PROSPECTS FOR US-EGYPTIAN RELATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001202840002-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 20, 2016
• Document Release Date: June 27, 2006
• Sequence Number: 2
• Publication Date: October 26, 1982
• Content Type: SNIE

Secret
SNIE 36.1-2-82
26 October 1982
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Intelligence
Prospects for
US-Egyptian Relations
Special National Intelligence Estimate
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SNIE 36.1-2-82
PROSPECTS FOR
US-EGYPTIAN RELATIONS
Information available as of 21 October 1982 was
used in the preparation of this Estimate.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State and the
Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
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SCOPE NOTE
This Special National Intelligence Estimate examines the prospects
for the US-Egyptian special relationship over the next year. It deals with
Egypt's domestic problems primarily as they affect that relationship.
Hi
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CONTENTS
SCOPE NOTE ............................................................................................................ iii
KEY JUDGMENTS .................................................................................................... 1
DISCUSSION .............................................................................................................. 3
Lebanon's Impact ................................................................................................... 3
Domestic Perceptions ............................................................................................. 4
...................................................... 5
Shared Strategic-Military Goals ............................................................................. 7
Economic Linkages and Problems ......................................................................... 8
Outlook .................................................................................................................... 9
ANNEX A: Biographic Portraits .............................................................................. A-1
ANNEX B: Economic Prospects ............................................................................. B-1
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KEY JUDGMENTS
The US-Egyptian relationship is maturing from its early political
"honeymoon" to a more complex, yet still mutually beneficial, connec-
tion. The Israeli invasion of Lebanon led to serious strains in US-
Egyptian ties and brought to the surface deeper problems that beset the
relationship. Most Egyptians, including President Mubarak and key
military leaders, feel the United States has failed to restrain Israel in the
region or press Tel Aviv to make concessions that Egypt believes are es-
sential to resolving the Palestinian issue. Cairo also believes Washington
has not paid appropriate attention to Egyptian concerns in the peace
process.
US policy toward the Arab-Israeli dispute will continue to be one
of the most important factors influencing US-Egyptian ties. Arab-Israeli
issues will remain the most volatile source of strain. President Reagan's
peace initiative has significantly improved the tone of the relationship,
but Egyptians are deeply skeptical that the United States has the
determination to pursue its initiative in the face of Israeli resistance.
The US economic and military assistance programs are vital to
Egypt but have come under growing criticism in recent years. Unrealis-
tic Egyptian expectations are partly to blame. Moreover, the Egyptians
believe they have not yet received the parity in aid with Israel expected
after Camp David. Such strains currently are manageable but could
grow sharply if progress is not made in meeting Egypt's concerns. If
Egypt perceives any detrimental changes in the aid relationship, it
would have an immediate negative impact. In any case, as Egypt's tight
foreign payments situation worsens next year, Cairo is likely to seek
additional balance-of-payments support from the United States to help
it delay economic reforms that might cause domestic instability.
Since the Israeli invasion of Lebanon, Egyptian leaders have
publicly linked progress in the peace process to US-Egyptian strategic
cooperation. Currently they are less willing than previously to allow
Egyptian participation in highly visible combined maneuvers. They will
continue to refuse to conclude a formal access agreement for US use of
Egyptian military facilities.
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The enduring and stable elements of the US-Egyptian "special
relationship" are mutual, shared objectives:
- A negotiated, comprehensive Arab-Israeli peace settlement.
- Opposition to Soviet and radical inroads in the Middle East.
- A politically stable and economically prosperous Egypt.
The volatility in the relationship is a product of different perceptions of
how to achieve these objectives.
Mubarak's domestic political standing plays a key role in his
readiness to cooperate with Washington.
The Lebanon crisis and growing
economic problems have undermined his credibility at home, and he is
determined to avoid additional vulnerabilities that might stem from the
US connection. While the Mubarak government has dealt firmly with
Egypt's radical Islamic militants, it has not so far alleviated the
underlying frustrations and despair on which radicalism and violence
feed. The roots of these frustrations lie largely in the difficult economic
and social conditions facing Egypt's urban population.
Unless the government demonstrates that it has the will and
capacity to improve these conditions by convincing Egyptians that it has
a well-thought-out, graduated program for economic improvement,
threats to the regime will continue to grow. Should Mubarak's domestic
problems worsen, he is likely to be more hesitant about open collabora-
tion with the United States on political or strategic issues.
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DISCUSSION
Lebanon's Impact
1. The US-Egyptian special relationship that devel-
oped in the late 1970s and was highlighted by the US
role in negotiating the Egyptian-Israeli peace treaty of
March 1979 is undergoing a transformation. Although
the connection is still strong, it is maturing into a more
complex, yet still mutually beneficial, relationship.
2. The Israeli invasion of Lebanon generated the
most serious policy differences between Egypt and. the
United States since 1979. The disagreement was high-
lighted by President Mubarak's refusal to support
Ambassador Habib's efforts to evacuate the Palestine
Liberation Organization from Beirut without linkage
to renewed Middle East peace efforts. Egyptian offi-
cials, including the military, were deeply frustrated
and angered by the invasion. Many Egyptians, like
other Arabs, believe Washington approved of the
Israeli action in advance and most were convinced it
did not do enough to restrain Israel once the invasion
began. The heavy civilian casualties during the siege
of Beirut in August and the Israeli move into West
Beirut in September deepened popular outrage and
resentment toward the United States as well as Israel.
Cairo's apparent inability to influence either Tel Aviv
or Washington also frustrated the Egyptian leadership.
3. Despite the invasion, Mubarak did not renounce
the peace treaty with Israel. Egyptian Government oil
sales to Israel also were unaffected, and Egypt request-
ed renewal of the discussions to settle the unresolved
Tabah territorial dispute in the Sinai. Cairo, however,
did freeze the normalization process-the building of
closer political, economic, cultural, and military ties-
with Israel, and Egypt's ambassasor in Tel Aviv was
recalled after the massacre in Beirut's Palestinian
refugee camps.
4. The US-Israeli-Egyptian autonomy negotiations
over the future of the West Bank and Gaza Strip have
been affected as well. The negotiations had already
been indefinitely suspended because Egypt refused to
acquiesce in Israeli demands that talks take place in
Jerusalem. Now Mubarak says Egypt will not return to
the negotiating table until Israel commits itself to a
schedule for withdrawing its forces from Lebanon. In
addition, Egypt says it wants Israel to redefine its
position on Palestinian self-determination and the
status of Jerusalem, halt the expansion and thickening
of Jewish settlements, and make some confidence-
building concessions before the talks resume. We
believe it is unlikely that Egypt will return to the
negotiating table without greater Arab participation.
5. Because of events in Lebanon, and Egyptian
perceptions of the lack of strong US actions to restrain
Israel, Mubarak undertook to put some distance be-
tween Egypt and the United States. Defense Minister
Abu Ghazala (see annex A for biographic portraits)
publicly linked progress on the Palestinian issue to
future willingness to allow US use of military facilities
in the region. Cairo Dindicated it wished to 25X1
reduce the visibility of its military cooperation with
the United States, and work on several joint projects
was slowed temporarily. Egypt made clear its unwill-
ingness to participate in the Jade Tiger combined US-
Omani military exercise, belying its previous enthusi-
asm for playing a major role in US Rapid Deployment
Force military operations in the Middle East. Cairo is
willing to allow overflights and refueling, however, for
the exercise.
6. Mubarak made clear that he wanted to avoid a
serious rupture with Washington. The President told
Egyptian journalists in early September to ease their
criticism of the United States. He has consistently
reiterated support for the Camp David process as well
as his interest in continued US economic and military
aid. Egypt has requested more military credits and
increased flexibility in its use of US economic aid.
7. President Reagan's recent initiative concerning
the West Bank and Gaza has significantly eased the
strains in US-Egyptian ties. Egyptian officials have
continued to emphasize the "positive aspects" of the
initiative despite their displeasure over its ruling out of
Palestinian statehood as a possible outcome and the
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lack of reference to the PLO. Cairo has also praised
the results of the Arab summit in Fez, Morocco, as a
step forward. Nonetheless, Ghazala has reiterated pub-
licly the linkage between the peace process and strate-
gic cooperation, and the Israeli move into Beirut after
President-elect Bashir Jumayyil's assassination and the
massacre that followed served to revive concern about
the US ability to influence Tel Aviv. Egyptians are
skeptical, moreover, that the United States has the
determination to follow through with the initiative in
the face of strong Israeli rejection.
Domestic Perceptions
8. We believe the extent of Egyptian suspicions
about the US role in the Lebanese crisis reflects deeper
doubts about some aspects of Egypt's close alliance
with the United States. Disappointment with the US
connection is intimately linked to disillusionment
about the peace treaty with Israel. For many Egyp-
tians, the peace negotiated in 1979 under US auspices
has been a disappointment because:
- It has not brought prosperity as promised by the
late President Sadat.
- It has cost Egypt the friendship and support of
other Arab states.
- It has not brought the influence with Israel and
the United States that Egypt expected.
- It has not yet spread and brought a peaceful
solution to the overall Palestinian problem.
Inflated expectations are part of the problem. The
Egyptian public had long been led to believe that
peace would bring massive US aid and investment that
would produce almost instant prosperity. Instead, eco-
nomic conditions remain difficult. Moreover, Egyp-
tians did not expect the treaty to result in a prolonged
period of regional isolation.
9. Dissatisfaction with some of the results of the
peace treaty does not translate into support for a
return to belligerency, however, and few, if any,
Egyptians favor another costly war with Israel. In-
stead, the Egyptian mood has become increasingly
embittered toward the Begin government, especially
since many believe Israeli actions like the Golan
annexation, the raid on Iraq's nuclear facility, and the
invasion of Lebanon were carried out in part to keep
Egypt isolated from its Arab neighbors. Further,
Egyptians are sensitive to the charge that their unilat-
eral settlement has made possible these Israeli actions.
Bitterness with Israel has heightened interest in better
ties with other Arabs. While Egyptians have always
had mixed emotions about their Arab brothers, most
increasingly favor a more active policy to seek rap-
prochement with the moderate Arab states.
10. Egyptians have long tended to overestimate the
US ability to influence Tel Aviv. They believe Wash-
ington has failed to press Israel to make concessions
they consider necessary for progress in the peace
process. In addition, Egyptians feel the United States is
taking Egypt for granted. They charge that Cairo has
not been treated as a "full partner" and that its views
on issues like Lebanon are not given sufficient weight.
A critical factor governing future Egyptian attitudes
will be not only the extent but the success of US efforts
to convince Israel to accept President Reagan's peace
proposals.
11. Frustrated by Israeli actions and perceived US
inaction, Egyptians also have gradually voiced growing
doubts about the economic and military benefits that
the peace treaty brought. Many believe US economic
aid and Sadat's "Open Door" economic policy failed to
produce significant results. Moreover, many Egyptians
are convinced that US economic assistance and policies
that spur the private sector have fostered unprecedent-
ed corruption among the elite while doing little to help
the average citizen. Moreover, many criticize US assist-
ance for spending too much on feasibility studies,
contract reports, and other bureaucratic items that do
not directly benefit Egyptians. Some worry that US aid
gives Washington too much influence on internal Egyp-
tian economic decisions and would prefer a cash trans-
fer disbursement-such as Israel receives-rather than
specific project assistance.
12. US military aid has been criticized as well,
especially the long delivery schedules and high costs.
Egyptians want US military aid to equal that given
Israel in quantity, quality, and terms. They have been
unhappy settling for less, even though Egyptian techni-
cal shortcomings alone would limit the absorption of
greater quantities of sophisticated equipment. Mubarak
has been a tenacious advocate of high levels of security
assistance and has argued frequently that any reduction
in US aid would weaken his support in the military as
well as Egyptian support for the US connection.
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13. Sadat's willingness to provide Egyptian military
facilities to the United States, reiterated by Mubarak,
has also aroused criticism and charges that the offer
actually involved US bases. Opposition groups charged
that the offer undermined Egypt's national sovereign-
ty as well as its standing as a nonaligned nation. (See
paragraphs 23 to 32 for additional information on
military and economic linkages.)
14. The opposition has taken the lead in criticizing
the US connection. Islamic fundamentalists, while
welcoming Sadat's reversal of former President Nasir's
close ties to the Soviets, have strongly criticized the
peace treaty, US influence on Egypt's economy and
society, strategic cooperation with Washington, and
Egypt's estrangement from the other Arabs. The most
important fundamentalist group, the Muslim Brother-
hood, has been a particularly strong opponent of ties
with Israel but has not advocated violence. While
critical of Western cultural influence in Egypt, the
Brotherhood is not as xenophobic as some other Islam-
ic fundamentalist groups. More extreme groups, like
the Jihad organization that was responsible for Sadat's
assassination, are more likely to attempt anti-Ameri-
can and antiregime violence. The fundamentalists,
especially the Brotherhood, enjoy widespread popular
backing, and their hardline positions toward Israel
have encouraged Mubarak to maintain a tough posi-
tion vis-a-vis Israel. His refusal to visit Jerusalem last
February reflected in part a desire to avoid funda-
mentalist ire.
15. The left, including some of Egypt's legal politi-
cal parties, have been particularly critical of the
United States. The National Progressive Unionist
Grouping (NPUG) and the Socialist Labor Party ech-
oed several leading fundamentalists in protesting the
Israeli invasion and US policy in late June. Coopera-
tion between the left and right is rare, but is a deep
concern for the regime. Leftist leaders have called for
a break in diplomatic ties with Israel, an embargo on
oil sales to Israel, curtailment of US-Egyptian strategic
cooperation, and improved Egyptian ties with the
Arab states and the USSR. Some even urged a boycott
of US trade. The NPUG has also criticized the new US
peace initiative as insufficiently responsive to Arab
interests. While few in numbers, the left has wide
appeal among Egyptian intellectuals, giving it a fairly
influential role. The tiny, illegal Communist Party is
also critical of the United States but has little impact
on Egyptian politics or popular opinion.
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lems. The soft oil market and the slowing of other key
sources of foreign earnings will make it increasingly
difficult to pursue rapid economic growth and expen-
sive government consumer subsidy programs in the
coming years. The public expects Mubarak to act
decisively to improve economic conditions, but there is
little public support for the far-reaching economic
reforms needed to sustain a healthier economy in the
coming years or even for the President's frank talk on
what needs to be done to cope with the economy (see
inset). The greatest threat to economic stability in the
coming months is the possibility of a sharp decline in
world oil prices. Egypt would have difficulty making
up the loss in foreign earnings and would look to the
United States for help.
Recent Remarks by President Mubarak
on Egypt's Economy
- The main problem facing us is to try to ease the
hardship of the people. We must devote tremen-
dous efforts and pay maximum attention to this
problem.
- France suffers from economic problems. Mexico
is in debt. We are not the only ones who have
problems. There is something we must do; stop
talking, stop abusing each other and work instead.
Nothing can do us any good but work.
- Do you know how much the subsidy for bread
per year is? About 800 million [Egyptian] pounds.
This is all the Suez Canal income plus 200
million.... The amount allocated for subsidizing
corn, vegetable oil, and sugar is 408 million
pounds.... The subsidies eat up the country's
resources.
- The general policy of the country is not to touch
the subsidies, not to increase the prices of neces-
sary products for the toiling factions.
- [We cannot] press a button on a magic wand to
get watermelons. No, this is not the case. We
should all know the reality and the facts.... We
must all work.
~vlost
Egyptians s i seem willing o give im more time to
prove his abilities, and the military and internal
security forces remain loyal. Mubarak has renewed the
state of emergency to keep the Islamic extremists and
other critics on the defensive. The Muslim Brother-
hood, while still unsure of Mubarak, probably is not
ready to challenge the regime.
21. Over the longer run, Mubarak's staying power
will depend on his ability to convince Egyptians of his
leadership skills and his success at making progress on
pressing economic and social problems. His handling
of Egyptian-US and Egyptian-Israeli ties will be im-
portant in convincing his countrymen of his presiden-
tial qualities. Successful reconciliation with the other
Arab governments would boost his standing signifi-
cantly. The most critical issue, however, will be Mu-
barak's handling of the economy. There are no quick
fixes for Egypt's massive problems. Poorly prepared
and executed reforms could spark civil unrest, as in
1977; even well-planned changes will encounter resist-
ance. A patient approach is necessary but so is con-
vincing the Egyptian public that the regime has a
viable program for long-term prosperity. US financial
assistance can play an important role, but the key
decisions must be Egyptian.
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Stability Indicators
There are several indicators to help monitor Egypt's
- A new government crackdown on the legal oppo-
sition and the press.
- Revival of extremist Islamic-sponsored terrorism.
- Renewed Coptic-Muslim sectarian violence.
- An upsurge in student protests.
- Successful efforts to unify the leftist and Islamic
wings of the opposition.
Shared Strategic-Military Goals
23. Despite some differences over Arab-Israeli is-
sues, Mubarak believes the United States and Egypt
share broader strategic goals. Mubarak is deeply con-
cerned about Soviet ambitions in the Middle East.
While he has improved the tone of Soviet-Egyptian
relations, he is committed to thwarting Soviet ad-
vances in the area.
sion. In the last six months Egypt has held combined
maneuvers with Sudan and Oman to underscore its
support for the regimes of these states. This kind of
strategic cooperation was not damaged by the Leba-
nese crisis. If anything, Cairo would like to increase its
role as a "full partner" with the United States in
maintaining regional stability but is constrained by its
financial weaknesses and lack of access to much of the
Arab world.
24. Like Mubarak, the Egyptian military leadership
is a strong supporter of the special relationship, and
the military in general shares his anti-Soviet views.
The military's attitude is grounded in its desire for US
equipment and the relatively favorable relationship it
has enjoyed with US personnel. Combined exercises
such as Bright Star held in 1981 generate a great deal
of Egyptian military respect for and understanding of
the US armed forces and their capabilities.
25. Nonetheless, the initiation in 1979 of a large US
military assistance program for Egypt, whose armed
forces were formerly supplied with Soviet arms and
utilized Soviet methods, was bound to create day-to-
day working problems. The Egyptian armed forces
would like to be completely reequipped with modern
American weapons, but are frustrated by the limita-
tions of the US Foreign Military Sales (FMS) program.
(See table 1.) The senior leadership is procuring addi-
tional military assistance from other sources not only
to prevent overdependence on a single source, but also
to fill perceived shortfalls in the US program. They
also believe Egypt has a right to equal status with
Israel for military assistance. Military leaders recog-
nize the need for training and infrastructure programs
but do not understand the long leadtimes in delivery
US Military Sales to Egypt
Deliveries
Begun
Current
(Aug 1982)
Projected
(Dec 1984)
Anticipated
Total Request
(Dec 1987)
M-60A3 tanks
1981
311
659
900
M-113A2 armored personnel carriers
1981
511 a
858
1,965
TOW launchers
1979
252 b
252
600
F-4 aircraft
1979
35
35
35
F-16 aircraft
1981
12
40
80
CH-47 helicopters
1981
15
15
15
C-130 aircraft
1979
20
23
23
I-HAWK batteries
1982
4
12
12
a Includes 36 acquired by direct commercial contract.
b Includes 100 acquired by direct commercial contract.
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programs. They believe the United States could do
more if it wanted to, and they often cite the acceler-
ated F-4 program as an example.
26. Probably the biggest problem has been institut-
ing the US system for spare parts supplies and mainte-
nance. The Egyptians are still tied to the Soviet
scheme of having a one-for-one duplication of spare
parts for a given weapon system and have yet to
accept the US system of not stocking parts of proven
reliability. Also, the Soviets tended to perform routine
maintenance rather than train Egyptians. Mainte-
nance problems with F-4 aircraft have been exacerbat-
ed by the accelerated delivery schedule Egypt de-
manded and are largely responsible for Egypt's
decision to sell the F-4s. There have been complaints
by Egyptian military students in the F-16 program
that their training was inadequate and incomplete.
Such complaints do not appear to be widespread but
ere is a shortage o qua t ie trainees an
US deliveries are straining inadequate Egyptian logis-
tic systems. Basically, the Egyptians would like to have
weapons and equipment sooner and worry about
training, logistics, and resupply problems later-as
opposed to the US FMS package approach of building
a step-by-step program designed to utilize the equip-
ment fully and build an effective force.
27. Personnel problems also complicate military
ties. Members of the Egyptian military often do not
feel comfortable with the goal-oriented US advisers.
American military personnel which many American
soldiers do not fully understand.
Economic Linkages and Problems
28. Extensive official and private economic ties
between Egypt and the United States (see inset) have
played a positive role in supporting domestic stability
in recent years. In particular, US economic and mili-
tary aid has supplemented rising foreign earnings and
enabled Egypt simultaneously to pursue rapid eco-
nomic growth, to rearm its military, and to boost
domestic consumption. Despite some unhappiness
with aspects of US aid, Egypt's leaders are grateful for
the massive aid inflows that have accompanied closer
political relations. They believe the US assistance
program for Egypt-greater than for any other devel-
oping country--provides US political and strategic
gains and thus constitutes a fair deal. Reliable substi-
tutes for US aid are not on the horizon. Oil-rich Arab
states such as Saudi Arabia and Kuwait-Cairo's previ-
ous financial backers-are providing massive aid to
Iraq, a more immediate concern to them. Further-
more, potential Arab donors face smaller oil revenues
because of the soft world oil market.
Key Economic Linkages
- The United States is the largest donor of econom-
ic aid to Egypt, with commitments since 1975
totaling nearly $7 billion. Slightly more than half
has provided balance-of-payments support, with
the rest for development projects such as power
plants and infrastructure repair.
- Egypt imported 75 percent of its wheat needs in
1981 and 45 percent of the imports came from
the United States.
- The United States is Egypt's largest trading part-
ner, providing 20 percent of Egyptian civilian
imports and buying 8 percent of Egyptian exports
in 1980, the most recent year for which there are
data available.
- One US firm-Amoco-discovered, developed,
and produces 75 percent of Egyptian oil through
its production-sharing subsidiary. The value of
this oil during the current Egyptian fiscal year is
$5.7 billion at current world market prices. Egypt
uses its share of this oil for domestic consumption
and exports.
- One out of seven tourists who visit Egypt is
American. Americans are the single largest na-
tional group among tourists in Egypt.
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29. Despite the positive aspects of US-Egyptian
economic ties, several irritants exist. Foremost is the
Egyptians' belief that they have not received the aid
flexibility promised by President Mubarak when he
visited Washington last February. Egypt's maximum
desire is that US economic aid be provided on the
same cash transfer basis as US assistance to Israel.
30. Overly prescriptive economic policy advice
from US officials has the potential to become a major
source of friction. Egyptian leaders appear wary that
the United States will go beyond its current policy of
encouraging domestic economic reforms and attempt
to use aid as a lever on Egyptian economic policies.
President Mubarak is clearly aware that economic
policies intended to maintain low food and energy
prices are counterproductive to economic develop-
ment and a healthy balance of payments. He also has
indicated, however, that he has no intention of making
rapid policy shifts that might cause social and political
unrest.
31. Although US aid has been essential in helping
meet near-term needs and has contributed to develop-
ment efforts, some longer term impacts are less favor-
able. Economic assistance has been in the form of
either grants or long-term, low-interest loans, but
interest payments on US military credits are near
market rates and will approach $500 million a year by
the mid-1980s. As Egypt faces a more difficult foreign
payments situation in the years ahead, Cairo may seek
debt relief for FMS payments. Egypt also is likely to
seek a much larger share of new economic aid, or even
all, as balance-of-payments support. This would pro-
vide the greatest help in maintaining domestic stability
in a period of foreign payments problems. It would
also come close to the cash transfers provided Israel.
32. Private economic links with the United States
create fewer negative responses. US oil firms maintain
a low profile in Cairo and their operations are in
remote areas of the country. The value of Egyptian oil
taken by Amoco for costs and profit under its produc-
tion-sharing agreement are not revealed by the gov-
ernment. On the other hand, while Egypt has long
hosted foreign tourists, high-rise luxury hotels with
casinos have been criticized by Islamic fundamental-
ists because they encourage Egyptians to pursue "for-
eign" lifestyles.
Outlook
33. Egypt does have alternatives to the US connec-
tion, but none can secure all of Cairo's objectives. In
extremis, it could return to a close alignment with the
USSR as it did in the 1950s and 1960s. Such a dramatic
shift is highly unlikely, given the strong anti-Commu-
nist views of Mubarak, his key aides, and the leader-
ship of the Egyptian military. Moreover, such a policy
would probably be unpopular in Egypt and alienate
Israel and Saudi Arabia. Mubarak may continue to
normalize ties with Moscow by sending an ambassa-
dor, but a fundamental change in relations is not
likely.
34. Egypt is moving toward greater nonalignment
and closer identification with the Arab states. In
Cairo's view, such a policy is not incompatible with
close ties to the United States, and Mubarak is seeking
to enjoy the benefits of both. The Egyptians clearly
hope to gain badly needed financial aid from the oil-
rich Arab states. Egypt's ability to reap the full
benefits of close ties to the other Arabs, however,
remains constrained by its ties to Israel. The soft world
oil market has also reduced the Arabs' willingness and
ability to aid Egypt. In any case, the Arabs cannot
replace the United States as a source of military
assistance.
35. The enduring and stable elements of the US-
Egyptian "special relationship" are mutual, shared
objectives:
- A negotiated, comprehensive Arab-Israeli peace
settlement.
- Opposition to Soviet and radical inroads in the
Middle East.
- A politically stable and economically prosperous
Egypt.
The volatility in the relationship is a product of
different perceptions of how to achieve these objec-
tives. The single most important factor in maintaining
the special relationship will continue to be US policy
toward Israel and the Arab-Israeli conflict. US-Egyp-
tian relations are intimately and irrevocably tied to the
US-Egyptian-Israeli triangle in terms of both Egyptian
domestic politics and Cairo's regional objectives.
Should most Egyptians become convinced that the
United States is not willing to press Israel to resolve the
Palestinian issue, the special relationship will suffer
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new and serious strains. US military and economic
linkages and their inherent leverage will not dissuade
Mubarak from taking steps to distance Egypt from the
United States if he perceives a serious domestic threat
from not doing so.
36. The new US initiative announced by President
Reagan on 1 September is critical to the future of US-
Egyptian ties. Key to Mubarak's policy toward the
United States is its ability and willingness to pursue the
initiative in the face of Israeli resistance and other
regional problems. Cairo is unlikely to participate in
peace negotiations until Israel accepts at least some
elements of the US proposal as a basis for negotiations
and other Arab-Palestinian representatives become
involved. Egypt is especially concerned about US
willingness to press Israel to alter its West Bank-Gaza
policies and freeze the construction of Israeli
settlements.
37. Whatever the results of the current initiative,
the events of this past summer probably will have
some lingering impact on US-Egyptian ties unless
there is rapid and dramatic progress in the peace
process. Unqualified Egyptian support for major US
initiatives in the area can no longer be assumed or
taken for granted. In future crises, Cairo probably will
be more assertive in proposing its own policy initia-
tives, such as the French-Egyptian draft Security
Council resolution on Palestinian issues that was circu-
lated informally during the Lebanese crisis. Nor are
Egyptian-Israeli ties likely to return to business as
usual in the next year. Normalization probably will
remain stalled even after Israel leaves Lebanon unless
there is significant progress in the peace talks. Should
PLO leader Arafat visit Cairo, as some reports suggest,
Egyptian-Israeli ties will be further strained.
38. Mubarak probably will remain reluctant to
engage in new high-visibility combined maneuvers
like the Bright Star exercises, at least as long as Israeli
troops remain in Lebanon. This does not rule out
continued military cooperation, including training and
pre-positioning of equipment in Egypt. Cairo will also
adhere to its longstanding policy of minimizing the
size of the US presence in Egypt.
39. It is unlikely that Mubarak will be more forth-
coming in providing a written commitment for US use
of Egyptian facilities Such a move 25X1
would be strongly criticized by the Egyptian opposi-
tion and lack support among the elite. Cairo will
permit US use of its facilities in a crisis-as during the
Iran rescue mission-but will remain unwilling to sign
an explicit agreement.
40. Close cooperation is likely to continue in less
visible areas. The most enduring and stable element in
the US-Egyptian relationship is shared opposition to
Soviet advances in the area. Egypt will continue to
provide limited amounts of military aid to pro-US
regimes like those in Sudan and Somalia when they are
threatened by pro-Soviet states like Libya and Ethio-
pia. This parallel support for pro-Western regimes
may expand to include a larger Egyptian role in
assisting Arabian Peninsula states as Egyptian-Arab
ties continue to improve.
41. The problems in the Egyptian-US relationship,
although serious, are manageable, if given careful
attention and a recognition of the limits domestic
politics impose on Mubarak. Expectations on both
sides must be kept reasonable. The connection is
maturing; a rupture is not imminent, inevitable, or
likely. Some differences in viewpoint are certain to
occur, however, and should be expected. In fact, a
somewhat looser identification with US policies could
have beneficial effects for the stability of the Mubarak
regime and, in so doing, provide a healthier basis on
which the two countries can pursue their cooperative
and mutually beneficial relationship on issues and in
areas that are of key importance to US interests in the
Middle East.
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ANNEX A
BIOGRAPHIC PORTRAITS
Muhammad 'Abd al-Halim
ABU GHAZALA
Deputy Prime Minister; Minister of
Defense and War Production;
Armed Forces Commander in Chief
The hard-charging, blunt-spoken Defense Minister
has been promoted twice during the Mubarak presi-
dency: he was named a field marshal in April and
elevated to the post of Deputy Prime Minister in
August 1982. Abu Ghazala is widely viewed as the
probable choice for vice president; he has the military
stature to ensure the loyalty of the all-important officer
corps. The 52-year-old field marshal is a decorated
combat veteran of the 1967 and 1973 Arab-Israeli
wars; he is respected within the military for his
courage, decisiveness, and military acumen.
Abu Ghazala's relationship with Mubarak dates
from their attendance at the Military Academy, from
which they both graduated in 1949; the two men are
still close. Like Mubarak, Abu Ghazala received ad-
vanced military training in the Soviet Union and, like
Mubarak, he has expressed intense dislike for the
Soviets. Abu Ghazala is favorably disposed toward the
United States and has described with affection the
time he spent as defense and armed forces attache in
Washington during the years 1976-80. He
also believes that gyp needs o en its
isolation from the Arabs and diversify its arms sources.
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MUHI AL-DIN
Prime Minister; Secretary General,
National Democratic Party
A surprise choice as Prime Minister, the self-assured
Muhi al-Din
Deputy Prime Minister; Minister of
Foreign Affairs
`Ali serves Mubarak as he did the late Anwar Sadat:
he is the loyal soldier who faithfully carries out the
President's orders. `Ali came to prominence in Egypt
as a result of his daring in the 1967 and 1973 Arab-
service-in the ruling political party, in the People's Israeli wars, but it was Mubarak who shepherded his
Assembly, as a three-time governor, and in a succes- career into ministerial positions.
believe he has gained Mubarak's support
through his loyalty and hard work. With no independ-
ent power base, Muhi al-Din
knows the personalities and imitations
o the Egyptian political system and, more than
anyone else in the inner circle, is qualified to offer
Mubarak domestic political advice.
Muhi al-Din has been particularly active in attempt-
ing to play the role of arbiter within the cabinet on
important economic issues. Because he has been sin-
gled out for sometimes scathing criticism by the
opponents of the regime, Muhi al-Din is the most
likely cabinet candidate for dismissal, should Mubarak
deem that a necessary step to deflect opposition. The
56-year-old Prime Minister, who holds a doctorate in
roentgenology (a branch of radiology) comes from a
politically prominent family.
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pointment as Defense Minister (1978-80) and as For-
eign Minister. Mubarak respects `Ali, but the Foreign
Minister is not Mubarak's closest adviser.
The 61-year-old `Ali has a reputation of rectitude,
simplicity, and geniality. His name has frequently
candidate.
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Butrus Ghali is the primary global analyst in the
Foreign Ministry. He is the architect of Egypt's Afri-
can policy and a fervent advocate of Pan-Arabism. His
survival in Mubarak's government-despite his intense
rivalry with presidential confidant Usama al-Baz-is a
recognition of his skills and past performance. Ghali
has been an important member of the Egyptian team
engaged in the Egyptian-Israeli dialogue since 1977.
Butrus Butrus GHALI
Minister of State for Foreign
Affairs
Brilliant, urbane, and indefatigable, he is a skilled
negotiator. Ghali enjoys Foreign Minister 'Ali's re-
spect; he is not known to be close to Mubarak.
Ghali is not a Foreign Ministry insider; he came to
his present position in 1977 after a distinguished
career in academia. Recognized as an expert in inter-
national law, he headed the Center for Political and
Strategic Studies in Cairo, and was chairman of the
political science department at Cairo University. A
Sorbonne-educated Fulbright scholar, the 59-year-old
Ghali
-177e==~ed by a prominent toreign journalist as the
most pessimistic man in official Cairo, Ghali has long
expressed his concern over Egypt's loss of prestige in
the Nonaligned Movement and isolation in the Third
World, and his conviction that Egypt must not become
the "Cuba of the Western World."
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ANNEX B
ECONOMIC PROSPECTS
1. Egypt so far has weathered recent global eco-
nomic problems better than most developing coun-
tries, but the future is clouded by the government's
failure to address fundamental economic problems.
The soft oil market and the slowing of other key
sources of foreign earnings will make it increasingly
difficult to pursue rapid economic growth and expen-
sive government consumer subsidy programs in the
coming years. Although the public expects President
Mubarak to act decisively to improve economic condi-
tions, there is little public support for the far-reaching
economic reforms needed to sustain a healthier econo-
my in the coming years. The greatest threat to eco-
nomic stability in the coming months is the possibility
of a sharp decline in world oil prices. Egypt would
have difficulty making up the loss in foreign earnings
and would look to the United States for help.
Recent Economic Performance
2. The Egyptian economy in the second half of the
1970s experienced rapid growth and significant
changes (see charts). Real growth of 8 to 9 percent was
spurred by large inflows of foreign assistance; sharply
rising foreign earnings, particularly from oil and work-
er remittances; and policies more conducive to private
sector activity. Egypt also was able to underwrite
increasingly expensive consumer subsidies and price
controls that shelter low- and middle-income consum-
ers from inflation. Through this intervention in the
marketplace and by providing large wage increases,
the government helped spread the benefits of growth
and prevented inflation from becoming a significant
source of domestic instability.
3. Most Egyptians believe, however, that only a
privileged few benefited from the improved economic
performance. In particular, Sadat's "Open Door" poli-
cies are widely believed to have caused enormous
maldistribution of wealth, eroding the social equity
allegedly achieved under President Nasir. Further-
more, the public is still awaiting the dividend prom-
ised by peace with Israel.
4. This year Egypt has withstood the effects of the
soft oil market, high interest rates, and the global
recession better than most other developing countries.
For 1982 we estimate Egypt's current account deficit
will be only slightly larger than its $2 billion deficit in
1981. In 1980 the deficit was $500 million. We project
import growth this year will be less than last because
of declines in international commodity prices and
restrictions on imports by public sector firms. Egyp-
tian oil export earnings will decline only slightly
because export prices have been carefully adjusted to
remain competitive and to boost sales. We expect
earnings from remittances and tourism to recover
from last year's declines because of more favorable
exchange rate policies, continuing strong demand for
Egyptian workers, and sharply higher tourist bookings
for the second half of the year.
5. Nonetheless, with foreign exchange reserves of
only $700 million, which is equivalent to less than one
month's imports, the Egyptian Central Bank and
government-controlled public sector banks have had to
take several measures to deal with a tightening foreign
payments situation:
- The Central Bank of Egypt last spring arranged a
$200 million syndicated Eurodollar loan, and two
public sector banks have floated loans of $40
million and $35 million.
- The Central Bank has leaned on Egyptian im-
porters to seek longer term trade financing and
has selectively tightened domestic credit controls
to limit demand for nonessential imports.
- The public sector firms have had their access to
foreign exchange restricted.
- Public sector banks in July became more active
in purchasing foreign exchange from Egyptian
workers in Saudi Arabia and other Arab states by
paying higher exchange rates.
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0
Egypt: Economic Indicators
Note change in scales
Real GDP Growth
Percent
Consumer Price Growth
Percent
Current Account Deficit
Billion US $
Composition of Foreign Earnings in 1981
Percent
Tourism 6
Suez Canal 10-
Other services 13
Other exports 17
Remittances 24 -
a Estimated.
b Projected.
cinitial estimate.
d Actual deficit.
e Initial estimate.
Government Budget Deficit
Billion Egyptian Pounds
t
N fN men M
00 00 00 00
ry ry
00 00 0C 00
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6. We expect real economic growth in 1982 to be
about 6 percent because of the tighter foreign ex-
change situation. Because of the continued rapid
expansion of the money supply stemming from large
government budget deficits, the inflation rate has
increased to 15 percent annually from 10 percent in
1981. After increasing 42 percent in 1981, the money
supply grew at an annual rate of 45 percent in the first
four months of 1982. Continuing large government
deficits-equivalent to about 20 percent of gross do-
mestic product (GDP)-will fuel further inflation.
Although low- and middle-income consumers are shel-
tered by extensive government price controls and
subsidies, consumers with larger disposable incomes
who can purchase uncontrolled goods face an annual
inflation rate of 30 percent or more.
Gradual Policy Changes
7. Mubarak has attempted to generate popular sup-
port for new policy directions that deal with Egypt's
fundamental economic policies, I A
highly touted conference of economic experts and
ministers earlier this year did not produce the clear-
cut answers Mubarak wanted. There is widespread
support for the government to "do something," but no
agreement over what should be done and no obvious
willingness to bear the burden of economic reforms.
The Egyptian people are far more accustomed to
promises, even unrealistic ones, than Mubarak's frank
talk and work ethic.
8. Mubarak and Prime Minister Muhi al-Din are
extremely wary of undertaking necessary policy re-
forms that risk upsetting domestic stability. Lacking a
consensus on bold moves, the government has made
only small economic policy changes to deal with more
immediate concerns. The minimal policy moves un-
dertaken include:
- Raising consumer electricity prices by 5 to 20
percent on 1 May.
- Hiking controlled interest rates by 1.5 percent on
1 July.
- Increasing public sector wages by 4 Egyptian
pounds per worker per month in July, far less
than increases by Sadat in recent years.
- Expanding the list of items subject to the con-
sumption tax on 6 July while boosting the tax
rates by 5 to 100 percent.
9. With memories of the January 1977 riots over
bread price hikes still strong, even these gradual
changes have been made with little public fanfare and
grumbling but no unrest.
10. Mubarak's caution is also reflected in recent
cabinet switches and the emerging Five-Year Plan,
neither of which portends dramatic changes. Discus-
sions with US officials indicate that the new economic
ministers do not intend to propose major reforms, but
instead agree with Mubarak's policy of increasing
production. This emphasis is embodied in the Five-
Year Plan. While not yet finalized, Mubarak's state-
ments about the new plan indicate no significant shifts
in priorities between the public and private sectors.
The public sector will receive new investment funds,
but its scope will not be broadened. The private sector
will be encouraged to increase "productive" invest-
ments through new efforts to make the "Open Door"
policies work better.
The Coming Year
11. Egypt's foreign payments in 1983 will continue
to worsen since no large new sources of foreign
earnings are in sight. We project the current account
deficit will increase to $2.5 billion, assuming (a) oil
prices remain at present levels, (b) the government
encourages remittances and tourist earnings through
competitive exchange rate policies, and (c) the govern-
ment keeps the lid on public sector imports.' It is
unlikely that inflation will fall from the present level
of 15 percent, and real economic growth is likely to be
around 5 percent.
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Mubarak could also crack down on luxury imports and
more vigorously pursue anticorruption programs.
While these programs might help win political sup-
port, they would not improve the economy's
performance.
13. Should oil prices decline sharply in the coming
year, as some observers believe they could, Egypt will
be under increased pressure to secure additional for-
eign financial inflows and to reconsider politically
sensitive reforms. We estimate that for each $1-per-
barrel decline in the price of oil, Egypt loses $200
million in foreign earnings. For example, if oil prices
fall to $24 per barrel, Egypt would face a 1983 current
account deficit on the order of $4 billion, as compared
with a projected deficit of $2.5 billion if oil prices
remain stable. (See table 2.) Since official foreign
exchange reserves amount to less than one month's
exports, a steep oil price decline would leave Egypt
scrambling for alternative financing.
14. The willingness of other Arab states to provide
aid, however, would be limited by political consider-
ations as well as their own oil earnings shortfalls.
Commercial funding also would be difficult to obtain
in a period of financial uncertainty caused by steep oil
price declines. The United States, therefore, almost
certainly would be asked to provide greater balance-
of-payments support. Egypt could seek to receive a
larger share or even all of its economic aid this fiscal
year as balance-of-payments support. Cairo would
count on the United States for sympathetic under-
standing of the domestic political imperatives for such
assistance. Egypt ultimately could be forced to turn to
the International Monetary Fund and would seek US
help in limiting IMF conditions.
15. Foreign exchange difficulties caused by a sharp
drop in oil prices could be used by the government to
justify unpopular reforms. This argument, however,
would not be well received in Egypt. Mubarak's
efforts to educate Egyptians about the hard economic
facts of life apparently have done little to convince the
public of the magnitude of these problems, nor have
they stopped the erosion of his credibility. Should the
government be forced to impose austerity measures as
part of an agreement with the IMF, the Egyptian
public and opposition would blame the country's
problems on inept leadership or perhaps even the close
relationship with the United States.
Beyond the Next Year
16. Although economic growth has continued in
1982 and the government has so far avoided a major
Egypt: Current Account Balance a
(billion US dollars)
Trade balance
-3.7
-4.4
-5.5
-6.0
Exports
3.9
4.4
4.3
4.7
oil
2.5
2.8
2.6
2.9
Nonoil
1.3
1.6
1.7
1.8
Imports
7.6
8.8
9.8
10.7
Net services
3.2
2.4
3.2
3.4
Receipts
5.3
4.9
6.0
6.5
Remittances
2.7
2.2
2.8
3.0
Suez Canal
0.7
0.9
1.0
1.1
Tourism
0.8
0.6
0.8
0.9
Other
1.2
1.3
1.4
1.5
Payments
2.2
2.5
2.8
3.1
Unrequited transfers
0.1
0.1
0.1
0.1
Current account balance
-0.5
-2.0
-2.2
-2.5
a Figures may not add because of rounding.
b Projection assuming oil prices in 1983 remain at current levels through the end of the year.
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foreign payments crisis, Egyptian officials have not ad-
dressed the longstanding economic problems that dim
future prospects. We believe the government will contin-
ue to avoid tackling the major issues until forced by
foreign payments problems. We also believe that a failure
to deal with these issues will continue to hobble the
performance of the economy and will make the ultimate
imposition of reforms even more difficult. Because of the
likely unpopularity of reforms, however, we believe that
when the government does finally take tougher action, it
may well have to impose stricter domestic security
measures to maintain domestic stability.
17. Rapid Population Growth. Population growth
of close to 3 percent a year is adding more than a
million Egyptians each year to the narrow confines of
the Nile valley and delta. Population densities in
urban and rural areas are some of the highest in the
world. Egypt's leaders are well aware that population
pressures underlie many of the country's economic
woes, but they have been unwilling to challenge
Egyptian and Islamic traditions that encourage large
families.
18. Large Budget Deficits. Budget deficits equal
to 20 percent of GDP and financed largely through
money creation are fueling inflationary pressures and
stimulating import demand. Dealing with the budget
deficit, however, would require tough political choices
on price controls, subsidies, and taxes that the leader-
ship will remain unwilling to face.
19. Subsidized Food Prices. Low subsidized food
prices-bread at 5 cents a pound and sugar at 6 cents a
pound-have spared Egyptians the malnutritution
that affects many Third World peoples but at a high
cost. Subsidies cost the government more than 2 billion
pounds a year. Agricultural productivity also has been
affected adversely by controls on farm prices, and
imports have increased because of the demand for
food. In 1981, Egypt imported nearly half of its nine
basic food items. Although President Mubarak has
strongly emphasized the costs of food subsidies in
recent speeches, he has promised not to change the
system because of political opposition.
20. Low Energy Prices. Controlled domestic ener-
gy prices have led to rapid consumption increases,
lower government oil revenues, and energy-inefficient
investments. Domestic petroleum prices average 20
percent of world market prices. This results in a major
loss of domestic revenues for the government and
reduces supplies available for export. The government
has put off significant energy price adjustments be-
cause of the rippling inflationary effect they would
have throughout the economy.
21. Public-Sector Inefficiency. With few excep-
tions, public-sector industries are not efficient. They
are forced to carry excess workers and charge low
prices, and they are not required to earn a profit.
Public-sector workers and managers, however, consti-
tute a powerful political lobby against reforms and
they are supported by the socialist tendencies among
the political elite.
22. Inadequate Public Services and Housing.
The 10-million-plus residents of the greater Cairo area
must cope with overburdened public services and
inadequate housing supplies. While urban Egyptians
obviously choose to live in this crowded urban envi-
ronment rather than in the countryside, there is
growing frustration over the quality of urban life. It is
a Herculean task for the government just to prevent
existing problems from worsening, let alone to make
significant improvements. Mubarak, however, seems
intent on improving conditions in Cairo and has asked
for US help.
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