INTELLIGENCE MEMORANDUM EGYPT: SADAT'S ECONOMIC OPTIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050038-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 20, 2016
• Document Release Date: March 13, 2006
• Sequence Number: 38
• Publication Date: April 1, 1973
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Egypt: Sadist's Economic Options
Secret
ER IM 73-41
April 1973
Copy No. E ()
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D
Egypt: Sadat's Economic Options
April 1973
Egyptian President Anwar Sadat faces economic prob:.;ms that could eventually figure
in the search for peace in the Middle East. New short-term difficulties have been added
to the long-term problems of chronic trade deficits and crushing foreign debt. These
difficulties include a rise in the prospective current account deficit to almost US $400
million in 1973, even after counting Khartoum subsidies of some $250 million. The rise
in the deficit stems from increased expenditures for wheat, decreased earnings from oil,
and the suspension )f Libya's ad hoc aid, which covered as much as $200 million of
Egypt's annual deficits.
Sadat has several options, none entirely palatable. He can:
? Muddle through - e.g., draw down unexpended credits, seek further
credits from international lending agencies, cult imports further, and
default on current bills and debt service payments. These measures,
however, could deprive Egypt of its remaining credit hopes, lower living
standards, and cut back employment opportunities for the restless urban
population.
? Seek additional aid from the USSR. The Soviets might defer or extend
debt repayment to case Sadat's immediate financial problem, but they
distrust Sadat and are wary of adding to the huge debt owed by the
Egyptians on past military and economic aid. In any cast., they have
never supplied substantial amounts of hard currency to any LDC.
? Embrace the oil-rich Libyans in the hope of assuring both immediate
ad hoc aid and longer term economic security. This option probably
would require Cairo to adopt a more radical stance toward Israel.
? Endeavor to exact financial aid from the United States and ether Western
countries by agreeing to more forthcoming settlement terms with Isaael.
If such a move were made, all remaining Libyan fina :,.:ial support -
inciuding Libya's annual $59 million Khartoum subsidy - would cease.
Egypt also might lose $191 million annually in Khartoum subsidies from
other Arab states.
Note: Comments and queries regarding this publication are welcome(]. They may be
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I. The economy inherited by Egyptian President Anwar Sadat in
1970 was riddled with fundamental weaknesses. Land I'or agriculturc was
inadequate to feet) Egypt's poor and rapidly growing population. Mineral
resources to support industrial production were in short supply. A chronic
balance-ol'-payments deficit was making the economy increasingly dependent
on foreign financial assistance. Little breathing space was available, because
roll-over agreements on debt repayments had already been negotiated with
most of Egypt's creditors.
2. Economic planners in the 1960s had banked heavily on the
expansion of' primary production to increase export earnings and on the
development of domestic industry to replace imported manufactures. Their
expectations were disappointed. Although the Aswan Iligh Dais, completed
in 1970, resulted in the more efi'ective use of the Nile's water, the extent
of reclaimable land proved exaggerated. On notch of the best land, high
out (fl t levels have already been achieved, and further gains in yields are
running into diminishing returns. The savings expected from the expansion
of consumer industries were largely offset by new requirements for imported
raw materials and intermediate goods. Explorations for oil failed to turn
tip appreciable new reserver.
Urge Trade Deficits
3. Under the Nasir regime, improvident economic policies, costly
military programs, and foreign adventures in Yemen and elsewhere had
turned a small international trade surplus into a sir.ahle deficit. B the end
of 1906, Egypt's gold reserves had been reduced to less than S 100 million
and foreign exchange reserves had been drawn down to $ 156 million from
$750 million in 1952. Non-military debt alone was some $2 billion, equal
in amount to more thaii one-third of gross national product ((;NI').
4. After the 1967 war with Israel, the trade deficit was reduced
(see Table I ). Consumer imports were restricted, and a drop in investment
meant smaller imports of' capital goods. Export earnings, on the other hand.
were boosted by a partial recovery of petroleum exports and bumper
harvests of cotton in 1969 and 19710. Nevertheless, these gains in the
merchandise account were more than offset by losses of foreign exchange
earnings from (lie Suez Canal and tourism. Closure of the canal deprived
Egypt of' more than $200 million annually in revenues, and tourist earnings
suffered an initial cut of nearly 25%%. Industrial production facilities in the
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Egypt: Balance of Payments, Pre-War and Post-Wart
Million US $
FY 1967
FY 1968
FY 1969
FY 1970
Merchandise trade balance
-346
-307
-176
-288
Exports, f.o.b.
607
583
707
800
Imports, c.i.f.
-953
-890
-883
-1,088
Services (net)
164
-49
-59
-81
Receipts
402
134
154
171
Suez Canal dues
219
...,
Tourism and other services
183
134
154
171
Payments (including interest
on debt)
-239
-184
-214
-252
Unrequited transfers (net)
69
192
288
320
Balance on current
account
-113
-164
52
-49
Non-monetary capital
158
48
-33
43
Drawings on medium-term
and long-term loans
230
128
176
249
Repayments on medium-term
and long-term loans
-126
-134
-244
-267
Other capital (net)
54
55
34
61
Net errors and omissions
6
-8
7
-6
Balance of payments
51
-124
26
-12
Monetary movements2
-51
124
-26
12
Allocation of SDR's
....
....
....
25
Use of fund credit
-12
10
-21
-16
Foreign exchange
-121
80
.6
16
Payments agreements
22
29
-2
-17
Other
60
5
3
4
1. Fiscal years ending 30 June of designated year. Ucwuse of rounding, components may not add to
the totals shown.
2. A negative entry denotes a balance-of-payments surplus, a positive entry a deficit.
once-thriving canal zone area were damaged or destroyed and production
dislocated, depriving Egypt of assets that had accounted for 7% of GNP.
5. Egypt's foreign exchange losses finin the 1967 war prompted
regular annual Arab subsidies of at least $250 million. Because foreign
exchange reserves and net foreign capital inflows from both the Eastern
and Western countries were reduced to a minimum (in 1969 there was a
net outflow), even this substantial aid was insufficient, and the chronic
current account deficit had to be covered by ad hoc aid from friendly
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Arab countries. Since 1967 the Arab world has paid out close to $2 billion
ill ,1111111,11 subsidies and other aid to keep Egypt alloat financially.
The Economy in 1967-72
6. Whereas the postwar Egyptian economy required substantial
foreign assistance, it showed more resilience that most observers had
expected. In spite of damage to industrial plant in the can1;1 zone, industrial
output was increased, largely through use of excess capacity. Favorable
growing conditions resulted in a bumper cotton crop in the fall of' 1969,
followed by an even larger crop in 1970. A steady influx of luxury-hungry
Soviet technicians and their families stimulated the demand for Egyptian
consumer goods. The buildup of military installations provided employment
and markets for domestic industries, particularly the construction industry,
which had experienced a downturn with the completion of basic work on
the Aswan Dam. 1Egypt's real GNP increased as follows:
Egypt: Box-Score of Gross National Product
1967-721
1967: Down 1% because of war and lack of foreign exchange to buy
industrial raw materials and replacement parts.
1968: Up 2% primarily because of increased support from other Arab
states, which enabled industry to work at a higher rate.
1969: Up 6% because of continued Arab support, accelerated defense
building, and below-average damage from agricultural pests.
1970: Up 5% because of increases in industrial activity, constriction
of military facilities, and Arab support.
1971: Up 3`l,4X as industrial and military expansion and Arab support
started to level off.
1972: Little or no expansion as agricultural output declined slightly,
military activity slowed further, and a drop in Arab aid created
import bottlenecks in die industrial sector.
I. Because Egyptian data are fragmentary and arc presented on a fiscal year basis, the GNP
percentages above should be regarded as rough orders of magnitude.
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Economic Planning
7. Egyptian leaders have attempted four economic plans in little
more than a decade and have discarded three of them. The First Five-Year
Plan, launched in fiscal year (FY) 1961,1 achieved moderate success. Many
of the plan projects were completed, and the basic goal - a rise in per
capita income - was achieved for several years. The Second Five-Year Plan,
begun in FY 1966, was doomed from the start because certain preliminary
steps, such as the renovation of the transportation system and the expansion
of intermediate goods production, had not been completed during the First
Plan. An interim Three-Year Plan fell victim to the June 1967 war, which
caused a switch to extraordinary wartime planning. The Third Five-Year
Plan, drawn tip to start in FY 1970, was postponed a year by the Nasir
regime and was abandoned when Sadat came to power in September 1970.
8. Soon after taking over, Sadat announced his basic aims for the
economy to be an increase in national income of I00% in 10 years, an
average annual growth of 7%, a rate never previously sustained by Egypt.
In the first years under Sadat, real growth of GNP actually averaged roughly
2% per year. The recently announced Ten-Year Plan (1973-82) purports
to be a format for accelerating this growth rate through injections of state
investment of $ 19 billion over the plan period. The plan earmarks
considerable investment for the petroleum industry, apparently on the
optimistic assumption that new discoveries of oil and gas will provide much
of the additional foreign exchange needed to support the plan. Prospects
are remote that Egypt can find enough foreign exchange from other sources.
Prospects for 1973
9. Sadat faces dreary prospects on the economic front in 1973 -
a sharply rising bill for imported food, reduced assistance from the USSR
and Arab states, and a lack of vigor in the industrial sector.
10. The worldwide shortage of foodgrains is having a marked impact
on Egypt's 1973 payments deficit. With the vast majority of Egypt's 35
million people squeezed into the narrow Nile Valley and with much of
the best acreage devoted to cotton and other non-grain crops, agriculture
can furnish little wheat for urban consumption. The minimum import
requirement for wheat in 1973 will be on the order of 3 million metric
tons, Although some price protection will be afforded by existing long-term
supply agreements, the rise in wheat prices of some $40 to $50 a ton will
be a main factor in raising Egypt's wheat bill by some $ I00 million in
1973. This rise in wheat prices is not likely to cause a shift of appreciable
1. Through FY 1972, Egypt's fiscal year ran from t July to 30 June of the stated year. Fiscal
years now coincide with calendar years.
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acreage to wheat, at least in the short-run, because a rearrangement of water
control is necessary in a switch, and wheat is a more land-intensive crop
than most other Egyptian crops.
11. Falling petroleum output also will widen the trade deficit. In the
once highly productive ELI Morgan field in the Gulf' of Suez, a decline in
pressure has seduced output by almost 200,000 barrels per day since 1970.
Output in older fields also is falling. Total output in calendar year 1973
may not exceed 200,000 barrels per day, compared with 245,000 barrels
per day in FY 1972. This decline will deprive the Egyptian General
Petroleum Company, owner or joint owner of most operations, of about
$40 million in export earrings in 1973. The current account deficit for
1973 is likely to be almost $400 million (see Table 2).
Egypt: Balance-of-Payments Summaryt
FY 1971
FY 1972
FY 19732
Current account3
-216
-244
-394
Capital account
Ncgl.
Negl.
34
Of which West German aid:
....
....
34
Balance
-' I6
-244
-360
Financing
Bilateral clearing balances
60
80
100
Ad lioc balance-of-payments
support't
146
153
15
Other (including reserve
drawdown)
I. Through FY 1972, Egypt's fiscal year ran from I July to 30 June. Fiscal
years now coincide with calendar years. Thus the second part of calendar year
1972 is not accounted for in the table.
2. Estimated.
3. Including Khartoum subsidy payments from Arab states of from $250
12. Prospects for Arab aid also are poorer than in the recent past.
In 1970-71 Libya provided about $150 million annually in direct
balance-of-payments support in addition to a $59 million annual Khartoum
subsidy.'- Since 1971, however. Qadhafi has been reluctant to give untied
2. As the result of an Arab summit meeting at Khartoum in the aftermath of the Six-Day War,
rich Arab nations agreed to transfer substantial sums annually to Egypt to make up for losses in
foreign exchange.
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funds to any client state.1
13. The precarious financial situation suggests that some trimming of
imports will be needed in 1973. Because little room exists for additional
cuts in imports of luxury consumer goods and because cuts in imports of
food or fertilizer could only worsen Sadat's political position, the effect
of a reduction of imports will be felt most acutely in manufacturing. Most
manufactures depend to some extent on imports of raw materials and
equipment. A cut in imports for industry, together with the large annual
additions to the labor force, means an inevitable rise in unemployment or
underemployment in the cities.
14. In the short term, Sadat may try to muddle through with his
economic problems, drawing down available credits not yet expended,
seeking further credits from international lending agencies, cutting imports
here and there, and defaulting on current bills and debt service payments.
The US agreement, which requires a act outflow of at least $111 million
annually, would be a prime candidate for default.3 Such temporary measures
might backfire quickly, depriving Egypt of its remaining credit hopes,
lowering living standards, and cutting back job opportunities, particularly
in the cities. Eventually, economic deterioration and the consequent erosion
of Sadat's political position could force a harder look at other economic
options.
Economic Options in the Longer Term
15. Sadat has to appraise his long-term economic options under at
least two alternative assumptions: (a) a continuation of the status quo of
"no war, no peace", and (b) a settlement with Israel that would provide
for at least pa, tial return of the Sinai and opening of the Suez Canal. The
economic implications for Egypt of the two assumptions vary widely in
major respects but share a common theme of continued heavy reliance on
outside resources.
No War, No Peace
16. Under current conditions of "no war, no peace," the basic
economic problem to be faced by Egypt's socialist government is covering
a current account deficit that will total more than $1 billion over the next
5 years even in the absence of large inflows of capital goods. Expected
3. Until this year, payments to the United States were kept current, unlike those on agreements
with any other major Western creditor.
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gains in exports over the next several years probably will no more than
cover imreasing requirements for imported foods, other essential consumer
goods, and industrial inputs. Imports of capital goods necessary to sustain
investment activity must continue to be financed with additional foreign
loans or grants. In 1971-72, investment of about 12% of GNP4 yielded
a growth rate at best equal to population growth - about 3'A. The current
account deficit was more than $200 million in those years. The deficit
almost certainly cannot be reduced below this level for several years without
further reducing present austere consumption standards or the already low
rate of economic growth.
17. Adequate credits to cover this future deficit may not be available,
even though some possible lines of credit exist. Substantial credits already
extended by Eastern Europe remain unused. West Germany has proved to
be fairly generous and has recently provided a rollover agreement and
additional credits. Several smaller Western nations such as Sweden and
Australia have extended small trade credits recently. Finally, the
multinational lending institutions such as the IBRD and UN Development
Program could extend additional aid. Grants may be forthcoming from the
newly rich Persian Gulf states. Egyptian sabre rattling may even bring forth
untied cash or joint venture proposals from traditional Arab donors -
Kuwait, Saudi Arabia, and Libya. Nevertheless, only $750 million in net
credit is clearly in sight over the next 5 years (see Table 3). Because most
of this amount is project aid, it will not actually become available until
projects are selected and construction is begun.
18. Sadat has sought to fill the prospective balance-of-payments gal)
by seeking private foreign capital investment and by encouraging the
repatriation of funds banked by Egyptians abroad. The Arab International
Bank was set up by Sadat in 1970 to marshal private funds; a large number
of investment guarantees have been provided. Thus far, however, only a
few investment projects have been approved in the private sector.
Implementation probably will continue to lag because revitalizing the private
sector runs counter to deep socialist currents and poses difficult political
questions. Furthermore, the amount of capital offered will be reduced by
the impatience of entrepreneurs with the tortuous process of approval and
with the continuing threat of renewed hostilities. In any event, the
encouragement of private investment is a long-term policy that will not
relieve Egypt's short-term economic stringencies.
19. Sadat may consider asking the USSR to finance some or all of
the prospective payments deficit, but the USSR cannot be expected to rush
4. If the population of a less developed country is growing at 3%. the investment of 1210 of
its GNP normally provides for little momentum in economic development.
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Egypt: Foreign Account Financing
at Alternative Levels of GNP Growth
1973.77
Cumulative current account
deficit
1,250
2,250
Foreseeable financing (net)
750
Eastern Europe
350
IBRD
100
West Germany
100
Other Western
countries
100
Bilateral trade credits
100
To be financed
500
1,500
1. Based on informatioi available on the new Ten-Year Plan.
to Egypt's rescue as it did in the 1950s and 1960s when the West refused
to finance the Aswan High Dam and when the United States cut off
commodity aid. Moscow might agree to defer or extend Egypt's debt
repayments to ease immediate financial problems. Moscow is reluctant,
however, to accept further increments in Egypt's already gigantic debt,
which, including military obligations, now totals $1.5 billion. Moreover, the
USSR is not interested in bailing out Sadat, a man Moscow now distrusts
and would like to see replaced.
20. Sadat may still be counting on the option of union with Libya,
which remains scheduled for September 1973. With its $3 billion in reserves
and $1.5 billion in annual revenues from oil, Libya offers to Egypt a degree
of financial security unobtainable elsewhere.5
21. If economic conditions deteriorate in 1973 to the extent that
Sadat's political position is threatened, Cairo can be expected to intensify
its efforts to obtain additional Libyan or other Arab aid for Egypt's
short-term and long-term interests. The other Arab countries - which are
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rapidly becoming loaded with oil money - are capable of underwriting
Egypt's economic future indefinitely. Libya might be ready to do so,
especially if a more radical approach to Israel can be exacted as an interim
quid pro quo. The magnitude of the long-term financial assurances needed
by Egypt is uncertain, but more than $1 billion would be required over
the next five years to assure constant per capita incomes and to offset
settlement risks. To underwrite a settlement with Israel and the Ten-Year
Plan, which is doomed without a sponsor, would cost $2 billion over the
5-year period.
Western Aid in Exchange for Settlement with Israel
22. Sadat might seek to case his economic difficulties by exacting
promises of financial assistance from the United States and other Western
countries in exchange for an agreement to more forthcoming settlement
terms with Israel. In the event of a settlement with Israel, the impact on
Egypt's economy would depend on a number of factors. (For a detailed
discussion, see the Appendix.) Chief among these is the attitude of Egypt's
Arab benefactors who are formally committed to provide subsidies only
until the "consequences of the aggression are removed." Timing also will
be important. Even under the best of cLumstances, li' wevcr, a settlement
cannot free Sadat completely from dependence on others.
23. In the case of a settlement in the near term, the immediate cost
of covering Egypt's current account deficit could be small. Conceivably,
much of the deficit could be covered by gains in revenues once the Suez
Canal was reopened, together with rapid drawdowns of existing foreign
credits and the continued receipt of annual subsidy payments from Saudi
Arabia and Kuwait. If the latter subsidy payments were discontinued in
the wake of' the peace settlement, Egypt would require additional foreign
assistance of at least $191 million to cover the annual deficit. Egypt would
no doubt like to enter into a settlement with some guarantees of' foreign
assistance to rebuild the economy and to provide for an increase in the
rate of GNP growth. Such guarantees could cost an additional $100 million
in foreign assistance. If settlement is delayed, the annual costs of covering
Egypt's deficit would go up because revenues from Sinai oil and from the
Suez Canal probably will decline over the years.
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APPENDIX
THE ECONOMIC EFFECTS OF SETTLEMENT
An immediate settlement that would return all or hart of the Sinai
and lead to reopening of the Suez Canal probably would be favorable for
Egypt's economy, even though it would almost certainly cause Qadhafi to
cut off the $59 million annual subsidy. In the short run, this loss would
he more than offset uy oil output regained from the Sinai fields, valued
at about $95 million a year at current production rates. Net earnings of
some $1 10 million a year could be expected once the Suer Canal is opened.
The restoration of these two sources of revenue would reduce Egypt's
prospective balance-ol'-payments gap by $146 million, even without Libyan
aid. Potential gains, however, would not offset the loss of other Arab aid.
It' Kuwait and Saudi Arabia curtail their subsidies, the payments gap would
he increased by at least $45 million annually (see the table).
Egypt: The Financial Impact
of peace in 1974
Egyptian gains
205
Net canal revenuesl
110
Increased oil income
95
Loss of Arab aid
Libya
59
Kuwait and Saudi Arabia
191
Net impact under alternate assumptions
Libyan aid cut oil'
+146
All Khartoum aid cut off
-45
1. Cross revenues are estimated to be $120 million
annually, assuming no decline over the years. Clearing costs
of $40 million are prorated over four years and excluded
from the cumulative total.
The longer a settlement is delayed, the less favorable will be the
economic impact. Aftc r almost 6 years of' rapid Israeli exploitation,
considerable doubt exists concerning the size of' remaining oil reserves in
the Sinai. Most observers agree that output has reached maximum levels
and that production probably will decline to zero over the next decade.
The prospective net gain to Egypt from the canal also will decrease with
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increased use of larger tankers that cannot transit the canal and as costs
for renovating the canal increase.
Regardless of the timing of a settlement, the indir. ct benefits should
be sizable over the long run. Peace would facilitate development of the
tourist industry, Egypt's most promising growth sector. The Sadat regime,
unlike the Nasir regime, might be willing to devote official energies released
by peace to the task of streamlining Egypt's state bureaucracy and reducing
internal obstacles to economic progress. If Egypt opts for development of
a strong private sector, peace would be especially beneficial. As has been
demonstrated by the prolonged nego