Egypt’s external debt—the sums owed to other governments, private multinational banks and multilateral agencies like the World Bank—increased on an average of 28 percent per year under Anwar al-Sadat, compared to 13 percent over the previous ten years. Sadat’s decade also witnessed important shifts in the origin and structure of this debt, in a manner that paralleled—and to a large extent financed—Egypt’s political reorientation.

The government of Gamal Abdel Nasser had accrued a total external debt of just over $2 billion by 1965. The most important creditors were the USSR, the US, West Germany, Italy and Kuwait. The Western bloc (including Kuwait) accounted for some 76 percent of the total. The combination of Egypt’s internal economic crisis beginning around 1965, the June war of 1967, and the deterioration of relations with the West, especially the United States, led to an almost exclusive reliance on the Socialist bloc countries in the years up to the October war of 1973. By 1973, Egypt’s non-military debt to the Soviet Union and its allies amounted to more than $2 billion.

After the 1973 war, Egypt’s improved relations with the conservative Arab oil states and with the US and other industrialized countries “profoundly affected Egypt’s ability to mobilize private and official capital” from those governments. New commitments of medium- and long-term loans, which averaged $350 million in the years before the war, leaped to $1.5 billion in 1974 and $3.1 billion in 1975. Conservative Arab states led by Saudi Arabia and Kuwait provided the greatest share. This Arab aid took the form of cash loans, even grants, which were immediately available to help pay for rising imports and pay off mounting short-term, high-interest loans to large private banks like Chase Manhattan and Citibank.

The political price for this “Arab Marshall Plan” was rigorous control of the Egyptian economy by international lending agencies such as the International Monetary Fund and the World Bank. Foreign investment regulations were liberalized further. In response to the advice and pressures of the IMF, Sadat announced a reduction in subsidies of foodstuffs and basic necessities in January 1977. This triggered a massive popular rebellion in Cairo, Alexandria and other cities that left scores dead, hundreds wounded, thousands under arrest and one regime badly shaken. The riots also sobered the expectations of the US and the international bankers. Sadat's survival required, at least in the near term, maintenance of the subsidies. They were quickly reinstated, and neither Sadat nor his successor has made any subsequent attempt to limit this largest single item of government expenditure.

Since 1977, the loans from Arab states have declined both absolutely and proportionately, while aid from the West, and especially the United States, grew significantly. This trend accelerated sharply after the 1978-1979 Camp David accords and peace treaty with Israel, when most of the Arab states broke relations with Cairo. US non-military assistance is currently $1.1 billion per year. This is half the total foreign aid to Egypt, which now equals about 8 percent of the country’s GNP.

Over this same period, receipts from workers’ remittances, oil exports, Suez Canal tolls and tourism have grown at a rate of almost 40 percent a year, allowing Egypt to increase imports in the face of stagnating non-oil exports. The country’s outstanding non-military debt continued to accumulate, reaching over $17 billion in 1980, but the rate of increase dropped from 37.4 percent in 1976-1977 to 8.4 percent in 1979-1980. By the end of the decade Egypt had managed to restructure its debt from largely short-term, high-interest bank loans to long-term, concessional loans from friendly governments, and to cover its rapidly expanding import needs with only moderate increases in total debt.

But Egypt’s international financial watchdogs were critical of Sadat’s political unwillingness to restructure the economy as well as the debt. The government, in their view, has been unwilling to utilize the favorable conjuncture of recent years to undertake the reforms—particularly in the realm of subsidies. In the words of the International Monetary Fund representative at a meeting of the major Western donor nations in Aswan in January 1981,

There remain serious structural maladjustments in the Egyptian economy that require bold and imaginative action on the part of the authorities. The present buoyancy of the economy and the balance of payments provide a conducive environment for such reform measures. If they are not taken now, circumstances for their adoption may well be less favorable later.

In his last year, Sadat dared not meddle with the subsidies. As a result, Egypt’s foreign exchange earnings were literally swallowed up in rising food imports. In the last months of his rule, the budget deficit led to a growth of the country’s money supply at an annual rate of 45 percent. The year also saw a deterioration of Egypt’s foreign exchange earnings. Oil exports were selling for $40.50 a barrel in January 1981; a year later, the same barrel fetched $32. The decline of oil prices and OPEC exports also affected workers’ remittances as the oil states cut back on expenditures and construction projects. Even canal tolls fluctuate to a considerable extent with the volume of oil in transit from the Gulf to Europe. Tourism has been set back by the political turmoil which culminated in the assassination of Sadat. Future growth of these foreign exchange sources is projected at no more than 11-13 percent per year. Import demand, however, continues to grow at 20 percent, more than twice the rate of domestic output. A recent unpublished Agency for International Development report to the US Congress argued that “while the outlook for the immediate future does not give cause for undue alarm, there are serious concerns that the debt picture for the decade of the 1980s will be decidedly different for Egypt than in the second half of the 1970s.” The report further warns that “the step-up in military purchases...foreshadow a larger debt burden to be carried in the future.... By 1985, interest payments on [Foreign Military Sales] credits alone are likely to equal or exceed total interest payments on Egypt’s entire civilian debt in 1980.”

“I will not make a promise which I cannot fulfill,” President Husni Mubarak asserted last November. In the view of the bankers and Western policymakers, he has kept this pledge by simply not making promises, with the result that “no real guides to economic policy have emerged.” Imports are still rising at an annual rate of 20 percent. Workers’ remittances and oil earnings have each decreased by 10 percent. Subsidies for basic commodities and energy in the latest budget amount to more than $7 billion, and debt servicing another $3.4 billion.