U.S.-Egypt Economic Ties

By John Haldane

President Hosni Mubarak's recent visit to Washington, and the attendant newspaper coverage, have served to reacquaint the American public with one of the U.S.'s main business partners in the Middle East: The Arab Republic of Egypt. With 48 million people in an area of 386,000 square miles (slightly smaller than California, Arizona and Nevada combined), Egypt is by far the most heavily populated country in the Middle East. Since 1976 the U.S. has been Egypt's leading foreign supplier. U.S. exports to Egypt last year totaled $2.7 billion, making that country our second largest market in the entire Middle East and North Africa region.

The American business community in Egypt has urged President Reagan and members of Congress to "support Egypt's determined efforts to achieve peace and stability in the Middle East, as well as Egypt's request for increased economic and military assistance" from the U.S. In Washington, President Mubarak sought to persuade the Administration and Congress to grant Egypt $860 million in supplemental aid for this year, and $2.8 billion for FY 1986—which is approximately $800 million more than the $2 billion it currently receives in security assistance.

The American Chamber of Commerce in Egypt, in a recent full-page advertisement in The Washington Post, recalled that "the U.S. is Egypt's most important trading partner, providing 33 percent of Egypt's imports." The Chamber, established in January, 1983, now has over 300 American and Egyptian company members and is one of the fastest growing overseas affiliates of the U.S. Chamber of Commerce.

Egypt's economy currently is growing less rapidly than in the late 1970s and early 1980s, but still fast enough to maintain an air of buoyancy. Oil export prices, which declined from early 1981 until early 1984, are now holding steady, thereby checking further declines in oil export revenues. Egypt earned about $2.8 billion from oil sales last year, a slight increase over 1983. Remittances from Egyptians working abroad totaled about $3.5 billion in 1984, and tolls from the Suez Canal, the country's third largest source of foreign exchange, amounted to almost $1 billion. Tourism, long a financial mainstay, also has been registering a slow but steady increase.

While Egypt's short-term economic prognosis is generally favorable, some experts are concerned that serious economic difficulties may arise in the long term. The population is rising at 2.7 percent per year, well in excess of agricultural output that is growing only by about two percent. Petroleum consumption is growing at 12 to 15 percent annually. Imports of consumer goods have been increasing, fueling a large trade deficit.

The Egyptian government is well-aware of the extent of its balance of payments and fiscal problems, and its great need for increased foreign exchange income. It has launched a major public education program outlining the problems facing the economy and has begun to introduce important economic reform measures at both the sectoral and the national levels.

As part of its strong effort to generate badly needed hard currency, Egypt has long encouraged U.S. companies to search for oil. As a result, foreign investment in Egypt now is concentrated in petroleum exploration, production and auxiliary services. Esso, Mobil, and other U.S. oil firms have played a leading role in developing Egypt's petroleum resources. American investment in this sector—going back to 1973 when the first production-sharing concession agreement was signed—now totals at least $1.5 billion, with all signs pointing to continued U.S. petroleum investment through the 1980s. Promising new finds in both the Gulf of Suez and the Western Desert signal continued growth in oil production and could allow Egypt to achieve its target of one million barrels per day by the mid-1980s.

The U.S. government has been active in providing financial assistance to Egypt through three channels: The Agency for International Development (AID), the Export-Import Bank, and the Overseas Private Insurance Corporation (OPIC).

The Administration has asked Congress for $815 million under the Economic Support Fund Program—the same level Congress appropriated in FY 1985—and $222 million under the food-for-peace program. A senior AID official emphasized that the FY 1986 proposed assistance is consistent with Egypt's current Five-Year Plan and builds upon the significant improvements in the implementation of the ongoing AID program.

Perhaps the most glamorous of the projects currently being funded by AID is the rehabilitation and modernization of the Aswan High Dam's hydroelectric power station, which generates about 40 percent of Egypt's electrical output. Twelve giant turbine runners, custom-designed and manufactured by Allis Chalmers, will be floated up the Nile River to Aswan to replace the original Soviet-built runners that have been causing serious problems almost from the day they were installed. The power plant's instrumentation, control and transmission apparatus also will be replaced, thus effectively Americanizing the power generation equipment in what, a generation ago, was a Soviet showcase project.

The Export-Import Bank, which helps promote U.S. exports by providing financing to foreign governments for the purchase of American goods, has been active in Egypt for a number of years. It recently made a preliminary commitment to Egypt for up to $200 million for its first nuclear power plant, a 1,000-megawatt station at El-Dabaa, west of Alexandria. The total cost of the project could reach $3 billion. If Egypt picks an American firm over West German, Italian and French competitors, the Export-Import Bank loan probably would be used to buy systems necessary to construct and operate a nuclear reactor from Westinghouse. Egypt already has concluded an agreement with the U.S. imposing strict controls over future uses of any such nuclear reactor.

OPIC, a self-sustaining U.S. government agency, assists U.S. investors in identifying and undertaking long-term private investments in developing countries. As of December, 1984, OPIC maintained active insurance contracts with more than 35 U.S. investors in Egypt, providing maximum total coverage in the fields of inconvertibility, expropriation, and war loss. In addition, 57 American firms have registered their intent either to undertake new investment or to expand existing ventures totaling about $500 million.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.