ANALYSIS OF EGYPT'S CURRENT LIQUIDITY CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000600050044-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 16, 2016
• Document Release Date: October 19, 2004
• Sequence Number: 44
• Publication Date: April 29, 1975
• Content Type: MEMO

 -Approved For Release,,~Q
National Security Council
Old Executive Office Building
SUBJECT Analysis of Egypt's Current
Liquidity Crisis
--5-
29 April 1975
WAjIIING9'ON, D.C. 20505
25X1
1. In response to request for an appraisal of
E is current financial problems
25X1
has prepa'reu L11U =7==
If further clarification is needed
can be reached
Attachment:
As stated above
MEMORANDUM FOR: Malcolm Butler
25X1
1 - Io
2
2 -I S)
Distribution: (S-Project 08324)
Orig. & 1 - Addressee
1 - Gardiner Brown, State
1 - James Roberts, AID
1 - D/OER, DD/OER, SA/ER
(29 April 1975)
Dept.
CONFIDENITIAL
Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
25X1
25X1
25X1
25X1
 Approved For Release 2004/10/28 CIA-RDP86T00608R000600050044-4
Analysis of Egynt's Cu:-rent Liquidity Crisis
As has been widely rumo:-ed since early this year,
the Egyptian government is obligated to repay or rollover
at least $1 billion and possibly as much as $1.6 billion
in short term banking facilities by June 1975.
As in the past, the level of such short tern borrcwwring
represents government estimates of cash receipts over
thle next 3.6 months. "Banking" anticipated cash receipts
many months in advance has been an EgyDtiar, practice
for many years. During the past year increased Arab
backing has made short term credit particularly easy
for Cairo to obtain. The Egyptians may have badly
overestimated 1975 receipts, however, borrowing well
in excess of their ability to pay.
Export earnings have been the most serious source
of miscalculation. When the'1974/75 cotton season
CGIti'FIDENr IAL
25X1
Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
 Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
GOIh1lIb i-i, H r`~L
opened last Fall the Egyptian Cotton Board predicted
$540 million in export receipts. Due primarily to
recession in Western Europe the crop is moving very
slowly and total receipts may equal no more than $400
million. With depressed conditions in Western Europe
also affecti;Txg other exports, total receipts may have
been more than $200 million below expectations during
the last two quarters (see Table 1).
Cairo may also have been overly optimistic about
the amount of cash aid that would be forthcoming from
other Arabs around the end of 1974. At the Arab Summit
in the Fall of 1974 $1 billion was originally allocated
for Egypt. Lack of Libyan arid Algerian participation,
however, reduced final. disbursement to $580 million.
Thus far only $100 million of the shortfall is known
to'have been made up by other donors.
The banking community almost certainly will agree
to rollover whatever Egypt cannot repay. Because Egypt
'has always honored the bulk of its short term obligations,
rollovers?werF.. readily offered even during the lean
inter-war years when econi.;nic prospects were extremely
bleak, cash reserves were ex?:remely limited, and long
term credit was almost impossible to obtain. Now with
CONE I .N T
Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
 , Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
i;AL
more than $500 million on hand as reserves and longer
term prospects vastly improved, rollovers should be
even easier to arrange..
Probably much of the recent publicity on the liquidity
crisis in Cairo has been timed to influence both congressional
aid considerations and the forthcoming Arab Summit.
If US or Arab aid is too little or comes too late,
Egypt will have little choice but to accept rollovers
on banking community terms, In the past Egypt regularly
reneged on long term credit obligations to other governments
in order to maintain its credit rating with the international
C0 i JL J TiAL
Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
 Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
(JU111-ILEi c~l,AAL
banking community. In the West this option has been
foreclosed by inter-war rollover agreements that, in
the main, tie the level of new credit to the level of
repayments. In the East the USSR is becoming impatient
with the "last paid" status that has characterized its
financial relations with Egypt for many years. Undoubtedly
deliveries of the Soviet arms on which the Egyptian
military still mainly depends' would be seriously affected
if Egypt lowered already minimal repayments on .;ts debt
to the USSR.
If the present crunch is resolved with stop gap
measures, Egypt is apt to end 1975 in another short
term credit bind. Unless consumption and investment
i
are slashed back to pre-war levels, the current account
deficit for the year will exceed $1.5 billion of which
at least $800 million remains to be financed with aid
or private investment (see Taale 2). The gap will be
substantially larger if cash transfers received earlier
this year are committed to retirement of short-term
debt carried over from the fo-.,irth quarter of 1974.
Unless ample levels of longer term credit or substantial
relief from long term debt repayment is available for
the balance of the year, Egypt may seek to avoid politically
Uui'JFIDE,ff
I IAL
Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
 Approved For Release 2004/10/28 CIA-RDP86T00608R000600050044-4
hazardous cuts in imports by resorting once again to
high cost, short; term borrowing.
If the Sadat government can survive its current
i
predicament without alienating consumers, prospective
investors or the international banking community, the
financial situation should begin to improve next year
as grain prices level off or drop, petroleum output
rises, traffic in the Suez Canal picks up, and demand
in Western Europe recovers. Unless another serious
deterioration in terms of trade occurs, a rising inflow
of private investment, revenues from the fully reopened
Suez Canal, completion of several new tourist hotels,
inauguration of the SUMED pipeline, and burgeoning oil
output in the Gulf of Suez could substantially close
Egypt's balance of
payments gap by 1978.
CIA/OER
29 April 1975
COM-Ii)EI fIAL
Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
 Approved For Release 2004/10/28 CIA-RDP86T00608R000600050044-4
Gui\1 ID i~I~
Comparison of Egyptian Expectations
and Actual Receipts (Cash or Equivalent)
October 1, 1974 - 31 March 1975
Maximum
Expectation
Estimated
Maximum
Actual Receipts
Cotton
5110
400
Arab cash aid
1,000
680
Other exports
350
300
Total
1, 810
11380
CIA/OER
29 April 1975
- ''U11 ~ N E-l JEf~?J-I'IAL
Approved For Release 2004/10/28 CIA-RDP86T00608R000600050044-4
 Approved For Release 2004/10/28 : CIA-RDP86T00608R000600050044-4
~UIVi'IUi..I~~ F !AL
Table 2
Egyptian Balance of Payments
1975 Estimate
Current receipts
1, 850
Goods
1,000
Cotton
Qil (net)
400
negl
Other
Services
600
Worker remittances
250
Tourism
400
Canal
175
Other
25
Current payments
-2,440
-3,522
-4,500
Demurrage
-100
Ogler
-400
Goods
-1,940
-3,022
-4,000'
Current balance
-590
-1,672
-2,650
Unrequited transfers
700
700
700,
Public debt'service
-335
-335
-335
Balance to be financed
with aid or private
in
vestment
-225
-807
-2,285
A- 1972 levels of aggregate
and investment at 1974
B - 1974 levels'of .,ggregate
and investment at 1974
C - 1964 levels of per capita
at 1974 levels (assumes
1974 import prices.
CIA/OER
29 April 1975
consumption, manufacturing production
import prices.
consumption, manufacturing production
import prices.
consumption with aggregate investment
manufacturing output at full capacity).
UU,tii-1DENTIAL
Approved For Release 2004/10/28: CIA -RD P88T00608R000600050044-4