Al-Ahram Weekly On-line
8 - 14 October 1998
Issue No.398
Published in Cairo by AL-AHRAM established in 1875 Current issue | Previous issue | Site map

Financing liberation

By Sherine Abdel-Razek

Economic seminar
As well as its military wounds and the harsh blow that had been dealt to its national pride, Egypt also came out of the 1967 War in poor economic condition. The closure of the Suez Canal, the fall-off in tourism revenue and the loss of Sinai with its oil and natural resources deprived the Egyptian budget of many of its basic sources of financing. Moreover, preparing for a war of liberation meant that all available resources had now to be channeled to the military, thus placing an additional burden on the national economy.

However, despite these multiple handicaps, the country was not about to collapse, and the seven-year period between 1967 and 1973 saw the implementation of a highly successful strategy to prepare the various sectors of the economy for the war.

Ahmed El-Naggar, an economic expert at the Al-Ahram Centre for Political and Strategic Studies, analysed the severe losses suffered by the Egyptian economy as a result of the 1967 defeat. Sinai, with its oil and mineral resources was not only a military loss, but also an economic loss, he said.

The closure of the Suez Canal deprived the nation of an important source of income. Before its closure, El-Naggar pointed out, the Canal's annual revenue amounted to LE95.3 million, about 4 per cent of the Gross Domestic Product in 1967. During the same seven-year period, the revenue from tourism plunged by LE36.5 million annually.

Nor was compensating for these economic losses the only worry of the authorities and the economists. Mobilising every available resource for the liberation battle to come was also a pressing concern.

To save Egypt's limited foreign exchange resources, Maj. Gen. [retr'd] Mohamed Gamal Mazloum explained, efforts were made to cut consumption by curtailing imports or at least freezing them at their current levels. As of 1972, the import of luxury goods such as cigarettes, television sets, refrigerators and rugs was banned. Moreover, a 50 per cent customs tariff was imposed on goods brought in by travellers arriving at airports and harbours. This, together with the imposition of new taxes, helped raise the necessary funding for the task of rearmament. Indirect taxes and customs revenues increased from LE442 million in 1969-70 to LE574 million in 1973.

According to El-Naggar, other policies adopted were distinctly more double-edged: printing more bank-notes and issuing government bonds both led to inflation and an increased public deficit. Yet they were essential if the necessary funds were to be raised. The value of government bonds issued in 1972 was LE459 million, compared to about one-half this amount three years earlier. In 1973, the growth rate of the issuance of Egyptian bank notes was eight times the growth rate of the national economy.

El-Naggar explained that such policies could easily have raised inflation to explosive rates. The government, however, was able to contain this threat by introducing obligatory pricing policies for the basic commodities.

Investments and savings were front-line victims on the economic home front. War-related investments, used to upgrade the nation's military capabilities, were given priority. While defence expenditure did not exceed 5.5 per cent of the Gross Domestic Product in 1960, it jumped to 20 per cent in 1973. Other public investments as a whole plunged to 11.9 per cent of the GDP in the period 1965-1972, compared to 16 per cent in 1959-1965.

Speakers at the panel agreed that rigid monetary policies crippled all efforts to encourage domestic savings because interest rates on deposits were kept at 5 per cent from 1962 to 1973.

Nevertheless, the negative impact of these policies on average citizens was minimal. The supply of food and basic goods was highly organised. Wholesale trading in food was confined to public agencies to ensure that supplies would continue to reach the people and not be hijacked by monopolistic practices in the private sector.

The weak performance in savings and investments pushed Egypt to increase its reliance on foreign financing which amounted to 5.6 per cent of the GDP in 1965-1972. This did not, however, materially increase the burden on the national economy because the bulk of this financing took the form of unrepayable grants.

Mohamed Abdel-Shafei Eissa, an economist with the National Planning Institute, pointed out the important role played by Arab countries in supporting the national economy. He said this support was sanctioned by the 1968 Khartoum summit at which Saudi Arabia, Kuwait and Libya together agreed to grant Egypt LE135 million annually until the end of hostilities.

The national economy began to recover in the second half of the 1970s, with the open-door policy and increased public revenues the two salient features. Oil, which had been used as a political weapon during the war, later became one of Egypt's principal economic assets. According to Heba Handoussa, executive manager of the Economic Research Forum, revenue from oil exports skyrocketed to $2.8 billion in 1982.

The reopening of the Suez Canal in 1975 added $85 million to the state budget. Nine years later, this figure had risen to $1 billion after the Canal's capacity had been expanded.

Abdel-Fattah El-Gebali, chief of the economic research department at the Al-Ahram Centre for Political and Strategic Studies, said the most important result of the October victory was the introduction of the economic open-door policy. "This policy was designed to encourage Arab and foreign investments in Egypt. It was meant to promote the private sector's role in the national economy by reducing administrative and bureaucratic red tape. Further, it called for more competitive public sector exports."

Investment was among the main beneficiaries of this policy, registering an average annual increase of 34 per cent to reach LE2.2 billion in 1984.

According to El-Gebali, another consequence of the October victory was the beginning of the wave of Egyptian workers who migrated to oil-rich Arab countries. The remittances of these expatriates amounted to LE123.1 million in 1976 and were a major source of foreign currency and liquidity at the time.

According to Handoussa, tourism also flourished as a result of the open-door policy which attracted more foreign investments to that sector. Revenue from tourism averaged $700 million annually in the period 1977-1985.

However, El-Gebali argued that the economic situation was not as rosy as all that: the increase in revenue was not matched by an increase in the supply of goods and services and consequently resulted in hyper-inflation.

This led to increased demand for imported goods, which in turn led to greater reliance upon foreign currencies and, thus, decreased the purchasing power of the Egyptian pound.