the same period of the previous
year.
Last December the govern-
ment told the IMF that it in-
tended to decrease total current
expenditure substantially and cut
cost-of-living subsidies by $16
million from the original FY-1966
budget figure of $80 million.
The cuts were to take effect im-
mediately and be continued into
subsequent years. Recently re-
leased figures on the FY-1967
budget, however, show no such
change. Current expenditures
exceed the original FY-1966 budget
estimates by $165 million. Cost-
of-living subsidies, instead of
falling, are scheduled to rise
by $3 million. Although flour
prices were raised and the size
of a loaf of bread was reduced,
wheat and flour subsidies alone
are expected to increase by
over $4 million to almost $36
million.
The 1967 budget envisages
revenues higher by almost $220
million, primarily as a result
of the price and tax changes
made last December. Increased
expenditures, however, are due
to absorb all but $10 million
of the anticipated revenue gain.
Thus, expenditures are being
transferred from private to pub-
lie consumption, rather than from
consumption to investment.
Delay and indecision have
interfered with earning oppor-
tunities as we:Ll as with internal
fiscal reform. A promising new
oil field in the Gulf of Suez re-
mained inactive for many months
pending final agreement between
Cairo and the Arherican conces-
sionaire in June..
e new field probably will not
start producing until early
1967. A further loss probably
resulted from delay in signing
a new pact with'ENI, the Ital-
ian company that is a partner
in exploitation of other Egyptian
fields. ENI had delayed expan-
sion plans duriftg the several
months of negotiations. In both
cases the Egyptians forfeited
current income in order to im-
prove terms pertaining to future
debt payments. Consequently, the
1965 increase in':Egyptian crude
output was the smallest in years
and crude export earnings failed
to rise.
Even the Suez Canal, symbol
of Egypt's independence and
success, has been affected by
the desperate search for finan-
cial relief. Canal revenues
have continued to grow and to-
taled about $209 million in FY
1966, supposedly all in hard
currency. In feat, at least $19
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million and possibly more than
$24 million annually is in ef-
fect mortgaged to pay for current
purchases or debt obligations.
During PL-480 negotiations in
late 1965, Cairo agreed to let
US Government ships pay from ac-
cumulated Egyptian pounds the
equivalent of some $200,000 in
canal fees during calendar 1966.
Compensation for nationaliza-
tion of Shell and British Petro-
leum interests is being paid
partly by forgiveness of $2.3
million in canal tolls annuall
for the next eight years.
In view of Egypt's extreme
sensitivity about any diversion
or commitment of canal receipts,
these arrangements are the clear-
est possible indication of the
severity of the current finan-
cial crisis. In its anxiety to
increase current receipts, Egypt
also may be reducing the canal's
earning potential by enacting
the third small fee increase in
three years. Gulf Oil recently
decided to rely exclusively on
giant tankers that will avoid
the canal, and other oil com-
panies reportedly are consider-
ing similar moves.
Fruitless Search for Relief
For the third time in as
many years, Egyptian teams have
tried to arrange postponements
of external debt repayment, but
their efforts have met with lit-
tle success. For the past sev-
eral years, short-term bank
loans outstanding have totaled
$200 million or more. On these
debts, interest charges alone
cost over $15 million annually,
and constant refinancing of re-
payments due on the principal
has been necessary. Perhaps
$100 million is now overdue on
Western short-term loans. The
most recent Egyptian proposal
was to pay all amounts overdue
through last October and to re-
finance amounts that were due in
the eight-month period from No-
vember 1965 through June 1966.
Of the countries approached,
only Italy acquiesced. In con-
junction with ENI's new agree-
ment with Egypt, Italy has pro-
vided $31 million in new long-
term loans, extended $10 million
in new export credits, and eased
the repayment schedule on $74
million in outstanding loans.
British banks
have said they will extend no
new credits while repayments
are overdue, and American banks
have been unresponsive to re-
quests for a new moratorium.
Both London and Washington have
urged Cairo to work out a multi-
lateral refinancing program un-
der the aegis of the IMF. Bonn
also refused to discuss any ex-
tension of repayments on govern-
ment-guaranteed debts except as
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part of a multilateral program,
although commercial bankers in
West Germany apparently agreed
to let Egypt remain about six
months in arrears on some $5 mil-
lion in short-term obligations.
Time for Decision
Egypt now has no prospect
of securing major financial re-
lief abroad. Consequently,
changes in economic policy appear
inevitable and not far distant.
Nasir rapidly is being backed
into a corner and must make some
choices or they may be forced
upon him. The next two months
probably will set the tone for
the coming year or two.
The short-term economic
future of Egypt hinges on the re-
sults of an IMF mission currently
in Cairo. Fund officials viewed
last December's austerity meas-
ures with considerable approval,
but only part of the promised
program was implemented. Conse-
quently, the IMF now believes de-
valuation of the Egyptian pound
is inescapable. The Egyptians
earlier refused to consider such
a move and contacts ceased for
several months. In late July,
however, the IMF was advised
that Cairo was prepared to ac-
cept its recommendations "in
principle" but wanted to dis-
cuss the extent and details of
the suggested program. If dis-
cussions lead to devaluation,
Egypt is in for a period of
greater austerity. In such cir-
cumstances, however, Western
creditors probably will be will-
ing to extend a helping hand.
While devaluation is politically
unpalatable for the regime, it
offers the best hope for economic
progress in the long run.
A new austerity program
might be only a temporary ex-
pedient. Any stabilization plan
worked out with the IMF probably
would require Egyptian compli-
ance with restrictions on im-
ports, domestic credit, and con-
sumption spending for up to two
years. In return, Egypt would
receive additional financing
from the Fund, and an agreement
with the IMF'would enable Cairo
to renegotiate debt obligations
to bankers and governments
throughout the free world. Once
the immediate pressure has been
relieved, Nair could resume
overspending abroad and infla-
tionary policies at home and
could continue such tactics un-
til credit again was exhausted.
If Cairo proves unwilling
to make the necessary adjust-
ments, the r.L?xt 12 months may
bring even greater delays in
debt payment, repeated refusals
of new requests for credit, a
foreign rescue operation, or
some combination. If Western
bankers continue unwilling to
increase credit lines and all
the major nations deny renewed
pleas for fi.rancial assistance,
Egypt will lack funds to pur-
chase needed, foodstuffs, procure
industrial goods for its fac-
tories, and make even partial
payments on current and overdue
debts. Foodsupplies now on
order will be consumed by Jan-
uary or February when foreign
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currency reserves usually reach
their yearly low. To date, the
Nasir regime has been conscien-
tious, if sometimes slow, about
paying its foreign debts. Under
any circumstances, Egypt will
try to make at least token pay-
ments, because a unilateral
suspension of debt repayment
would be followed by immediate
cessation of new commercial
credit and would destroy any hope
of economic progress in the next
few years.
From all indications, the
USSR is extremely reluctant to
see Egypt lose Western assist-
ance at this time. The Soviets
have used several channels to
urge the US to continue food
shipments under PL 480 and say
they have urged Egypt to remain
on good terms with the West. The
high cost of supporting the
Cuban economy probably makes
Moscow reluctant to assume a
similar burden for Egypt. The
possibility that the USSR might
make the necessary outlays, how-
ever, cannot be dismissed out
of hand.
Kuwait has provided Egypt
with over $200 million in cash
support, as well as other as-
sistance in the past several
years. Kuwaiti funds are not
inexhaustible, however, and
each new loan has faced greater
opposition in the Kuwaiti par-
liament. Presumably Kuwait will
hesitate to increase this as-
sistance if Egypt fails to sat-
isfy the demands of other free-
world lending sources.
If Cairo chooses the path
of austerity and reform, Prime
Minister Muhyi al-Din appears
to be the logical person to carry
out the program. Because of
his many pronouncements on the
subject, his name already is as-
sociated with self-sacrifice,
greater use of domestic re-
sources, and increased emphasis
on efficiency and saving. Po-
litical expediency, however, may
inspire Nasir to make Muhyi al-
Din a scapegoat for current
failures and to turn to some new
prime minister.
If, on the other hand,
Egypt rejects austerity and
elects to continue its present
course, Muhyi al-Din would al-
most certainly be replaced. In
these circumstances pro-Soviet
former prime minister Ali Sabri
would most likely be tapped to
head the government a ain.
(Prepared by the Office of Research and Reports)
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