CURRENT SUPPORT BRIEF SHIFTS IN EGYPTIAN ECONOMIC POLICY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A001800190003-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 12, 2016
• Document Release Date: May 9, 2002
• Sequence Number: 3
• Publication Date: December 23, 1963
• Content Type: BRIEF

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Current Support Brief
SHIFTS IN EGYPTIAN ECONOMIC POLICY
CIA/RR CB 63-101
23 December 1963
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
I 25X1
SECRET
GROUP 1
Excluded from automatic
downgrading and
declassification
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This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
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SHIFTS IN EGYPTIAN ECONOMIC POLICY
Economic realities apparently are forcing Egypt to modify longstand-
ing policies aimed at improving living standards while keeping prices and,
taxes at the lowest possible levels. Although actual changes made to date
have been slight, budget data, along with various press articles, indicate
that more extensive adjustments are programed and probably will be en-
acted in the next few months o The slight alterations of direction pres-
ently discernible are being taken reluctantly in response to,severe strains
in the Egyptian economy, and the pattern of change.appears to conform,
at least in part, to recommendations if international,lending institutions.
Although recent moves may be intended merely as stopgap measures, in
the absence of overriding domestic political repercussions long-range
requirements for foreign assistance could make these changes self-
perpetuating.
1. Past Policies on Consumption :
The economic policy of Egypt consistently has postulated greatly
increased personal incomes concurrent with price stability, With 1960
as a base year, the cost-of-living index stood at 97 in January 1963 and
the wholesale price index at 101. Per capita production, which rose by
about 5 percent between 1960 and 1962, was about $150 in mid-1962,
whereas per capita expenditures -- consumption plus investment --
were between $155 and $160. Prices have been restrained and the gap
has been bridged by dipping into the foreign exchange till and by govern-
ment borrowing on domestic account.
The annual deficit expenditure of from $5 to $10 per capita has re
suited in a serious strain on national financial resources (see the,
charts*), From 1.959 through the middle of 1962, net resources used
to finance the foreign trade deficit on current account were about
$720 million, and the foreign trade deficit for, 1963 may run, as high a.s
$330 million. As, a result, foreign exchange reserves have been nearly
exhausted and foreign borrowing has sharply increased. Price stabi-
lization, in the face of the trade imbalance. and the growing consumer
demand, has been accomplished through a complicated system of sub-
sidies for consumer goods, with the government rnakin;g up the dif
ference between retail prices and production or acquisition costs.
Prices on both imported and domestic goods have been fixed by t hie
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government, and unrealistically low prices in both categories have had
an adverse effect on the balance of payments. Subsidies on imported
commodities and low prices on goods containing imported components
have stimulated demand for imports, whereas low prices for domestic
products have encouraged home consumption at the expense of exports.
The cost of these subsidies also has contributed to recurring deficits
in the domestic budget.
Because of its interest in raising living standards, the government
has been extremely reluctant to raise taxes to a level sufficient to bal-
ance the budget. As a proportion of national income, tax revenues
actually have declined from 15.6 percent in fiscal year 1958 to 13.7 per-
cent in the fiscal year ending 30 June 1962. Ordinary budget expenditures
during this period have risen 40 percent, but tax receipts have increased
only 14 percent. The added tax revenues have come almost entirely from
import and excise duties. Spendable personal income has been maintained
at as high a level as possible by keeping income and property taxes almost
unchanged.
2. Signs of Change in Consumption Policy
Whereas government expenditures on subsidies for consumer goods
have grown rapidly, from 9 million Egyptian pounds* for fiscal year 1961
to 36. 5 million for fiscal year 1963, the budget for the current year shows
a decrease to 32. 4 million Egyptian pounds in this allocation. The long-
standing policy of price stabilization has been breached by recent in-
creases in the prices of sugar and electricity. The government has gone
to great lengths to justify these increases to the population and obviously
finds such action distasteful. In light of the budget data on subsidies,
these price increases suggest that the regime, however reluctantly, is
relaxing one of its most cherished economic principles.
Articles in the government-controlled press similarly are suggestive
of new policies. In August the semiofficial newspaper Al-Ahram ran a
lengthy series in four parts heavily underscoring the economic drain
caused by large personal consumption expenditures. According to the
author, consumer imports in 1962 were about $100 million greater than
in 1961. The articles laid great stress on the recently increased material
welfare of Egyptian citizens and then reiterated many times the necessity
of sacrificing some other current consumption gains. The reader was
exhorted to understand that imports must be cut and that consumption of
The current rate of exchange for the Egyptian pound is US $2. 30 to
1 Egyptian pound. This is a new rate as of early 1962.
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domestic products must be reduced so that these goods could be sold
abroad.
This public airing of the problem was followed by a period of quiet,
probably resulting from extreme official and press preoccupation with
affairs in Yemen, the Algerian-Moroccan dispute, and political develop-
ments in Iraq and Syria. In November, however, the government news
agency began releasing small items that tend to confirm the existence of
new policies. On 11 November a member of the Presidential Council,
reporting to a government-sponsored Administrative Development Confer-
ence, stated that credit facilities and foreign currency should be allotted
to Egyptian private businessmen so that they could contribute their share
to the building of the "Arab socialist society. " The official also reported
that public information media are to be utilized to make all citizens fully
aware of the "social and national responsibilities. " Three days later
this same conference issued resolutions incorporating the above sugges-
tions and urging that national development projects be financed by "com-
pulsory savings through such media as social insurance and raising the
prices of luxury commodities." In the context of Nasser's methods of
operation, the series of articles in Al-Ahram and;. thei.confercen;,66' ,,(
report appear to presage even stricter import controls, relaxation of
price controls on imported items and on domestic products suitable for
export, and enactment of some form of social security tax to supplement
government revenues.
The budget for the current fiscal year similarly points to a forth-
coming alteration in the tax structure, although only slight changes have
been announced to date. The new budget calls for a 5. 5-percent increase
in government revenues for fiscal year 1964 -- total tax yields are to in-
crease 11.6 percent, and the income and property tax receipt category
shows a jump of 18. 5 percent. Although actual revenues and expendi-
tures often vary greatly from Egyptian budgets, the magnitude of the
relative changes is evidence that increased income and property taxes
probably are to be imposed.
3. Recommendations of the International Lending Agencies
Egyptian authorities are projecting a deficit in the balance of pay-
ments of about $230 million in the fiscal year ending 30 June 1964, and
this understates the. probable deficit by as much as $100 million.
Foreign currency reserves as of the end of 1963 are less than $15 mil-
lion and Western commercial banks are exceedingly reluctant to renew
outstanding credit lines for more than 1 or 2 months at a time. To
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cover the imbalance, therefore, the government of Egypt anxiously has
been seeking loans from the International Monetary Fund (IMF), the
International Bank for Reconstruction and Development, the US, the UK,
and other potential sources. All of these Western sources have insisted
on alterations in Egyptian economic policy, and the evidence of impending
changes should be considered in light of the following program outlined
by the IMF as prerequisite to further loans:
a. Introduction of additional taxes*
b. Adjustment of the exchange rate system
c. Uniform application of higher discount rate by the Central_ Bank
d. Reduction of cost of living subsidies*
e. Revision of price structures in industry, power, and transport*
f. Establishment of ceilings on credit expansion
g. Lifting export quotas and removal of price controls on agri-
cultural products
h. Relaxation of foreign trade and payment restrictions
4. Motivation for Change
The apparent shifts in economic tactic's undoubtedly arise primarily
from Egypt's desperate need for outside assistance, particularly in the
form of foreign exchange. Western solidarity in urging changes along
the lines recommended by the IMF has been complete, and Egypt may
be trying to adopt the minimum measures necessary to get money from
these sources. Shortages of foreign currency in past periods have con-
tributed to a noticeable shortage of consumer goods, and such shortages
probably are reinforcing the nascent program aimed at cutting domestic
consumption.
Given such motives, the responsible Egyptian authorities probably
intend taking only minimum and temporary steps to elicit an adequate
in-flow of foreign capital. A brief bow to international financial pres-
sures, however, is not likely to suffice. Rapid industrialization, huge
foreign trade deficits, and compensation to foreign owners of national-
ized firms all will require sizable injections of foreign funds for many
years to come. Inasmuch as the Soviet Bloc has shown no disposition
to commit sums of the necessary magnitude, the funds can come only
from international lending agencies and Western governmental and
11 There is evidence of adoption of these measures by the Egyptian
authorities.
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private organizations. Continuing evidence of more realistic internal
economic planning will be prerequisite to governmental loans, and
private entities will not risk large sums without some confidence that
Egypt is developing a more viable economy with an ability to meet pay-
ments when they are due. Egyptian self-interest, therefore, appears to
dictate continued adherence to some aspects of the IMF strictures and
resulting deviation from those economic policies considered most
damaging to the Egyptian economy by Western financial experts. Should
the first steps toward higher prices and taxes create strong domestic
political reactions, political expediencies may restrict implementation
of such new policies and minimize any impact, but only at the expense
of reducing the availability of external economic assistance and recent
levels of economic growth.
Analyst:
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!f7,YPT'S DE'!ELOPING DOMESTIC DEBT
1959 1960 1961 1962
FISCAL YEARS (ENDING 30 JUNE)
:GOVERNMENT DOMESTIC DE$14
x
in 100
z
''YPTIAN OUTPUT. CONSUMPTION. AND
i'KiCE iNDICAIOKS
WHOLESALE PRICES
COST OF LIVING
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SECRET
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