EGYPTIAN FINANCIAL PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A002200070001-9
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• Document Page Count: 14
• Document Creation Date: December 9, 2016
• Document Release Date: April 24, 2001
• Sequence Number: 1
• Publication Date: January 1, 1965
• Content Type: BRIEF

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INTELLIGENCE BRIEF
EGYPTIAN FINANCIAL PROBLEMS
CIA/RR CB 65-7
January 1965
Copy No. 201
DIRECTORATE OF INTELLIGENCE
Office of Research and Reports
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GROUP 1
Excluded from automatic
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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, Sees. 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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EGYPTIAN FINANCIAL PROBLEMS
Egypt is caught in a financial dilemma born of progressively grow
cul -
ing overcommitment in many fxields.
forhseveral years si-s- is larg ly the
nation of a situation that has e
product of a longstanding deficiency of foreign exchange. In his attempts
to raise living standards in 'the United Arab Republic (UAR) and to gain
a place of importance on the world scene, Nasser has assumed heavy
financial commitments. Industrial investment, welfare services, mili-
tary power, and foreign ventures have been costly, and these programs
have made conflicting demands on inadequate resources. A rate of eco-
nomic growth of almost 6 percent per year has been attained, an indus-
trial complex has been implanted, and the military forces have been
equipped with modern weapons, but these gains have been accomplished
at a high cost, particularly in terms of serious depletion of present for-
eign exchange and the need to employ a significant share of future exports
to pay for past imports of military and industrial equipment.
Financial assistance adequate to support Nasser's programs has be-
come increasingly hard to find, and some adjustments in economic
policy appear likely. Consumer goods may become more scarce in the
months ahead, and the ambitious development program may be subjected
to close scrutiny. The unrealistic nature of economic goals is becoming
increasingly hard to ignore as financial difficulties mount. Development
credits of the sort provided earlier by the Communist YCt on the short-term
neither solve the problems nor have much impact
symptoms. US deliveries -of food under P. L. 480 are more directly
applicable to existing problems, covering Pri ateoforeign. investmentVis
tively small part of the many shortages.
almost at a standstill, largely because of nationalization policies.
1. Shortage of Hard Currency
Sale of more than $30 million of the UAR's official gold holdings -?-
a sharp departure from past policies -- is clear evidence that other
sources of ready money have been exhausted. From the end of World
War fI until the early 1960's, Egypt financed a growing trade deficit out
of large reserves of foreign exchange and foreign assets. Resources
were strained further by compensation payments to foreign owners of
nationalized companies. Little remained of former holdings in 1961,
when a cotton crop failure and expanding development costs doubled
the balance-or-payments deficit in a single year.
With reserves exhausted, Egypt turned to the International Monetary
Fund (IMF) and private Western banks. During 1962-64, $90 million
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was drawn from the IMF, and short-term commercial credits were
amassed. By the end of 1964, however, the limits of these lines of
credit apparently were reached. Moreover, repayments on long-
term development loans extended in the 1950's also were beginning to
mount. The current annual obligation of some $60 million to $70 mil-
lion on long-term loans now extant is expected to reach about $95 mil-
lion in 1966 and about $160 million by 1970. Bankers, fearful for the
safety of existing short-term loans, have resisted pressures to increase
the amounts outstanding. With no place else to turn, the UAR has con-
verted gold from its "currency cover" into the hard currency required
to meet overdue commitments. This temporary expedient, however,
does little to relieve the continuing pressure.
Hard currency earnings are increasing, but not fast enough to cover
the payments deficit. Sketchy data from Egyptian sources indicate that
foreign exchange earnings for 1964 may have been somewhat more than
$50 million above the level of 1963, with most of the increase probably
in hard currency. An increase of this magnitude would be a noteworthy
achievement, but in the context of the deficit; on current account in 1963
of $283 million (including $132 million in US loans in local currency),
earnings remain far from adequate.
2. Shortages of Consumer Goods
A serious shortage of consumer goods that developed in the fall of
1964 brought popular discontent into the open for the first time. Strict
import controls were imposed in mid-year,and, in an attempt to keep
the industrial complex operating and growing, emphasis was placed on
restraining "nonessential" (consumer) imports. Much of the consumer
merchandise for urban markets must be imported, and that which is
manufactured at home requires a high proportion of imported raw ma-
terials and components. While the influx of foreign goods was being
curtailed, the government continued to subsidize food prices and to con-
trol prices (many below cost) of manufactured items. Within a few
months the available supplies of food, clothing, and consumer durables
in city stores had dwindled., and potential purchasers, unable to buy
goods from government cooperatives, were turning to the black market.
Profiteering became widespread, and consumer dissatisfaction mounted.
New measures were adopted to reduce the disparity between supply
and demand and to quiet the unusual display of public unrest. An emer-
gency expenditure of $92 million in foreign exchange from budgeted
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funds was authorized for the immediate import of goods to satisfy the
most urgent consumer needs.' Price controls on some locally produced
foods were lifted to encourage farmers to increase the supply in
domestic markets. Meat rationing was imposed, food marketing
channels were reorganized, and the government began a concerted
campaign to promote saving and to discourage consumption. In an
attempt to siphon off increased consumer purchasing power, a higher
interest rate on savings accounts was introduced, accompanied by an
official campaign urging workers to increase savings as their way of
contributing to economic progress.
3. Difficulties in Industry
Egyptian industry has made tremendous advances and now contrib-
utes about one-third of national income, but it is suffering from --and
adding to the economic'difficulties besetting the country. The iron
and steel plant at Helwan, a project justified more by prestige than by.
potential profitability,.-is an outstanding example. One of the two blast
furnaces was closed down for several months in 1964 because the cur-
rency shortage had caused a delay in orders for necessary replacement
items. As a result, increased imports of steel are needed to fill the
gap. Other factories operating far below capacity for lack of spare
parts and raw materials include the Ford and Fiat automobile plants;
cement factories; and plants producing plastics; "batteries, and paper.
Funds to purchase the necessary inputs, which must come from abroad,
are not available. In spite of this shortage of foreign exchange, how-
ever, a new law has just been -drafted that would prohibit any enterprise
from closing down. either wholly or partly, without government per-
mission.
4. Bloc Economic Assistance
The Communist countries seem willing to support Nasser' s pro-
grams by using the traditional solutions of soft currency and the stretch-
ing out of debt obligations. They do not appear willing to provide the
massive injections of hard currency required to finance the Egyptian
trade deficit with non-Communist countries. In mid-December 1964.
the UAR` s cumulative deficit on bilateral trade accounts (mostly with
Communist countries) had reached $232. million -- an increase of about
$18 million in 1 month. Bilateral agreements permit the creditor coun-
try to demand hard currency payment of debit balances above a certain
limit, but in December Soviet officials reportedly promised not to exer-
cise this option, thus removing a potential threat, at least for a time.
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New trade agreements with the USSR, several European Satellites, and
Communist China provide for higher debt limits. Egyptian ministries
have been instructed to divert foreign purchases to Bloc countries, even
when Western equipment would be cheaper or better.
The promise of almost half a billion dollars in new economic credits
by Communist countries in 1964 should help to make further industrial-
ization possible. However, Egypt needs goods - - especially food and
manufactures -- in a quantity that the Bloc may not be willing to provide.
To date, no offers of hard currency for such a purpose have been noted.
5. Search for a Solution
Nasser himself has admitted publicly that serious problems exist
and will require drastic solutions. Thus far, however, only minor steps
have been taken to stem the flow of funds abroad. Selective tax increases
and import surcharges were introduced last summer. More recently,
government offices abroad have been closed, salaries of officials serving
overseas have been withheld in part, and foreign travel has been cur-
tailed.
Responsible officials assert that more basic changes will be adopted.
The Minister of the Treasury has projected imports of $828 million for
the fiscal year ending 30 June 1965 -- a drop of 13 percent in spite of
the emergency expenditure of $92 million. Prime Minister Ali Sabri
has admitted that the development effort must be slowed down, and the
Minister of Economy has stated that investment in industry has been
cut 15 percent below the budgeted level in the current fiscal year and
that the cut in the services sector has been set at 30 percent. Nasser
has claimed that his people will "tighten their belts" for the sake of
national growth, but recent disturbances indicate that the process will
be painful politically as well as personally.
25X1A
Analyst;
Coord: OCI
S-E-C-R-E'-T
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OFFICE OF RESEARCH AND REPORTS
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Control Sheet
Series Number CIA/RR CB 65-7
Date of Document January 1965
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Recipient
Ufa-? 1
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8 February 1965
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SUBJECT Transmittal of Material
Egatian
It is requested that the attached copies of CIA/RR CB 65-7,
Financial Problems,, January 1965, Secret, be forwarded as followst
State, ThR Communications Center,
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c7r
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Date:,' .
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CIA/RR CB 65-7
Egyptian Financial Problems -- January 1965 (SECRET)
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