CIA BRIEFING BOOK ON EGYPT FOR SECRETARY SIMON AND ASSISTANT SECRETARY DESIGNATE PARSKY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80M01389R000400050001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: December 19, 2016
• Document Release Date: June 29, 2005
• Sequence Number: 1
• Publication Date: July 5, 1974
• Content Type: BRIEF

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CIA Briefing Book on Egypt
for
Secretary Simon
and
Assistant Secretary Designate Parsky
5 July 1974
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Page
1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. The Nature of the Economy . . . . . . . . . . . . . . . . . . . 3
Development and Growth . . . . . . . . . . . . . . . . . . . 6
III. Egyptian Internal Finance . . . . . . . . . . . . . . . . . . . . 7
The State Budget . . . . . . . . . . . . . . . . . . . . . . 7
Banking System . . . . . . . . . . . . . . . . . . . . . . . 8
Money . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
IV. Egyptian Foreign Trade . . . . . . . . . . . . . . . . . . . . . 9
V. External Economic Relations . . . . . . . . . . . . . . . . . . I 1
VI. Status of Egypt's Arms Acquisitions . . . . . . . . . . . . . . . 13
VII. American Firms in Egypt . . . . . . . . . . . . . . . . . . . . 15
VIII. Politics in Egypt: A New Atmosphere, New Burdens . . . . . . . . 17
Political Change . . . . . . . . . . . . . . . . . . . . . . 17
Administrative Change . . . . . . . . . . . . . . . . . . . 18
IX. Sadat's Economic Policies . . . . . . . . . . . . . . . . . . . 21
X. Egypt's Economic Prospects . . . . . . . . . . . . . . . . . . 23
Fact Sheets on Egypt . . . . . . . . . . . . . . . . . . . . . . . . 25
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THE EGYPTIAN ECONOMY: CHARACTERISTICS
AND RECENT PERFORMANCE
1. Background
Egypt is a country built out of two thin strands of water: the greatest, the
Nile and its valley; the other the Suez Canal. The Nile was the cradle of Egyptian
civilization and the only constant in its survival. Its waters support Egyptian
agriculture which in turn provides the principal prop of the 36 million population
in an area the size of Texas, and on a cultivated area more the size of Connecticut.
That prop is devoted primarily to the production of export crops - particularly
the finest extra-long-staple cotton - whose proceeds are used to purchase grain,
capital equipment, and consumer goods. The valley's lavish production of rice,
onions, and grain no longer feeds Egypt's burgeoning population, although
agricultural exports (f.o.b.) still exceed agricultural imports (c.i.f.).
Industrial development in Egypt has been inextricably associated with its
agriculture. Cotton provided the base for a textile industry, and the enormous
need for fertilizer to sustain the multiple cropping in the valley was the spur for
the development of the chemical industry. As the only Arab nation with a trained,
skilled work force and with easy access to water transport, Egypt was the first
Arab nation to develop a petroleum refining industry. Yet three generations after
the beginning of industrialization, Egypt remains in a nascent industrial status, its
early entrepreneurs dispersed by Nasirite socialism and its managers dulled by years
of bureaucratic wrangling over investment allocation. It has added a budding iron
and steel industry, expanded the capacity of established industry, and is beginning
to expand into nonferrous metallurgy.
Egypt's initial foray into accelerated economic development under Nasir left
it with an unmanageable foreign debt and a keen sense of frustration. Halted by
financing difficulties in the early 1960s and by increasing pressure to secure a
military solution to the Palestinian problem, Nasir subordinated Egyptian plans
for economic growth to the more politically acceptable and the more easily financed
military objective. Renewed acceleration of economic development, if financed in
large part by foreign capital and directed in important measure by foreign
entrepreneurs and managers, may expect greater success. The major new factors
in the development equation are the huge amounts of Arab capital available to
Egypt and the burgeoning Middle East market in which Cairo has always been
an important vehicle.
Restoration of the Suez Canal will help Egyptian foreign exchange earnings.
Its utility as a connecting waterway, however, has been drastically reduced with
the growth in size of supertankers. Oil transit revenues, which provided the lion's
share of income before the 1967 closure of the Canal, will be less in the future
($145 million per year) than they have been in the past (about $220 million in
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the last full year of operation). Nevertheless, the Canal remains an important
Egyptian resource.
Egypt's other natural resources are small judged by those of its neighbors.
Small discoveries of petroleum and natural gas have been developed and may be
expected for the foreseeable future. They permit Egypt to be self-sufficient in
energy and may even produce an exportable surplus should the Sinai fields be
returned in the near future. Industrial growth at the rates projected by Sadat,
however, will quickly develop a domestic market for such a surplus. There is limited
prospect for expansion of the hydro-energy of the Nile. Indeed, much of the
capacity of the Aswan facility cannot be exploited because of the seasonal character
of the demand for irrigation water.
The overriding importance of the military establishment since the advent of
the Israeli state has had profound economic impact. Although weapons have been
obtained essentially without payments, the very magnitude of the modern weapons
employed and their need for transport, set-up, training, and maintenance have
imposed a large burden on the state. A Mideast solution that permits an early
and sustained reduction in Egypt's military effort seems critical to orderly economic
development.
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II. The Nature of the Economy
The economy of the Arab Republic of Egypt is more advanced than that
of any other Arab or African country, with the exception of South Africa. In
ancient times the need to control the Nile imposed a high degree of economic
organization and prompted an exceptional amount of technological innovation.
Despite thousands of years of exploitation by a series of conquerors, the first stages
of economic modernization occurred early in Egypt. As a result its economy is
more diversified and more complex than that of its neighbors.
Agriculture has long been highly productive in Egypt, supporting a large
number of people on a small amount of cultivable land. In the 19th century, when
Egypt was still a part of the Ottoman empire, cotton culture and perennial irrigation
of various crops were introduced in the Nile Delta. As control of the Nile increased,
more water for summer irrigation became available. Double and triple cropping
spread up the Nile. Other commercial crops -- rice, vegetables, and fruits -- were
adopted, further divorcing agriculture from peasant subsistence. As commercial
agriculture grew, elaborate crop rotation and extensive use of foreign commercial
fertilizer became prevalent. Application of chemical fertilizer per acre in Egypt
exceeds the rate in most other areas of the world. For decades, moreover, output
per acre has compared favorably with that in many Western countries.
Modern industry also is not new. Industrialization was impeded until this
century by the British administration's promotion of cotton culture and a trade
program that included high duties on industrial raw materials and capital goods.
Shortly before World War I, however, the first oil refinery in the Arab world was
constructed at Suez. In the 1930s, little more than a decade after the British left,
textile mills and other relatively large-scale manufacturing concerns began to appear.
By 1958, the first steel mill in the northern part of the African continent opened
at Hulwan.
Human resources are more highly developed in Egypt than in most developing
nations. In the cities where the legacy of ancient Egyptian civilization persists,
the upper and middle classes have always sought the best education available for
their children. After the 1952 revolution, higher education was provided for
hundreds of thousands of others in order to build a cadre for the military and
the proposed new economic order. As a result of these policies, Egypt now
represents a reserve of talent upon which the entire Middle East draws.
Despite a long headstart, Egypt remains a poor and far from modern state.
With a GNP of about $8.5 billion and a population of 36 million, per capita income
is less than $250 per year. Industrial development has been uneven, leaving the
country with little capacity for producing capital equipment or for expanding
industrial exports. Even after more than a decade of intensive effort at industrial
development under the Nasir regime, agriculture still provides more than one-fourth
of GNP and agricultural products account for more than half of export earnings.
In rural areas, despite centuries of steady progress, output has barely kept pace
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Production in Egypt
Major agricultural products
Cotton (lint) 446 510
Vegetables 4,928 5,280
Fruits 894 1,685
Rice 517 2,681
Maize 1,506 2,342
Sugarcane 5,258 7,300
Major industrial products
Iron and steel 78 431
Super phosphates 106 486
Nitrogen fertilizer 111 384 (FY)
Spinning and weaving 131 470
Portland cement 3,976
Generated electricity (million kwh) 992 7,995
with population growth, and incomes remain at or near the subsistence level.
Industrial growth. has failed altogether to keep abreast of urban migration and
population growth. In the cities, massive unemployment has been avoided only
by military recruitment, overstaffing in the state bureaucracy, and export of
professional personnel and skilled workers to other Arab countries.
The Nasir government created today's economic institutions. Between 1952
and 1964 the government acquired all foreign-owned agricultural land and
confiscated Egyptian holdings in excess of 100 acres. This land was then distributed
to peasants and to landless agricultural laborers, firmly establishing the small farm
as the dominant form of agricultural tenure and the small farmer as the principal
recipient of rents in the agricultural sector.
Control of industry and finance was altered much more radically. A spate
of nationalizations occurred in 1957, following the Suez crisis, in the course of
which all property of British and French citizens was sequestered. During 1961-64,
almost all other large industrial firms, all major banks, and most mining operations
became wholly or preponderantly government-owned. By the end of the 1960s,
less than 15% of all business firms were in private hands; private venture capital
played a major role only in transportation, construction, and crude petroleum
production. Almost all significant economic decisions were made by the central
government. Even in the agricultural sector, government policy dominates private
choice. Area planted, availability of water, and commodity prices, all are subject
to government control.
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EGYPT
Origin of GNP 1972
863598 7-74
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Development and Growth
For a time the Nasir government succeeded in radically altering Egypt's
economy. Output and industrial capacity grew rapidly from 1954 to 1965, largely
because of the addition of new industries. Agricultural output increased more
slowly. The favorable impact of land reform on individual incentives resulted in
steadily rising productivity during most of the first decade under the Nasir
government.
The economic growth achieved by the Nasir regime was accomplished with
insufficient regard for the costs involved or for the country's ability to pay. Unable
to borrow abroad any longer by 1967, the government lowered investment outlays
and restricted imports. The impact of these adjustments fell most heavily on the
industrial sector, where output dropped sharply. Because of the government's rigid
internal pricing policies, output of many agricultural crops also was cut back. Much
lower investment in infrastructure as the Aswan Dam neared completion caused
a decline in construction activity. Rising Suez Canal revenues and other gains in
the service sector barely offset declining output elsewhere. In FY 1967, GNP failed
to rise and per capita incomes declined.
In 1970 the Sadat regime inherited a battered and depressed economy. The
1967 war and its aftermath had seriously exacerbated Egypt's economic problems,
depriving the country of assets that produced some 7% of GNP. Cut off from
Western credit, saddled with growing industrial obsolescence, beholden to the USSR
for arms, and confronted with the constant threat of renewed hostilities, the new
government was able to tackle only the most immediate economic problems. During
the interwar period as a whole the Egyptian economy stood still, with real output
in 1973 only slightly, if any, greater than it was in 1966.
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III. Egyptian Internal Finance
Egyptian finance is dominated by the state. In most activities, including
banking, the government is the sole owner, and all operations are subject to the
constraints imposed by a cumbersome state budgetary process. While this system
has stifled initiative and reduced managerial efficiency in general, it has greatly
facilitated financial planning. For example, the government has been able to repress
much of the inflationary impact of social welfare and deficit financing schemes
simply by controlling both prices and import levels.
The State Budget
The present format of the Egyptian state budget reflects the monolithic nature
of the present economic order. The Egyptians inherited a simple fiscal structure
from their British administrators, with state investment confined to a few public
utilities and little but administrative operations funded through the state budget.
The budget since has been expanded and revised to accommodate the emergence
of Egypt as a socialist state. Even local government entities have lost much of
their fiscal role, becoming mainly collecting and disbursing agents for the central
government.
The first major post-colonial revision in the format of the Egyptian state
budget occurred in FY 1959. It incorporated an "enterprise budget" into the
traditional administrative budget. The purpose of the change was to reflect the
financial operations of state firms that had been nationalized or sequestered in
the wake of the October 1956 Suez crisis. New state enterprises and other
nationalized firms subsequently have been added to this budget, vastly increasing
its size. As a consequence of this change the budget now includes on the expenditure
side all salaries and other current outlays in the ministries and state firms, as well
as all investment in state enterprises. Revenues now consist not only of tax and
other ordinary receipts, but also of earnings of state firms. The most important
recent innovation in state finance was the creation, after the June 1967 war, of
an Emergency Fund. The fund was financed by oil-rich Arab states and was to
be used to cover military and other expenditures related to hostilities with Israel.
It also provided a convenient blind for other financial activities that the Egyptian
government did not want to detail in the conventional budget presentation.
The Egyptian government has always been reluctant to reveal much about
the implementation of the state budget. Until 1973 a substantial portion of the
planned budget was published each year. It appeared, however, in a wide variety
of inconsistent formats, many of which seemed almost designed to confuse. Actual
expenditures have never been published. Only small bits have been released to the
IMF and IBRD after long lags. In 1973, after changing from a fiscal (1 July -
30 June) year to a calendar year presentation, the Sadat regime announced that
even the planned budget would no longer be published. This move probably was
designed to avoid revelation of military outlays as well as to avoid too complete
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an account of Egypt's expenditures to its Arab benefactors. Now that financial
pressures on Sadat have been reduced, more budgetary candor may be
forthcoming. I
Banking System
The banking system consists primarily of government-owned institutions. At
the time of the revolution, Egypt had a relatively modern banking system owned
mostly by foreigners or wealthy Egyptians. The system then consisted of a de
facto central bank and 27 commercial banks. Following the nationalization of the
Suez Canal Company in 1956, foreign banks were "Egyptianized." The law initially
required that all banks be transferred to Egyptian nationals or to public entities,
but in 1961 the banks were taken over by the government. Until recently the
proscription against foreign-owned banks was relaxed only to permit pan-Arab banks
to operate in Egypt. Since the October war, however, the Sadat regime, as part
of a general economic liberalization, has again opened the door to
government-approved Western branch banks in Egypt. A preliminary agreement with
Chase Manhattan Bank has already been reported.2
Money
The monetary unit of Egypt is the Egyptian pound (#E), made up of
100 piasters, each in turn divided into 10 units called milliemes. The official parity
of the Egyptian pound has remained at US $2.872 since 1949, when it was devalued
in line with the pound sterling. A de facto devaluation occurred in 1962, after
which all official transactions took place at about $2.30 to the Egyptian pound.
The buying rate was raised to $2.55 to the pound in 1973, effectively revaluing
the pound for official transactions in spite of a contrary recommendation from
the IMF.
In practice the official pound rate is only applied to Egyptian private citizens
purchasing pounds with foreign exchange in Egypt. Almost all Egyptian
commodities moving in foreign trade are either bartered or priced in dollars or
pounds sterling and paid for in convertible currency. These foreign exchange receipts
are made available to state entities to pay for imports. For internal accounting
purposes, various exchange rates are used depending on the priority of the enterprise
involved. For many years, both diplomats and tourists in Egypt have received
preferential buying rates for pounds. The latest foreign exchange innovation is a
plan to create a parallel free currency market available to foreign visitors. In this
market, pounds could be acquired at the rate which they bring in such financial
centers as Beirut where they bring only about half of the official rate.
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IV. Egyptian Foreign Trade
Egypt is heavily dependent on foreign trade3 because of its severely restricted
resource base. Most mineral resources essential to modern industry are lacking.
In Egypt's almost rainless agricultural sector, both arable land and known water
supply are fixed in the short to mid-term. These rigid constraints have inspired
Egypt to concentrate increasingly on the production of high-value commercial crops
to be exchanged on the international market for other agricultural commodities,
industrial inputs, and consumer goods.
Despite considerable economic diversification over the years, Egypt's export
trade remains dominated by extra-long-staple cotton, marketed both as fiber and
as manufactured textiles. As the world's largest producer of long-staple cotton,
Egypt exercises considerable control over prices. Since the mid-1950s this power
has been enhanced by access to East European markets in which Egypt sells lower
grades of this cotton regularly and dumps surplus supplies of the top grade cotton
when demand in the West is weak. Egypt is also the world's third largest exporter
of rice. Dehydrated onions and citrus are other important exports.
Because of the heavy dependence on outside sources for both consumer and
producer goods, Egypt has only limited control over the volume of imports. Since
most food for urban consumption is imported, population growth and urbanization
have impinged relentlessly on the size of the import bill. Moreover, quickened
economic growth will reinforce the upward surge in the volume of imports until
capital and intermediate goods industries are more fully developed.
Reducing imports requires particularly difficult economic and political
decisions. Any reduction in the quantity or quality of consumer goods imports
causes immediate dissatisfaction in politically sensitive urban areas. On the other
hand, restricting the flow of imported industrial inputs leads to urban recession.
During foreign exchange crises in the past, the Egyptian government, after initially
limiting luxury goods imports, generally has resorted to restrictions on investment,
preferring to cope with eventual stagnation and obsolescence rather than to risk
the immediate ire of the urban masses.
The geographic pattern of Egyptian foreign trade has fluctuated widely over
the last two decades. Traditionally, Egypt traded almost exclusively with Western
Europe, but under Nasir, barter trade with Eastern Europe and other LDCs became
increasingly important. The growth in barter trade stemmed mainly from the
availability of concessionary credits either in the form of long-term, low-interest
loans from the USSR and Eastern Europe or in the form of sizable "swing balances"
allowed under bilateral trade agreements. These markets also provided an outlet
for Egyptian manufactured goods, surplus agricultural products, and other items
that could not easily or profitably be traded in the West. The share of bilateral
trade has begun to shrink recently, principally because high cotton prices in the
West have inspired the Egyptians to divert shipments that previously would have
been earmarked for the USSR.
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V. External Economic Relations
As a result of the excesses of the Nasir regime, Egypt has accumulated more
than 1.5 billion in external economic debts. Because of this debt overhang, Cairo
was for many years almost totally dependent on handouts of Arab aid to cover
a current account deficit that exceeds half a billion dollars.
When the socialist government came to power in 1952, Egypt's external
finances were in good order. Cotton exports and invisible earnings were adequate
to finance imports. Foreign debt was minuscule and foreign exchange reserves
amounted to almost $1 billion.
Egypt's external economic position changed rapidly under the socialist
government. Nasir's decision to promote simultaneously long-term economic growth
and a broad program of social welfare inflated demand for both capital and
consumer goods imports. For a time the mounting import bill was financed by
rising exports of agricultural products and by reduction of reserves. By the end
of the 1950s, however, Egypt had begun to borrow heavily in the West and, to
a somewhat lesser extent, in the East.
Implementation of the First Five-Year Plan (1960-65) greatly accelerated the
pace of foreign borrowing. By 1962, external debt was almost $1 billion, compared
with a GNP of less than $5 billion and annual export earnings (goods and services)
of about $500 million. By 1965, interest payments alone were absorbing 25% of
foreign exchange earnings.
Even before the Five-Year Plan was completed, it became clear that Egypt
would be unable to service its mounting foreign debts. The favorable early impact
of the land reform program began to fade, reducing agricultural export growth
well below initial government expectations. Egypt's newer manufacturing industries,
moreover, were failing to achieve savings in foreign exchange outlays. Because the
Plan had not been designed and implemented carefully, unexpected gaps in
industrial production had to be filled with imports. The new industries, heavily
dependent on imported inputs, could amortize foreign exchange investment costs
only at near-capacity production levels. A high level of output could not be
maintained, however, because of the inefficiency of Egypt's state bureaucracy and
the haphazard plan implementation that left newer industries dependent on an
outmoded economic infrastructure.
As early as 1963, Egypt began to have difficulty meeting the short repayment
schedules and high interest rates on its foreign commercial bank obligations. After
a series of defaults, acceptable debt-consolidation and. rollover agreements were
concluded with most banks in December 1966, effectively transforming Egypt's
overdue short-term obligations into medium-term indebtedness. By the time the
Five-Year Plan was concluded in 1965, Egypt was already seeking relief from longer
term obligations. Rollover agreements were concluded in 1966 with all major
Western creditors except the United States. Of these agreements, only the French,
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which had allowed considerable additional debt accumulation, was honored. Egypt
used the 1967 war with Israel as a pretext for new debt negotiations, most of
which were not concluded until 1969 or 1970. The aftermath of these debt
negotiations was a complete cessation of net capital inflow from the West. Moreover,
the Aswan High Dam had been completed, and repayments to the Soviet Union
almost certainly were as large or larger than greatly reduced aid drawings.
The 1967 war with Israel further restricted Egypt's financial options.4 Closure
of the Suez Canal, loss of the Sinai oilfields, and reduction in the tourist trade
led to foreign exchange losses of more than $250 million annually. Annual subsidies
from Saudi Arabia, Kuwait, and Libya, agreed to at Khartoum in October 1967,
were provided to replace these losses. Egypt was thus placed at the mercy of its
Arab neighbors at a time when it was already completely beholden to the USSR
for arms.
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VI. Status of Egypt's Arms Acquisitions
Moscow has been the source of about 90% of Cairo's arms purchases. More
than $3.1 billion worth of Soviet arms have been provided,5 of which two-thirds
have been delivered since the 1967 war, and $400 million since 6 October 1973.
Egyptians arms procurement since the 1967 war has centered around one
primary objective - regaining the Sinai. Soviet refusal to supply advanced weapons
systems that might challenge Israel's technological superiority led to Sadat's
expulsion in 1972 of most Soviet military advisers and technicians and all Soviet
combat units stationed in Egypt. Although Sadat's action reduced the Soviet
presence, it did not end the flow of Soviet arms. The T-62 medium tank was
provided in increasing numbers, and the BMP combat infantry vehicle and SU-17
and SU-20 fighter-bombers were introduced after the Soviet expulsion. Contracts
covering the supply of the Scud surface-to-surface missile system and the MIG-23
Flogger swing wing interceptor apparently also were concluded. The Soviet resupply
effort begun in October 1973 accelerated Egyptian arms modernization as those
units hardest hit in the fighting were reequipped with the most modern armored
equipment and antitank weapons being exported by the USSR.
The Soviet arms supply relationship has weakened considerably in recent
months. Since the disengagement agreement on the Egyptian front, Sadat has felt
less of a need for dependence on the Soviets. In mid-April, following a deterioration
in relations between Moscow and Cairo, the Soviets stopped arms deliveries and
Sadat publicly announced a program to diversify Egypt's sources of arms. Cairo
subsequently sent arms purchasing missions to Western Europe and expressed
interest in obtaining Mirage and Jaguar aircraft, the Rapier surface-to-air missile
system, and a wide range of support equipment ranging from trucks to electronics.
Despite mutual antagonism, neither Sadat nor the Soviets want a total break
in relations. Sadat needs Soviet arms and spare parts to maintain a credible military
posture to bring about a final peace treaty. Moscow would like to protect its use
of the port of Alexandria and needs a viable relationship with Egypt during the
Geneva peace negotiations to check the ebb of its position in the Middle East.
By June, Soviet-Egyptian relations, at least on the surface, were beginning
to improve, high-level Soviet-Egyptian meetings appeared to be in the wind, and
the resumption of Soviet arms deliveries seemed a possibility. Sadat will continue
to attempt to diversify his arms inventory by the introduction of sophisticated
Western weapons systems, but this will require a long-range program over part of
which he will of necessity be dependent on the Soviets. Moreover, diversification
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will depend on continued availability of Arab funding because cash payment or
short-term credit almost certainly will be involved.
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VII. American Firms in Egypt
US firms are not and never have been heavily involved in the Egyptian
economy. Before the 1952 revolution, French and British interests owned most
of the financial and industrial assets in Egypt. Although little pre-revolutionary
stigma is associated with US firms, entry into Egypt's highly socialized
post-revolutionary economy has been difficult. US firms are represented by
marketing offices in Egypt, established to sell such products as movies, cosmetics,
and pharmaceuticals, commodities in great demand but in short domestic supply.6
US oil companies who own most assets in the petroleum sector jointly with the
Egyptian General Petroleum Corporation are an exception to this pattern. Thus
far, US firms have invested more than $500 million in Egyptian oil production
and marketing, and another $200 million in investments has been scheduled.
After the October war, interest in US firms soared because of the good press
our diplomatic efforts received, Egyptian respect for US expertise, and the cost
advantages offered by the devalued US dollar. Engineering contracts were awarded
in quick succession to Bechtel Corporation (for the SUMED pipeline) and to
Murphy Pacific Company (for clearing the Suez Canal). Discussions also were held
with the Chase Manhattan Bank about establishing branches in Egypt and with
Sheraton hotels about construction of new tourist facilities. This euphoria slowed
abruptly in April 1974, when the Bechtel Corporation withdrew from the SUMED
contract. Temporarily, at least, this action discouraged Egyptian authorities from
offering other large contracts to US firms.
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VIII. Politics in Egypt: A New Atmosphere, New Burdens
The October 1973 war brought changes of revolutionary proportions to Egypt:
changes in Egypt's image of itself as a leader among Arab countries and as a
significant force among world nations; changes in President Sadat's image as a
domestic and an Arab leader; and, most important, changes in Egypt's foreign and
domestic policy orientations. The changes have been happy ones, evoking in the
Egyptians a sense of pride that is both self-satisfying and absolutely necessary for
the sustenance of the new policies Sadat is pursuing. The changes carry with them
methods of operation that are unfamilar and in some cases unwelcome to the
bureaucratic, administratively inflexible government apparatus that runs the
country.
Political Change
Sadat was seldom taken seriously before the war, either by his own people,
by other Arabs, or by the world at large -- something he never loses an opportunity
to point out now that the situation has changed. He lived in Nasir's shadow, and
his inability to match Nasir's flair or to reverse Nasir's defeats, despite persistent
promises to do so, made him a subject for jokes even among those who had not
been enamored of his predecessor.
The war has given Sadat proper title in his own right to the leadership of
Egypt and of the Arab world. The Egyptians, whatever the facts of the military
situation, believe they have won a military victory, and this has given Sadat a
certain freedom to set policies for Egypt and for the Arabs that he could not
have carried. off before. Without the restored sense of self-respect the war brought
with it, Sadat could not have pursued negotiations with Israel, could not have
improved his ties with the United States, and could not have shifted his
concentration from war to reconstruction.
Sadat believes that he has won for Egypt the right to be considered the political
equal of other nations - of the Israelis with whom he is negotiating, of the
superpowers on whom he now looks as partners rather than as sponsors, and of
the states that offer investment promises for Egypt's reconstruction program. This
self-confidence is a new sensation for Sadat, and he is prepared to capitalize on
it. He will gauge his relations with other states according to their readiness to
deal with him on equal terms. He regards the investment market that Egypt offers to say nothing of the political benefits that cooperation with Egypt provides as a fair trade-off for assistance in the one area, economic and technical develop-
ment, where he recognizes that Egypt still lags.
Sadat is not without opposition, and potentially serious opposition, from Arabs
who believe that he has conceded too much to Israel and turned his back on
the Arab "battleground" to concentrate on Egypt's narrow domestic interests. He
also faces opposition, less serious but potentially disruptive, from Egyptians who
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fear that he is moving too fast toward the United States and is abandoning Egypt's
economy and thus its political freedom to Western capitalists.
Sadat often admonishes the Egyptians to rid themselves of the "complexes"
that have characterized and hindered Egyptian policy in the past. His admonitions
are at once a sign of his own confidence in Egypt's ability to pursue its domestic
and foreign policies on its own terms, and a recognition that others in Egypt do
not share his self-confidence. To those who fear that closer ties with the United
States will mean subservience to Washington, Sadat points out that Egypt must
adapt itself to international changes, to detente in particular, and need no longer
fear that good relations with either superpower signifies that Egypt is cast in the
mold of client state for that superpower. In a similar vein, to those who fear
that foreign investment will mean a return to foreign colonialist domination, Sadat
emphasizes that he does not intend to give the economy over to foreign control
despite Egypt's resort to external financing and to foreign technical expertise.
Although not so directly stated, Sadat's admonitions apply as well to the fears
of other Arabs that he is giving up the struggle with Israel too easily.
Flexibility and adaptability have become the cornerstones of Sadat's policy,
domestic and foreign, since the war. Egypt's military and negotiating successes have
enabled him to overcome his own "complexes" about dealing with Israel and about
Egypt's ability to deal on equal terms with the rest of the world. His principal
task at present is to overcome the rigidity and extremism that prevent other Arabs
from following him readily.
Administrative Change
Sadat also faces administrative problems of a largely mechanical, yet complex
nature. Egypt's government apparatus is an overstaffed, overly centralized
bureaucracy with built-in inefficiencies and little experience in policy planning.
It needs revamping before it can effectively pursue the tasks of reconstruction
and domestic economic revitalization.
During most of the recent past, Egypt's foreign and domestic policies were
formulated largely on an ad hoc, almost haphazard basis. Sadat began to see the
benefits of comprehensive foreign policy planning as he prepared for the war. The
prospect of heavy foreign investment and large-scale development in the aftermath
of the war has now forced him to consider the need for similar planning and
more efficient implementation in the domestic sphere. Where planning and carrying
out foreign policies is essentially a one-man show in Egypt, domestic policies depend
to a large extent for their design, implementation, and acceptability on the collective
will and on the efficiency of a massive bureaucracy.
Sadat recognizes the problems involved and has taken the first steps necessary
to overcome them. He recently established specialized national councils to draw
up long-range policies in the fields that most closely concern development and
18
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 Approved For Release 20051 *4 CIA-RDP80MO1389R000400050001-9
reconstruction; these include councils for production and economic affairs, public
services and social development, and education and technology. Sadat and First
Deputy Prime Minister Hijazi also envision streamlining the implementation process
by delegating greater responsibility to lower levels of each ministry and at the
same time reducing the proliferation of small, overlapping agencies.
Recognizing the administrative problems that plague the government and
following through on corrective measures, however, are two very different things;
and Sadat and Hijazi face an uphill battle. They must fight a cumbersone and
well-entrenched bureaucracy that extends beyond the government to the
state-owned corporations that will participate most directly in reconstruction
programs, They must force change on a change-resistant apparatus; and the process,
if it is ever to be accomplished, will require years.
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Sadat's economic policies are directed toward the goal of maintaining an
economic growth rate of 7% - 10% a year during the next decade. This would
double GNP and provide a growth in per capita income of at least 4% a year.
He hopes that his program of economic liberalization will be the driving force
for this unprecedent growth by revitalizing Egypt's small private sector and by
attracting foreign venture capital.
Sadat's program of economic liberalization was begun in 1971 when an
omnibus foreign investment law was enacted that liberalized tax laws, provided
investment guarantees, and eased most of the restrictions on business management
and the movement of money. With the exception of the Arab International Bank
little progress had been made in implementing the program before the October
war. Egypt's cumbersome state bureaucracy had been slow to establish the necessary
administrative machinery, but the most serious impediment was the constant sabre
rattling by the Sadat regime which scared off most foreign capital.
The central mechanism of Sadat's liberalization program is the Free Zone
concept. Free Zone status can be accorded to an area or to an organization, entitling
it to all of the benefits of Egypt's revamped foreign investment code. Thus far
a large tract in or near Alexandria has been designated a Free Zone area, and
most of the reconstructed Suez Canal area is expected to become a Free Zone.
As Sadat's new policies are implemented, the state economic sector almost
certainly will shrink. Initially, the Sadat regime attempted to create the new private
sector by selling off unprofitable state firms, but this scheme was rejected by the
assembly. The same objective may be accomplished indirectly. The new investment
code entitles state firms to Free Zone status whenever a joint partnership is formed
with a foreign investor. Most of the Egyptian General Petroleum Company is already
entitled to escape state control by means of this provision, and other firms almost
certainly will be eligible in the future.
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X. Egypt's Economic Prospects
Egypt's e ects are greatly improved as a consequence of the
October war.
non-military aid from Arab sources
raise extraordinary receipts in 1973
to more than 58.50 million. ount of these funds was used to offset
war-related damages and inconveniences, and none was spent for arms. The extra
1973 receipts have permitted Egypt to repay its most pressing foreign debts, greatly
enhancing Cairo's credit rating, and will enable Egypt to finance its most urgent
imports through mid-1975. The post-war disengagement will allow the Suez Canal
to be reopened and the SUMED pipeline to be constructed as planned. For the
next five years or so, revenues from these two sources alone should be ample
to finance the normal increment in demand for consumer imports stemming from
urbanization, rising per capita incomes, and population growth.
Over the longer term, Sadat's ambitious economic plans will produce sizable
current account deficits.? Even a reasonably efficient investment program designed
to achieve a 7%-10% per annum growth in GNP could entail a current account
deficit of $500 million to $600 million annually over the next 6 years and a
cumulative deficit of about $3 billion.
The magnitude of state borrowing that will be necessary over the next several
years will depend on a number of uncertain factors. Revamping and expanding
Egypt's old and inadequate economic infrastructure will require considerable state
investment. The state will also need to relieve the most critical production
bottlenecks created by irrational past investment policies. To forestall criticism of
too rapid economic liberalization, the Sadat government will seek a sizable state
equity in new industrial projects. In the event that the Sinai oilfields are regained,
the prospective external deficit on state account could be partly offset by earnings
from crude oil exports. Continuation of the annual $190 million Arab subsidies
would enable the state to meet two-thirds of its prospective new public sector
investment commitments without further foreign borrowing and without Sinai oil.
Under no circumstances, however, would Egypt be able to retire a significant
amount of external official debt until 1980 or later.
Prospects for financing the current account deficit appear to be good even
if Arab subsidies are discontinued and assets on Sinai are not regained. At the
present time, about $1.6 billion in foreign aid -- mostly from Iran, the IBRD,
the United States, and Japan -- has been approved or is being seriously proposed.
In addition, almost $3 billion in venture capital is being proffered, mainly from
Arab sources. Together these amounts more than equal the cumulative deficit now
being projected.
While sufficient foreign funds to finance economic development should be
available, political and economic considerations could make it difficult for Egypt
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to take full advantage of this opportunity. To gain access to private funds on
a large scale, Egypt must open up its economy to private enterprise and substantially
reduce bureaucratic controls. There will be strong resistance to such a change both
from Egyptians with a socialist ideology and from vested interests. At the same
time, there is strong opposition in Egypt to large-scale foreign ownership of
Egyptian assets and an unwillingness to permit a high degree of Egyptian
dependence on any single foreign country. The Sadat government for example,
refused to permit Kuwait to acquire control of the SUMED pipeline. If necessary,
Egypt will forgo considerable funds to prevent what it considers to be a danger
of undue foreign influence.
24
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 Approved For Release 200 1 2 : CIA-RDP80MO1389R000400050001-9
FACT SHEETS ON EGYPT
LAND:
386,200 sq. mi. (including 22,200 sq. mi. occupied by
Israel); 2.8% cultivated (of which about 70% multiple
cropped); 96.5% desert, waste, or urban; 0.7% inland
water
Land boundaries: 1,570 mi. (1967), excludes occupied area
1,534 mi.
4ATER:
Limits of territorial waters (claimed): 12 n. mi. (plus
6 n. mi. "necessary supervision zone")
Coastline: 2,140 mi. (1967), excludes occupied area 1,340 mi.
3EOPLE:
Population: 36,418,000, average annual growth rate 2.2% (7/70-7/72)
Ethnic divisions: 90% Eastern Hamitic stock; 10% Greek, Italian, Syro-Lebanese
Religion: (official estimate) 94% Muslim, 6% Copt and other
Language: Arabic official, English and French widely understood by educated
classes
Literacy: around 40%
Labor force: 8 to 12 million; 45% to 50% agriculture, 10% industry, 10% trade
and finance, 30% services and other; serious shortage of skilled labor
Organized labor: 1 to 3 million
a0VERNMENT:
Legal name: Arab Republic of Egypt
Type: republic; under presidential rule since June 1956
Capital: Cairo
Political subdivisions: 25 governorates
Legal system: based on English common law, Islamic law, and Napoleonic codes;
permanent constitution written in 1971; judicial review of limited nature in
Supreme Court, also in Council of State which oversees validity of administrative
decisions; legal education at Cairo University; accepts compulsory ICJ
jurisdiction, with reservations
Branches: executive power vested in President, who appoints cabinet; People's
Assembly has little actual power (serves mainly for discussion and automa-
tic approval); independent judiciary administered by Minister of Justice
Government leader: President Anwar Sadat
Suffrage: universal over age 18
Elections: elections to People's Assembly every 5 years (most recent October
1971); presidential elections every 6 years (next scheduled in 1976)
Political parties and leaders: political parties banned except for the government-
sponsored sociopolitical grouping, Arab Socialist Union (ASU)
Communists: approximately 500, party members
Member of: AAPSO, Arab League, FAO, IAEA, IBRD, ICAO, IDA, IFC, IHB, ILO, IMCO,
IMF, ITU, OAU, Seabeds Committee (observer), U.N., UNESCO, UPU, WHO, WMO, WPC
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ECONOMY:
GNP: $8.5 billion (1973 est.), $240 per capita; slow decline in per capita income
since 1970 (C)
Agriculture: main cash crop -- cotton; other crops -- rice, onions, beans, wheat,
corn, barley; not self-sufficient in food, but agriculture a net earner of
foreign exchange
Major industries: textiles, food processing, chemicals, petroleum, construction,
cement
Electric power: 4,555,000 kw. capacity (1972); 8 billion kw.-hr. produced
(1972), 230 kw.-hr. per capita
Exports: $839 million (f.o.b., FY72); raw cotton, cotton yarn and fabric, rice;
also crude petroleum, onions, potatoes, chemicals, cement (C)
Imports: $1,2 79 million (c.i.f., FY72); foodstuffs, machinery and equipment,
fertilizers, woods (C)
Major trade partners: EC countries, U.S.S.R., and other Communist countries (C)
Aid:
economic -- Communist countries, $2.1 billion in credits through 1973; U.S.,
$1,017 million in credits and grants through FY72 (diplomatic relations and aid
suspended June 1967); sizable credits from international agencies, West Germany,
Italy; large grants from Libya since 1969; $250 million annual subsidy from
Arab states while canal is closed;
military -- Communist countries, about $3.5 billion through 1973 Egyptian
Monetary conversion rate: 1 Egyptian pound=US$2.54 (selling rate); 0.394 Epound=US$l (selling rate)
Fiscal year: calendar year, beginning in 1973
COMMUNICATIONS:
Railroads: 3,358 mi.; 570 mi. double track; 15 mi. electrified; 2,976 mi. 4'8 1/2"
gage, 156 mi. 3'3 3/8" gage, 226 mi. 2'5 1/2" gage
Highways: 29,000 mi.; 5,190 mi. paved, 7,130 mi. gravel, crushed stone, and
improved earth, 16,680 mi. unimproved earth, additional 1,150 mi. (mostly
paved) in territory (Sinai) occupied by Israel
Inland waterways: 2,100 mi.; Suez Canal, 100 mi. long, temporarily closed to
navigation because of sunken vessels; normally used by ocean-going vessels
drawing up to 38 ft. of water; Alexandria-Cairo waterway navigable by barges
of 500-ton capacity; Nile and large canals by barges of 420-ton capacity;.
Ismailia Canal by barges of 200- to 300-ton capacity; secondary canals by
sailing craft of 10- to 70-ton capacity
Freight carried: Suez Canal (1966) -- 242 million tons of which 175?6 million
tons were POL
Pipelines: crude oil, 185 mi.; refined products, 390 mi.; natural gas, 30 mi.
Ports: 3 major, 8 minor
Merchant marine: 45 ships (1,000 GRT or over) totaling 208,400 GRT, 275,500
DWT; includes 5 passenger, 32 cargo, 8 tanker (C)
Civil air: 16 major transport aircraft
Airfields: 159 total, 79 usable; 69 with permanent-surface runways; 42 with
runways 8,000-11,999 ft., 21 with runways 4,000-7,999 ft.; 2 seaplane stations
Telecommunications: second best system of coaxial and multiconductor cables,
open-wire lines, and radio communication stations in Africa; principal centers
Alexandria and Cairo, secondary centers Al Mansurah, Ismailia, and Tanta;
365,000 telephones; 5.1 million radio and 600,000 TV receivers; 12 AM, 1 FM,
and 26 TV stations
26
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25X1
Vi H
~.9t ti a
o '" a
b y
tO0 F. s~pyy..,, ~O
of y
Ewa a~
13~c
~7 ~ G d N
U y W W
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Egypt: Value of Significant Imports from the United States and the West, 19711
Million US $
Imports From
(1)
(2)
(3)
SITC
Categories
Commodities
United
States
United States,
Canada, Japan,
France, United
Kingdom, Italy,
West Germany
Column
2 +
Other
Western
Europe
041
Wheat
2.1
2.6
044
Corn
2.3
2.3
2.3
046
Wheat flour
....2
53.1
54.3
048
Cereal preparations
0.5
0.5
0.6
081
Animal foods
1.3
1.4
1.7
121
Tobacco
1.0
1.1
1.1
122
Tobacco manufactures
0.8
1.0
1.0
332
Petroleum products
0.6
16.7
19.5
411
Animal oils and fats
11.0
11.4
1.1.6
421
Vegetable oils and fats
18.5
18.9
19.5
561
Manufactured fertilizers
....
3.5
3.7
599
Chemical materials, n.e.s.
Of which:
1.4
10.1
26.1
599.2
Pesticides
0.1
4.5
N.A.
678
Iron and steel tubes and pipes
O; which:
0.5
6.2
6.4
678.2
Seamless steel tubing
0.3
4.0
N.A.
711
Non-electrical power generating machinery
1.6
9.1
13.2
717
Textile and leather machinery
0.2
6.6
11.3
719
Non-electric machinery, n.e.s.
Of which:
4.5
24.9
29.0
719.2
Pumps and centrifuges
1.9
8.6
N.A.
724
Telecommunications apparatus
0.3
6.9
12.9
732
Road vehicles
Of which:
1.4
47.5
48.3
732.1
Passenger vehicles (non-bus)
0.1
10.4
N.A.
732.3
Trucks
0.2
18.3
N.A.
732.8
Bodies, frames, and other vehicle
parts
0.6
16.7
N.A.
734
Aircraft
Of which:
1.4
3.2
3.4
734.9
Aircraft parts
1.4
3.2
N.A.
1. No total or data for "all other suppliers" can be derived, because the other trading partners of the Arab states do not
publish trade data at this level of detail.
2. A leader entry (....) indicates a negligible amount of imports.
34
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25X1
Egypt: Balance of Paymentsl
A. Merchandise
Exports, f.o.b.
607
583
707
800
823
839
Imports, c.i.f.
-953
-890
-883
-1,088
-1,221
-1,279
Trade balance
-346
-307
-176
-288
-398
-440
B. Services
Receipts
402
134
154
171
171
195
Suez Canal dues
219
....
....
....
....
....
Other services
183
134
154
171
171
195
Payments
-239
-184
-214
-252
-262
-281
Total (net)
164
-49
-59
-81
-91
-86
C. Unrequited transfers (net)
69
192
288
320
272
281
D. Balance on current account
(A + B + C)
-113
-164
52
-49
-216
-244
E. Nonmonetary capital
Drawings on medium- and
long-term loans
230
128
176
249
349
400
Repayments on medium- and
long-term loans
-126
-134
-244
-267
-331
-282
Other capital (net)
54
55
34
61
-14
29
Total
158
48
-33
43
4
147
F. Net errors and omissions
6
-8
7
-6
-25
16
G. Total (D + E + F)
51
-124
26
-12
-237
-81
H. Allocation of SDRs
....
....
....
25
20
22
1. Total (G + H)
51
-124
26
13
-217
-59
J. Monetary movements
Foreign exchange
(increase -)
-121
80
-6
16
159
54
Payments agreements
22
29
-2
-17
59
2
Other
60
5
3
4
-1
3
1. Converted throughout at the rate of #E 1 = US $2.30.
2. Ending 31 June of designated year.
3. Negative entry denotes a balance-of-payments surplus, a positive entry a deficit.
35
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25X1
COMMUNIST MILITARY AID TO EGYPT
Ex
tended
Dra
wn
Total
US
SR
Eastern
Europe
Total USS
Eastern
R Europe
Total
3,531
3,1
35
396
3
516 3
12
0
396
1956-66
1,439 1
,1
60
279
,
,
1,315 1,045
270
1967
200
1
75
25
175 17
0
5
1968
100
1
00
....
115 100
15
1969
87
50
37
102 90
12
1970
657
6
50
7
677 640
37
1971
415
4
00
15
361 350
11
1972
170
1
50
20
283 250
33
1973
463
4
50
13
463 450
13
1974
....
....
....
25 25
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Economic Activity
Major industrial complex
cracking plant
Shi
d
Oil refinery
pyar
Steel
4W Oilfield
Gasfield
Electronics
~--- Principal oil pipeline
Chemicals
Fe
Iron
Textile mill
Mn
Manganese
Sugar mill
C
Coal
Hydroelectric powerplant
Ph
Phosphate
(asterisk denotes a reported location)
Area of cultivation
AI 'Alamayn
I ?Abfi ai Gharadiq
Fe ? Al Bawiti
C*
*?Al Kharijah
C'
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Srwt
No Foreign
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