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Egypt DEBT AND RESTRUCTURING
Ironically, in 1990 Egypt found itself heavily indebted as it
had been more than a century previously. The practice of external
borrowing began with Muhammad Ali, who sought funds to finance,
among other things, his ambitious development schemes. Significant
debt began to build up only in the second half of the nineteenth
century, coinciding with the rise of the export economy. In the
1880s, Egypt was unable to repay its debts, and Britain, the main
lender, used this an excuse to occupy Egypt for the next half
century. The debt was economically disastrous for Egypt because it
consumed all the surpluses accumulated during and after World War
I, which could otherwise have been invested in economic
development.
Egypt emerged from World II, as from World War I, with
substantial reserves resulting from the goods and services it
supplied to the Allies and its lower imports because of worldwide
shortages. The reserves were kept under British control until the
end of the 1940s, when Egypt started to use them to finance
imports. They practically disappeared in the late 1950s, and Egypt
again began external borrowing. Still, by the late 1960s debt was
not substantial.
Only with the increased borrowing under Sadat and Mubarak did
debt become the nagging problem it was in 1990. Debt information
was incomplete, and estimates of it varied. Variations resulted
from the multiplicity of creditors, the private nature of some
arrangements, and the exclusion of debt data from official
statistics or the showing of lower figures in government budgets.
Publicly guaranteed, long-term debt climbed from more than US$3
billion in 1974 to about US$15.8 billion in 1980, or more than
five-fold. During the same period, real GDP (at 1980 prices) less
than doubled, and exports rose three-fold. If short-term debts were
considered, the gap between the growth of debt and that of GDP and
exports would be greater (see
table 12, Appendix).
In 1988 total external debt was expected to reach US$46 billion
or about double the amount in 1981. As a result, civilian debt came
close to GDP in 1987 and was forecast to surpass it in 1988. Thus,
Egypt, like many developing countries, entered the final decade of
the twentieth century with burdensome debt.
Most of Egypt's debt was owed to other governments or
guaranteed by them, especially when military debt was taken into
account. For example, in 1987 debt to private creditors was about
21 percent of the civilian total, and debt to multilateral
organizations was about 17 percent of the civilian total. Prior to
the peace treaty with Israel in 1979, the largest creditors were
Arab countries; since 1979 the Arabs were replaced by OECD members.
In 1987 Egypt owed US$10.1 billion to the United States. Of this
about US$4.6 billion, or about 23 percent of Egypt's combined debt,
was military debt. Within Egypt itself, the largest debtor was the
government and the public sector generally. For example, public
debt, apart from the military made up about 78 percent of the
total; the rest was borne by private enterprises and banks.
As debt increased, Egypt became vulnerable to pressure from
creditors who wanted it to repay the debts and restructure the
economy. During the 1980s, prolonged, tug-of-war-like negotiations
occurred between Egypt and various creditors represented by the IMF
and the Paris Club.
Before concluding agreements with other creditors, Egypt had
first to win the endorsement of the IMF on the soundness of its
financial position. In return for a financial package to ease
repayment terms, the IMF policy requires that a government
undertake a macroeconomic stabilization program, known as the IMF
conditionality, that touches basically on every aspect of the
economy. The program consists of two interlinked components, one
external and the other internal. The external component applies to
the reduction of the trade deficit, in Egypt's case through the
devaluation of the Egyptian pound to make exports more competitive.
The internal component is far-reaching and aimed at minimizing the
role of the state in the economic process. It calls for, among
other things, appreciable cuts in the budget deficit, elimination
of price controls, and the closing of inefficient public
enterprises with the ultimate goal of privatization.
Although there was a growing consensus in Egypt on the need for
reform, many interests conflicted and experts differed on the best
course. Because of their colonial experience, Egyptians were
generally sensitive to having their economic policies dictated by
outsiders. As far back as 1966, Nasser rejected on nationalist
grounds an IMF "background stabilization program" much more modest
than subsequent ones.
The demand for cutting the budget, which would have entailed
mainly reducing the subsidies of basic commodities, was officially
resisted as politically destabilizing. Within the cabinet itself,
there were different voices. For instance, while the minister of
agriculture supported dismantling price controls so as to raise the
incomes of his constituency, the farmers, the minister of food and
supply opposed dismantling them on the ground that lack of such
controls would hurt his main constituency, urban consumers.
The fear of political instability was not the only reason for
resistance to restructuring. Politically significant Egyptian
groups, including public-sector employees, some leading
intellectuals, and ruling party functionaries, viewed with
suspicion attempts to weaken drastically the role of government and
the public sector. Egypt, they said, had a weak state for more than
a century and free trade for an even longer period, yet the country
remained underdeveloped. They pointed to the wasteful economic
behavior of the private sector during the infitah and the
way this policy widened the income gap between rich and poor.
Finally, they referred to the successes of Japan, the Republic of
Korea (South Korea), and Taiwan, where strong partnerships between
the state and the private sector propelled economic growth.
Private-sector entrepreneurs themselves were little interested
in certain aspects of reform. They considered state intervention
necessary in such areas as tariff protection against foreign
competition, stabilization of input prices, increased savings, and
investment in infrastructure. Although they wanted to see less red
tape and the simplification of investment procedures, they were
able to turn market restrictions to their advantage through
manipulation. Their relationship to the public sector was often
more symbiotic than adversarial. For example, in the mid-1980s the
poultry industry--which had grown astronomically since the mid-
1970s as a result of private investment by entrepreneurs,
government officials, and military officers--wanted the government
to ban egg imports and to limit new farms and emergency low-
interest loans to offset what it saw as market saturation. Poultry
farm owners resorted to a massive slaughter of 4 to 5 million
chickens to dramatize their demand.
In spite of these constraints and because of the economic
difficulties and mounting debt and deficit, the government since
the mid-1980s had no alternative but to come to terms with the IMF
and its creditors. In the negotiations, disputes often centered on
the pace and scope of restructuring, not on the need for it.
Finally, after intense bargaining and pressure on the IMF by the
United States, which was concerned about the impact of the Cairo
security police riots in February 1986, an agreement was signed in
May 1987. The agreement was considered lenient by IMF standards,
although not by the Egyptians. For example, it involved Egypt's
agreement to lower its budget deficit to 10 percent of GDP, a
ceiling that the government found arbitrary. The IMF allowed Egypt
to keep the official rate of ŁE1 = US$1.43 for pricing oil, cotton
exports, and rice but stressed the need for eventually eliminating
the multiple exchange-rate system.
In return, the government was to obtain SDR250 million, or
about US$327 million, much less than the US$1.5 billion standby
credit Egypt had applied for in 1986. More important, the agreement
paved the way for an arrangement with Paris Club creditors to
alleviate Egypt's debt. Toward the end of May, the Paris Club
approved a ten-year rescheduling, with a five-year grace period.
The arrangement also covered arrears outstanding at the end of
1986, in addition to interest and principal repayments due between
the beginning of 1987 and June 1988 on all guaranteed debts
contracted before the end of October 1987.
The government subsequently implemented many changes, including
raising energy and food prices, setting higher and market-
determined prices for farm production with the exception of cotton,
and trimming budget and trade deficits
(see The Role of Government
, this ch.). The IMF and Paris Club members, however, were not
satisfied with the pace of reform and expressed their concern that
Egypt was delivering much less than it had promised. Egypt wanted
to extend the period of arrears and payments on publicly guaranteed
loans to the end of 1989 instead of June 1988 as was stipulated in
the 1987 agreement with the Paris Club. A new round of negotiations
began, and an accord with the IMF was anticipated in July 1989. The
deadline passed inconclusively, and the marathon bargaining was
continuing in early 1990.
Irrespective of the conclusion of these negotiations, Egypt
entered the closing decade of the twentieth century facing an
enormous economic challenge. Economic growth was unable to keep up
with that of population, and inflation was eating into the modest
income of many Egyptians. The government introduced uneven reforms
in pricing and other policies, but more effective reform was
needed, especially in the stagnant and outmoded industrial field
and the notoriously inefficient bureaucracy. Although Egyptian
agricultural yields were respectable, they could be enhanced
substantially. Revenues from oil, the Suez Canal, workers'
remittances, and tourism--the main sources of foreign currency--
were expected to grow, if at all, at low rates. Egypt had to propel
its agriculture and industry forward if it were to achieve a self-
sustaining growth and feed and create jobs for a rapidly growing
population.
* * *
Basic data on the Egyptian economy are available in the
English-language editions of the annual Statistical Yearbook
of the Central Agency for Public Mobilization and Statistics and
the more carefully produced quarterly Economic Bulletin of
the National Bank of Egypt. The World Bank's wealth of statistics
on the structure of the economy are summed up in the annual
World Tables. The International Monetary Fund's publication,
Directions of International Trade, is a good source for
trade statistics, as is its International Financial
Statistics for finance. Information on agriculture is available
in the Production Yearbook of the United Nations Food and
Agriculture Organization.
Two of the most concise and insightful sources on the
contemporary Egyptian economy are The Egyptian Economy, 1952-
72 by Robert Mabro, and Foreign Trade Regimes and Economic
Development by Bent Hansen and Karim Nashashibi. The latter
covers the post-World War II period until the late 1960s. Mahmoud
Abdel-Fadil's The Political Economy of Nasserism gives a
rigorous analysis of the economy, especially employment, during
Nasser's presidency. Unfortunately, no similar sources exist for
the Sadat or Mubarak periods. The Egypt of Nasser and Sadat
by John Waterbury is considered the basic text for the 1952-80
political economy.
Several books offer treatment of specific sectors.
Industrialization is discussed insightfully in The
Industrialization of Egypt, 1939-73 by Robert Mabro and Samir
Radwan. A synthesis of the modern history of Egyptian agriculture
is given in Egypt's Agricultural Development, 1800-1980 by
Alan Richards. The World Bank issues occasional policy-oriented
studies; one of the most comprehensive is Trade, Exchange Rate,
and Agricultural Pricing Policies in Egypt (2 volumes) by Jean-
Jacques Dethier. This work also offers a wealth of statistics for
the period between 1960 and 1985.
Journalistic updates on the state of the Egyptian economy are
available in special reports issued by three London-based
periodicals: Economist Intelligence Unit's Country Report:
Egypt; Financial Times; and Middle East Economic
Digest. Finally, the Egyptian Arabic language weekly, Al
Ahram al Iqtisadi is an indispensable source on the economic
debate within Egypt itself. (For further information and complete
citations,
see
Bibliography.)
Data as of December 1990
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