• 18:32
  • Friday ,17 October 2014

Egypt’s economic battle from June 1967 to October 1973

By-Ahmed El-Sayed Al-Naggar



Friday ,17 October 2014

Egypt’s economic battle from June 1967 to October 1973

Over its long history, which ushered in the written history of the world, Egypt lived through decisive moments when the future of the entire nation was at stake. Every time, its heroic people prove the country has a sword and invincible wall of human valour to repel any assailants and propel the nation to the stature it deserves above all enemies. When Egypt was established as a unified state in 5,000 BC there were no other states in existence. Thus, there were no outside threats and it was not interested in invading or ransacking any lands if it chose. These were inhabited by small tribal or familial communities that could never stand up to the first unified state in history, Egypt. The real threat facing the state that remained unified for nearly 1,000 years came from within because of ambitions to pounce on power by regions that had united and formed the bigger state. Egypt disintegrated into clashing regions for 1,000 years and the people suffered terribly from civil conflicts. Then, the ruler of one of the regions, Mena, was able to reunite the country and the Egyptian people sanctified him.

The experience of unification followed by destructive disintegration made a unified state a hallowed notion for the people; they could take anything except what violates the unity of the state which is their banner, pride and structure that protects the unity of their country. This fact was enforced in the conscience of Egyptians when the state slumped, weakened and became vulnerable to the occupation onslaught of herds of savages coming from the Asian desert, commonly known as the Hyksos. These savages occupied Egypt for two centuries and made the people miserable. What is amazing, however, is that the indigenous people maintained their identity and their revolts did not stop until the 17th Dynasty was able to annihilate the occupiers in revenge for violating Egypt’s lands and humiliating its people. After that, Egypt went on campaigns beyond its borders and took control of the entire Old World. Its empire peaked under the rule of Men Khabr Raa, better known as Thutmosis III, and stretched from the heart of Africa to the entire Fertile Crescent and the Hittite Kingdom (modern day Turkey), where he left his monumental obelisk at the city of Carchemish near the Syrian-Turkish border.

Despite the demise of the Pharaonic Empire three centuries before the birth of Christ, the people of Egypt upheld their unity and endured eons of foreign occupation, and their sons were used as battle fodder without them ruling their land by themselves. While such experiences may dispirit the people and dilute the character of the nation, instead the Egyptians maintained their identity and traditions and even assimilated invaders into their more advanced civilisational make-up. When Ibrahim Pacha, son of Mohamed Ali, revived the Egyptian military more than two centuries ago by creating an army composed of the sons of farmers, he astonished the world with their great victories across the lands from the heart of Africa to the Arab Mashreq. They defeated the Ottoman Empire in the battle of Konya in 1832 when they destroyed the Ottoman army and captured its commander (Mohamed Rachid Pacha), and later signed the Kutahya Treaty in 1833 which boosted Egypt’s independence and influence from the heart of Africa to North Syria. When Turkey violated the Kutahya Treaty, war broke out once again and culminated in the Battle of Nizip in 1839 when the Egyptian army once again destroyed the Turkish army and the entire Ottoman fleet surrendered at Alexandria.

This was before European countries came together to destroy and curb Egypt’s rising star as a regional and world leader. Aside from a long history of victories and defeats, anyone who reviews Egypt’s military history will find that it impressed the world and developed new military strategies when it launched offensive wars and took the initiative. However, its defensive performance has been problematic. Perhaps the Egyptian saying, “The stick that strikes first is first,” is rooted in this history, meaning that the stick that initiates an attack is always victorious. For the first time since the collapse of the old Egyptian state in Pharaonic times, an Egyptian finally became the leader of the country, namely the late leader Gamal Abdel Nasser who championed national independence, economic development, social justice and led Egypt’s industrial revolution. He also built the High Dam, the greatest infrastructure project in the world in the 21st century. He was able in a short period to make Egypt the most advanced developing country and propelled it into a position of regional and international leadership. On the military front, however, he took a disastrous decision by closing the Tiran Straits without realising this would justify a war on Egypt by the Zionist entity, while Egypt was unprepared for war. The leaders of the Egyptian army had limited talents and underestimated the power of the enemy at this delicate moment in Egypt’s history. Instead of initiating an attack — something Egypt is very competent at historically — Egypt waited for the Zionist attack in 1967 and was defeated.

The Egyptian people took up like a hurricane in a legendary uprising after Nasser’s abdication speech, rejecting defeat and failure while clinging onto hope and strong faith that Egypt never surrenders to occupation and oppression. They declared determination to continue the war and recover their pride and land, and that Nasser is the one who must lead the people in this war. Indeed, Egypt rebuilt its army very efficiently and launched one of its most noble wars in history, namely the War of Attrition, sacrificing several great men for the sake of national liberation, most prominently General Abdel-Moneim Riyad and Brigadier Ibrahim El-Rifai, the lion of the Special Forces and eternal pride of the Egyptian military. However, during this battle, Egypt had to adopt an economic system to enable it to fund the war and meet the needs of the citizenry at the same time. What did Egypt do with its economy and the people’s capabilities, minds and money? Egypt’s economy in the face of June 1967 losses Egypt was like a great tiger licking the wounds of defeat but fearlessly preparing for the next battle. It had experienced colossal military and economic losses that required extraordinary efforts to recover. It had to exert great effort to fund military spending whether at current rates or by purchasing weapons and rebuilding and developing military infrastructure that was destroyed or seriously damaged in the 1967 war. Egypt’s former Prime Minister Aziz Sedki estimated these losses at nearly LE11 billion, or $25 billion, at the time when the Egyptian pound was worth 2.3 US dollars between the wars of June 1967 and October 1973. Major economic losses resulting from the June 1967 war included: 1. Egypt lost 80 per cent of its military equipment and needed to find funds to purchase replacements, which was a huge burden on Egypt’s economy. 2. Egypt lost Sinai with its oil and mineral resources and tourism potential.

These were resources that could have been only a temporary loss if Israel had respected international treaties and not depleted this wealth. Instead, Israel looted in a deprived predatory manner Sinai’s wealth, especially the oil. This means Egypt lost forever part of the natural wealth in Sinai after 1967. 3. Egypt lost Suez Canal revenues which had reached some LE95.3 million in 1966, or $219.2 million, which amounts to four per cent of GDP for that year. Along with this drop in revenues, losses resulting from Israel’s bombardment of Suez Canal facilities amounted to nearly LE1 billion, or $2.3 billion. 4. Egypt lost a crucial portion of tourism revenues, about LE37 billion per year, or $84 million. 5. Egypt lost part of its human resources, the most important factor for economic development. In the war, it also lost production assets that were destroyed or temporarily or permanently disabled. Some 17 major industrial facilities were destroyed at a loss of LE169.3 million, $389.4 million, in revenues. Along with all these losses, there was widespread destruction of economic and residential buildings in Suze Canal cities that were heavily attacked and destroyed. These are the main economic losses for Egypt after the Israeli aggression in 1967, but Egypt’s burdened economy had to launch a major mission for funding and compensating these direct economic losses, and finance replacements for losses in equipment and military infrastructure. At the same time, fund overall military spending while trying to cope with domestic consumption to reduce civilian imports and maintain them at current levels, in order to focus Egypt’s foreign currency on military purchases. Economic policies between the two wars Egypt’s leadership realised it was managing a war economy in the true sense, and thus to a large extent adopted necessary policies.

These included new taxes and raising existing taxes to increase public revenues necessary to offset the quick rise in public spending needed to prepare for another round of military confrontation with the Zionist entity. Tax revenues, through indirect and tariff taxes, increased from LE442.5 million in 1969/1970 to LE574.7 million in 1973, which is 63.4 per cent of tax revenues in 1969/1970 and 69.1 per cent in 1973. Direct taxes amounted to LE255 million in 1969/1970, or 36.3 per cent of tax revenues that year. Direct taxes were no more than LE257.5 million in 1971, or 30.9 per cent of all tax revenues for that year. Since indirect taxation of commodities and services are footed by the majority of the citizens, one can say that the majority of citizens shouldered the burden of funding preparations for the October War. The people who were indignant for their homeland and pride were making infinite sacrifices. More money was printed to fund public spending, known as financing by deficit. The amount of payment methods jumped from LE397.2 million in June 1960 to LE761.5 million in June 1970, and again to LE866.6 million in June 1972, at a 10 per cent annual growth rate. The value of treasury bonds rose from LE164 million in the fiscal year 1959-1960 to nearly LE375 million in 1969-1970, and then to LE459 million in 1972. This monetary policy of financing by deficit was a major factor contributing to inflation. Inflation was suppressed between the 1967 and 1973 wars because of compulsory pricing policies for basic commodities, but it exploded after the October 1973 war as government pricing was gradually lifted forever. Egypt’s economic policies between the two wars also gave priority to investments that serve the battle above all other investments. It also suspended the import of luxury goods, especially at the beginning of the 1972, including luxury woolen clothing and fabric, televisions, radios, cigarettes, refrigerators, washing machines and luxury carpets. At the same time, tariffs on imported luxury goods for personal use rose by 50 per cent and the wholesale of basic development commodities and materials was limited to the public sector.

The goal here was to prevent any manipulation of these commodities, ensuring they reach the public at acceptable prices since their availability is a key factor in maintaining political stability. If the public sector played the main role in funding preparations for the battle, the household segment, which controlled the agriculture sector and many services, also effectively contributed to Egypt’s war preparations, whether by shouldering taxes or active contribution in production and development during that critical time of Egypt’s history. Nonetheless, it was the public sector and its heavy industry base that played the greatest role in preparing Egypt for the October War after the 1967 defeat. Economic performance from June to October Defence spending in Egypt came to no more than 5.5 per cent of GDP annually during 1960-1965. After the 1967 defeat, this multiplied and peaked during weapons purchases to 21.5 per cent of GDP in 1971. It hovered around that figure, and in 1973 was 20 per cent of GDP. At least one fifth of GDP financed defence spending since the start of the War of Attrition until the 1973 October War. Naturally, deducting this important portion of GDP to fund vital defence spending impacted the economy’s ability to fund new investments needed to achieve high development rates. Once investment rates dropped, so did the rate of real development of GDP. The unusually broader role of the state and its economic role at times of emergency between the 1967 and 1973 wars also raised government consumption to very high rates. Government consumption rose steadily from LE488 million in 1967 to LE1.077 billion in 1973, which means it grew by 120.7 per cent or an average of 20.1 per cent each year during that period. The average rate of government consumption during 1960-1966 was 18.7 per cent, although that period saw a great wave of government investments in building the public industry sector and establishing some major infrastructure projects, most importantly the High Dam. Despite rapid population growth, the average private consumption rate between the wars reached 7.6 per cent annually, which is much less than its average rate of growth of 10.4 per cent annually during 1960-1966.

This demonstrates reduced private spending between the 1967 and 1973 wars through financial mechanisms, by imposing new and revised taxes. These measures were not met with opposition or complaints because overall public understanding of the need to ration private spending to the lowest rates and dedicate all economic potential for another military confrontation with the enemy to recover land and dignity. The net result of all government and private consumption between 1967 and 1973 shows high rates because of high public spending, primarily on the defence sector. The employment rate between the two wars is likely to have stayed close to the rate of the 1960s. Unemployment had reached seven per cent in the first half of the 1960s and rose to eight per cent in second half. However, the mobilisation mood, long army draft terms that absorbed large numbers of youth, and the state’s commitment to hiring graduates reined in unemployment rates in the early 1970s before the war. Egypt’s economic performance overseas continued on the same track despite short-lived temporary changes. The loss of Suez Canal revenues, a large portion of tourism and some oil production certainly impacted Egypt’s balance overseas between 1967 and 1973. Meanwhile, the rise in imports of goods and services related to defence spending negatively impacted Egypt’s foreign balance. Egypt and global economic developments between the two wars On the path to mobilise its economic resources to prepare for war, Egypt looked at major economic developments around the world to decide how best to engage them to maximise benefits for Egypt and reduce drawbacks. The most important developments were the collapse of the gold standard, unstable global exchange rates, growing global inflation and thus increasing import costs. All this, while continuing to link economic relations overseas with political and ideological issues. Egypt avoided turbulence in foreign exchange markets by enforcing the exchange rate used in Egypt based on the controlled value of the Egyptian pound vis-à-vis the dollar. Trade and payment agreements that Egypt had signed and applied to large portions of its foreign trade also helped reduce Egypt’s need for foreign currency. As well as shoring up the exchange rate between the wars, trade and payment agreements also saved Egypt’s foreign currency revenues to fund imports from free currency countries or countries that have not signed trade and payment agreements with Egypt. Naturally, the majority — if not all — of these imports were necessary to support Egypt's war preparations.

There was a notable rise in global inflation between the two wars from 4.2 per cent in 1967 to 4.4 per cent in 1968, then to five per cent in 1969, followed by six per cent in 1970, before it rose to 9.4 per cent by 1973. This rise was the prelude for rapid inflation around the world after the 1973 war. This jump in global inflation simply meant a rise in the cost of Egypt’s imports, but since foreign trade was concentrated on socialist states whose exports mostly remained at fixed or very slow moving prices, this helped maintain the cost of imports from those same states. Between 1967 and 1973, pressure was put on Egypt by Western countries and global financial institutions controlled by these countries, such as restricting Egyptian exports to these countries and blocking Egypt from borrowing from capital markets in major capitalist countries, the IMF and the World Bank. Egypt’s handling of these conditions and pressures was resilient and inspiring, focusing on self-reliance to fund war preparations, cooperation in trade, loans and funding with friendly countries led by the Soviet Union and Arab brothers. Soviet loans were due starting one year after projects were completed, so payments were made from production revenues over 12 years with an interest rate of 2.5 per cent. Accordingly, it was not unusual for Egypt to have completed the iron and steel complex between the two wars although it cost more than $165 million. The Soviet soft loan helped construction along, and there were also Soviet loans funding the import of large amounts of weapons and military equipment. Self-reliance and assistance of true friends Egypt relied substantially on itself in funding defence spending and preparing for war fueled by popular anger over Israel’s victory in June 1967, and the people’s determination to go to war at any cost until victory against the Zionist enemy. Thus, non-military foreign debts at the end of the October War amounted to $2.7 billion in addition to military debts of $2 billion, mostly to the USSR. These are very small debts especially when compared to foreign assistance the Zionist government received at that time. During 1967-1973, non-military Israeli foreign debts rose by $4.726 billion to $6.792 billion which indicates the volume of loans Israel received during that time.

Added to that were reparation payments from Germany and other non-refundable grants. Official US aid to Israel amounted to $4.312 billion during 1967-1973, including $1.655 billion in non-refundable grants and the rest as soft loans. Despite the large amount of foreign aid to Israel between the wars, many times the figure sent to Egypt, through self-reliance and fewer loans Egypt was able to offset economic losses resulting from the 1967 war and fund defence spending necessary to prepare its army for zero hour with the Zionist enemy. When that moment came, Egypt’s economy — despite any remarks on its performance — paved the way for war and put leadership of the battle in the hands of highly patriotic and expert military commanders. However, the political leadership squandered many military and citizen acts of valour, whether by deciding to continue advancing despite the bad timing, which resulted in the thaghra (gap on the Egyptian front), and not destroying Zionist forces that infiltrated the gap by all possible means. Also, by putting 99 per cent of the cards of the game in the hands of the US, that unequivocally stood by the Zionists against Egypt in that battle. Despite circumstances, the economy overall played its role to prepare Egypt to go to war in reasonable shape, and serves as a model of self-reliance primarily, along with assistance from true friends and brothers at momentous times in history.