EGYPT'S ECONOMIC PROSPECTS: AN UPDATE
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Document Number (FOIA) /ESDN (CREST):
CIA-RDP86T01017R000202190001-6
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RIPPUB
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S
Document Page Count:
6
Document Creation Date:
December 22, 2016
Document Release Date:
January 7, 2011
Sequence Number:
1
Case Number:
Publication Date:
April 9, 1986
Content Type:
MEMO
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Sanitized Copy Approved for Release 2011/01/07: CIA-RDP86T01017R000202190001 6 le,
SUBJECT: Egypt's Economic Prospects: An Update
DISTRI BUTION:
External
I - Jock Covey, NSC
1 - Howard Teicher, NSC
I - Elaine Morton, NSC
1 - David J. Dunford, State
1 - George S. Harris, State
I - Martin J. Bailey, State
1 - Robert H. Pelletreau, Jr., ISA/DOD
1 - Sandra Charles, ISA/DOD
1 - Col. William Lindsay, ISA/DOD
1 - Robert Anderson, Treasury
1 - Byron Jackson, Commerce
Internal
1 - DUI
1 - NIO/NESA
1 - C/PES
1 - PDB Staff
1 - NID Staff
6 - CPAS/IMD/CB
1 - D/NESA
I - DD/NESA
1 - C/PPS
2 - NESA/PPS
1 - C/NESA/SO
1 - C/NESA/IA
1 - C/NESA/PG
1 - C/NESA/AI
2 - NESA/AI/E
DDI/NESA/AI/EA
(9 Apr 86)
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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
9 April 1986
Egypt's Economic Prospects: An Update
Summary
We remain pessimistic about Egypt's economic
prospects, both short-term and beyond. During 1986 the
Egyptian government will likely confront a liquidity
crisis severe enough to force the regime to adopt
hastily conceived austerity measures which could lead
to political disorder. We see nothing in macro-
economic trends or in the recent reform measures
announced by Cairo that makes us more sanguine about
the economic outlook. To the contrary, basic economic
indicators point to a worsening of Egypt's financial
position, while regime efforts to deal with the
problems are weak or inappropriate.
The Plunge in Foreign Earnings Accelerates
Egypt's primary sources of foreign exchange are in trouble
and earnings are falling at an alarming rate. Petroleum revenues
are likely to decline to $1.2 billion, or roughly one-half of
1985's estimated S2.4 billion earnings, largely as a result of
the continuing slide in world oil prices. (Our oil revenue
estimates are projected-on the assumption that prices will
stabilize and average S13 per barrel for the year.) If average
prices^fallctoIS10lper barrel, Egyptian earnings would drop an
This memorandum was prepared by the Arab-
Israeli Division, Office of Near Eastern an out Asian
Analysis. Information as of 9 April 1986 was used in its
preparation. Questions or comments should he addressed to Chief,
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Egyptian officials can do very little over the near term to
compensate for lower oil prices. Egypt possesses very little
surplus production capacity. Current production has been
averaging around 870,000 barrels per day (b/d) and can be
increased only marginally to perhaps 900,000-950,000 b/d. Over
the next year or so large increases in domestic energy prices
could conceivably cut oil consumption, thereby increasing the
exportable surplus, but the regime remains wedded to low energy
prices for domestic consumers. Moreover, price hikes probably
would do little more than reduce the rate of growth of energy
Remittances and other major sources of foreign exchange
appear to be in worse shape than our analysis in March
indicated. Baghdad, as a result of financial pressures
associated with the Gulf War, has decided to reduce the large
expatriate labor force in Iraq. Official Egyptian projections
show as many as 300,000 Egyptian workers, or about 40 percent of
the Egyptian work force in Iraq, returning home over the next
several months. Many of those remaining will face substantial
wage cuts and restrictions on exporting capital. Returning
Egyptian expatriate workers may boost remittances initially as
they bring with them accumulated savings, but the overall
implications of this exoaus are extremely negative and will
depress remittance earnings over the year.
Tourism also appears unlikely to recover from the combined
effects of renewed terrorism in the Middle East, the February
police riots, and growing US/Libyan tension. According to recent
press reports, many tourists are avoiding Egypt and bookings at
major Cairo hotels are slumping. The impact of reduced tourist
earnings goes far beyond the relatively small receipts recorded
in the balance of payments accounts; much of tourist spending
finds its way through the unofficial economy and provides major
unrecorded earnings for important segments of the middle and
We see no other major elements of Egypt's balance of
payments likely to offset the deterioration in foreign exchange
earnings caused by falling oil prices, remittances, and
tourism. Lower interest rates for the small portion of Egyptian
debt that is interest-sensitive are far outweighed by the much
larger drop in interest earnings of banking system assets
invested overseas. We have optimistically assumed that private
capital flows will increase during 1986, largely as a result of
the GM deal and associated spin-offs. We have further built into
our projections an assumed ten percent cut in imports.
Nevertheless, this far from worst case scenario still shows Egypt
with a financing gap of at least $1.2 billion during 1986.
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Reform Efforts to Date
The reform measures announced by the government in late
March fall considerably short of what is required to deal with
the economic crisis. Most of the proposed changes--largely tax
increases directed at the middle class and some customs reforms--
will, at best, restrain somewhat the growth of already large
budget deficits. They will not effectively address the more
serious balance of payments problem. Among the glaring omissions
of this reform package are:
no mention of any progress toward a unified exchange
rate,
no specific measures to curb imports or boost exports by
undertaking structural reform of the subsidy system or
revamping the inefficient public sector industries,
no significant energy price increases.
The proposed actions in no way represent what we suggested
is most needed--an integrated package of reforms designed to
stimulate the economy and mobilize public opinion in support of
the program. Instead, the same cautious and piecemeal approach
to reform that has proven unsuccessful in the past is being
trundled out one more time and packaged by Egyptian officials as
a significant step forward. Prime Minister Lotfy has left open
the door for additional reforms in coming months, but the current
tenor of Cairo's thinking on economic reform is not encouraging.
Prologue to Crisis
Mubarak's refusal' to enter into a serious dialogue with the
IMF/IBRD represents, in our opinion, a mistake that could spark a
financial crisis in the near term. A key indicator of impending
crisis would be the unwillingness of foreign commercial banks to
hold short-term credit tranches, primarily supplier credits, at
The lack o any significant
progress toward developing an effective adjustment program and
the absence of movement toward a rescheduling of official debt,
could erode banking community confidence in Egypt's ability to
service debt and trigger foreign banks into cutting their short-
term lending to Egypt. If this occurs, Cairo will be hard
pressed to finance immediate import needs and a full blown
economic crisis could be at hand.
The Mubarak regime is, we believe, unprepared to deal
effectively with the consequences of such an emergency and would
likely react by imposing drastic and ill-advised austerity
measures which could heighten the risk of civil unrest and
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political instability. In our opinion, comprehensive and orderly
reforms at the present time, linked to careful public opinion
preparation, are less likely to lead to turmoil than hurried
measures at the last minute. We believe that the regime must
pursue an adjustment program that, however it is packaged, is in
substantial agreement with the IMF and includes a Paris Club
rescheduling of official debt. Further delays can only add to
the severity of the adjustment process.
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J Lt. ix. a
Egypt: Balance of Payments
Billion US $
1985 1
1986 2
Current Account Balance
-1.6
-2.7
Trade Balance
-6.1
-6.2
Exports (f.o.b)
3.9
2.8
Oil
2.4
1.2
Non Oil
1.5
1.6
Imports
-10.0
-9.0
Service Balance
3.3
2.3
Receipts
7.0
5.9
Remittances
2.8
2.0
Suez Canal
.9
.9
Tourism
.4
.3
Other
2.9
2.7
Payments
-3.7
-3.6
Official Transfers
1.2
1.2
Capital Account
1.2
1.5
Financing Gap
.4
-1.2
1 Estimated
2 Projected
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