United Arab Republic: A Survey of Developments During the Five-Year Plan, 1960/61–1964/65

BETWEEN July 1, 1960 and June 30, 1965 the United Arab Republic implemented its First Five-Year Plan. In many respects the country made good economic progress in this period, despite the difficulties it encountered, such as a significant increase in its already high rate of population growth, the hostilities in Yemen, the crop failure in 1961/62, and the inevitable transitional problems associated with the large-scale nationalization programs which were carried out in these years. However, the U.A.R.’s intensive efforts to attain ambitious objectives simultaneously in the areas of development, welfare, and defense overtaxed its available resources with resulting strains on its internal and external equilibrium.

Abstract

BETWEEN July 1, 1960 and June 30, 1965 the United Arab Republic implemented its First Five-Year Plan. In many respects the country made good economic progress in this period, despite the difficulties it encountered, such as a significant increase in its already high rate of population growth, the hostilities in Yemen, the crop failure in 1961/62, and the inevitable transitional problems associated with the large-scale nationalization programs which were carried out in these years. However, the U.A.R.’s intensive efforts to attain ambitious objectives simultaneously in the areas of development, welfare, and defense overtaxed its available resources with resulting strains on its internal and external equilibrium.

BETWEEN July 1, 1960 and June 30, 1965 the United Arab Republic implemented its First Five-Year Plan. In many respects the country made good economic progress in this period, despite the difficulties it encountered, such as a significant increase in its already high rate of population growth, the hostilities in Yemen, the crop failure in 1961/62, and the inevitable transitional problems associated with the large-scale nationalization programs which were carried out in these years. However, the U.A.R.’s intensive efforts to attain ambitious objectives simultaneously in the areas of development, welfare, and defense overtaxed its available resources with resulting strains on its internal and external equilibrium.

The following sections examine these developments and attempt to relate them to the targets of U.A.R. economic policy, as reflected in the Five-Year Plan. Section I discusses output and employment; Section II, trends in demand, and Section III, the absorption of excess demand through increases in prices and balance of payments deficits.

I. Output and Employment

The U.A.R.’s development effort during the period of the First Five-Year Plan may be credited with a number of significant achievements. In particular, output and employment were increased substantially. Important projects, notably the first phase of the High Dam, were completed, opening up large possibilities for further expansion of output in the future. Furthermore, some progress was made toward restructuring production in accordance with desired objectives.

Output, measured by the gross domestic product (GDP) in constant prices (Table 1), increased 37 per cent over the years of the First Plan, i.e., at a compound rate of 6.5 per cent per annum (Table 2). This growth was a little short of the Plan objective of about 40 per cent (Table 3). However, it represented a considerable improvement over the preceding five years, when the rate of growth was 4.8 per cent. In per capita terms also, the growth rate accelerated between 1955/56–1959/60 and 1960/61–1964/65 from 2.5 per cent to 3.6 per cent a year, a noteworthy accomplishment since the rate of increase of the population rose from 2.3 per cent to 2.8 per cent.1

Table 1.

United Arab Republic: Output and Expenditure, 1954/55-1964/651

(In millions of Egyptian pounds)

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Sources: International Monetary Fund, International Financial Statistics; Ministry of Planning of the U.A.R.; and Bent Hansen and Girgis A. Marzouk, Development and Economic Policy in the U.A.R. (Egypt) (Amsterdam, 1965).

Because of rounding, figures do not add to all totals in this and following tables.

With output (defined as in fn. 4) at constant 1954/55 prices.

With output (defined as in fn. 4) at constant 1959/60 prices.

Represents GDP at constant market prices. Unfortunately, no such series is given in the U.A.R.’s national accounts. The above series has been computed by taking GDP at current market prices for 1954/55 and 1959/60 and by applying the growth rates implied by the available data for GDP at factor cost at constant prices, to obtain the figures for the intervening and subsequent years.

I.e., total available resources (GDP at current market prices plus net borrowing from abroad).

The residual obtained by subtracting net borrowing from abroad from excess demand.

Table 2.

United Arab Republic: Growth of Output, Expenditure, and Population, 1955/56-1959/60 and 1960/61-1964/65

(In per cent)

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Source: Table 1.

Based on figures for private consumption at current prices deflated by the cost of living index and divided by population.

Based on figures for public consumption at current prices deflated by the cost of living index and divided by population.

Table 3.

United Arab Republic: Composition and Growth of Gross Domestic Product, 1954/55-1964/651

(In per cent)

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Sources: Ministry of Planning of the U.A.R. and Bent Hansen and Girgis A. Marzouk, Development and Economic Policy in the U.A.R. (Egypt) (Amsterdam, 1965).

Based on figures given in 1959/60 constant prices.

Including mining and electricity.

Based on figures given in current prices.

Employment rose from about 6 million in 1959/60 to about 7.3 million in 1964/65, i.e., to a level significantly above the Plan target of 7 million. While some of this increase should probably be discounted as representing an overstaffing of government services and enterprises dictated by social rather than economic considerations, nevertheless, it can be surmised that an appreciable reduction was achieved in the country’s unemployment, open or disguised.

Completion of the first phase of the High Dam has enabled the U.A.R. to control, at long last, the waters of the Nile. Already this control has averted what would have otherwise been a serious flood disaster in 1964 and serious injury to agricultural output from the low upstream rainfall in 1965. However, the country has not yet reaped the major part of anticipated benefits of the High Dam. Eventually, it is hoped, this project will make it possible to (1) expand the cultivated area by 1.3 million feddans;2 (2) convert 700,000 feddans from basin to perennial irrigation; (3) increase land productivity through improved drainage when the ground water table is lowered; (4) improve navigation along the Nile; (5) substantially increase output and exports of rice; and (6) increase capacity for power production by the equivalent of some 10 billion kilowatt-hours per annum. The direct increase in national income as a result of the High Dam is projected at LE 234 million per annum, or more than 15 per cent of GDP in 1964/65.

On the other hand, efforts to alter the structure of output have had somewhat more modest results. The principal objective of the Plan in this context was to double industrial output (including mining and electricity), so as to raise the share contributed by this sector to over-all output from about 21 per cent in 1959/60 to 30 per cent in 1964/65 (see Table 3). Actually, industrial production increased by about 50 per cent and in 1964/65 constituted 23 per cent of total output. While this outcome was considerably below the Plan target, it was nevertheless an achievement, given the difficulties which must have resulted from the almost complete nationalization of industry in 1961. These difficulties have not yet been fully overcome; much remains to be done in decentralizing the organization of state enterprises, creating incentives, and adopting appropriate accounting procedures and pricing policies.

In agriculture, too, the increase in output (18 per cent) was much less than projected under the Plan (26 per cent), and the relative contribution of the agricultural sector fell as a result, even more than had been envisaged under the Plan. Nevertheless, there was substantial progress in agriculture. Production of foodstuffs outpaced the increase in population, an achievement that was one of the principal objectives of agricultural policy in the U.A.R. Moreover, both the hoped-for switch from low-value to high-value crops (e.g., rice, vegetables, and fruits) and the intended increase in yields in other crops, materialized to some extent. In addition, the cultivated area was extended by more than 500,000 feddans of reclaimed land, which has not yet reached full production potential.

II. Demand

Demand, measured by expenditure at current prices, rose by some 55 per cent over the period reviewed. Of the three components of demand, investment expenditures and public consumption expenditures showed the largest percentage increases. Private consumption increased more modestly, as the Government was moderately successful in restraining the growth of disposable incomes. These increases in demand were made possible by an expansionary credit policy, the impact of which, however, was blunted to some extent by a decline in the income velocity of money.

Investment expenditure at current prices went up by no less than 113 per cent between 1959/60 and 1964/65. For the years 1960/61–1964/65 as a whole, the First Plan envisaged fixed capital formation totaling LE 1,577 million and an additional investment to increase stocks of LE 120 million, i.e., a total investment of LE 1,697 million at constant prices. In fact, fixed capital formation amounted to LE 1,513 million in current prices, or somewhat less than LE 1,470 million in real terms;3 hence, in this respect a high rate of implementation of the Plan objective was achieved.4 There do not appear to be any statistics on changes in inventories during the period surveyed, but all available information points to the conclusion that stocks did not increase much and may even have declined.

Public consumption expenditure at current prices rose from LE 228 million in 1959/60 to LE 431 million in 1964/65, or by 89 per cent. According to the Plan, the ratio of such expenditures to GDP was to fall from 16.6 per cent in 1959/60 to 14.6 per cent in 1964/65; in fact, in the latter year the ratio in question turned out to be 21 per cent. Thus, actual developments in this regard represented one of the most distinct deviations from the objectives of the Plan. No breakdown of public consumption expenditure is available in the U.A.R.’s national accounts; furthermore, the U.A.R. has not published actual budget results for the period here discussed. It is known, nevertheless, that all major categories of current expenditure increased substantially in the years of the First Plan, but that the most extensive increases occurred in the area of defense. In a recent speech5 the President of the U.A.R. stated that military expenditures reached a level of LE 200 million in 1964/65, or roughly 10 per cent of GDP and more than 46 per cent of the above-mentioned figure for public consumption in the same year.

Private consumption expenditures rose by roughly 37 per cent between 1959/60 and 1964/65; as a percentage of GDP, however, they declined from 70.6 per cent to 64.9 per cent, the latter figure being the precise target provided under the Plan. In real terms and on a per capita basis, private consumption expenditure rose by a compound rate of 1.7 per cent a year. The relatively modest extent of this increase should be attributed mainly to government efforts to restrain the growth of private disposable income, chiefly by means of increases in taxation and in contributions for social security plans.6 No statistics on private disposable income are available, but rough calculations indicate an increase in such income of about 40 per cent from 1959/60 to 1964/65, considerably less than the rise in GDP over the same period.7

The over-all large increase in demand during the First Plan would not have occurred without the expansionary monetary and credit policy pursued by the authorities. Domestic credit outstanding doubled between 1959/60 and 1964/65 (Table 4). Claims of the banking system on the government sector rose by LE 300 million, or 132 per cent, reflecting the country’s heavy budget deficits; credit to the nongovernment sector increased by about 69 per cent. In part, the additional credit created by the banking system was absorbed by changes in net foreign assets, which fell from a large positive amount to a negative amount.8 Still, liquidity (money plus quasi-money) rose by 73 per cent and the money supply by 64 per cent, while the concurrent increases in GDP in real terms amounted to 37 per cent and in current values to 49 per cent.

Table 4.

United Arab Republic: Credit, Liquidity, and National Income, 1954, 1959, 1959/60, and 1964/65

(Value in millions of Egyptian pounds)

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Sources: International Monetary Fund, International Financial Statistics; Ministry of Planning of the U.A.R.; Bent Hansen, The National Outlay of the V.A.R. (Egypt), 1937-39 and 1945-1962/63, Institute of National Planning (Cairo, 1963).

End of period data.

Claims on private sector plus claims on specialized banks minus “other items net.”

Gross national income for 1954/55 at current market prices.

GDP for 1959/60.

To some extent the impact of credit creation was softened by developments in monetary velocity. It will be seen from Table 4 that in the five years before 1959/60, income velocity rose noticeably. This probably reflected a tendency to draw down cash balances resulting from anxieties inspired by international political events or expectations of impending nationalization of property. A special factor at work may have been the decline of the foreign business community, the principal user of deposit money. In contrast, income velocity declined between 1959/60 and 1964/65 for reasons that are not entirely clear. However, two explanations appear plausible. The special factors just mentioned may have lost strength, and, therefore, there may have been a tendency to return to the more normal state of affairs prevailing before they had become operative. The other explanation is that the decline in velocity may have been associated with the Government’s effort to suppress inflation.

III. Excess Demand

It was indicated above that expenditure exceeded output in the period reviewed and that this led to an increase in prices and pressures on the balance of payments position. Specifically, as shown by the data in Table 1, demand totaled LE 9,014 million in 1960/61–1964/65 and output LE 8,286 million, so that, on the basis of these figures, excess demand amounted to LE 728 million. Of this excess demand, LE 310 million, or 43 per cent, was absorbed by price increases, and LE 418 million, or 57 per cent, by current account deficits.9 This section discusses price developments in some detail. There is also a discussion of the current account deficit and of its implications for the capital account of the balance of payments.

Prices

Table 5 summarizes price changes during 1959/60 to 1964/65; in this period the cost of living rose by 10 per cent and the wholesale price index by 8 per cent. The implicit price deflator for gross domestic income (GDI) moved up about 7 per cent. This deflator is derived by dividing GDI at current prices by the same series at constant prices and should be considered, therefore, a more comprehensive measure of price movements than either the cost of living index or the wholesale price index.

Table 5.

United Arab Republic: Price Indices, 1960/61-1964/65 and September 1966

(1959/60 = 100)

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Sources: International Monetary Fund, International Financial Statistics, and National Bank of Egypt, Economic Bulletin, Vol. XIX (1966), pp. 388 ff.

Period averages.

The index number listed for each fiscal year is the end-of-December figure for the calendar year included therein; e.g., the index number for 1960/61 is the figure for December 1960.

GDI at current prices divided by GDI at constant 1959/60 prices.

The fact that price increases were limited was due to determined government efforts to suppress inflation through rationing, price controls, and subsidies. Export taxes were not used primarily for this purpose; nevertheless, they had the same effect.

The disadvantages of these methods of holding down the price level were by no means negligible. A black market developed for controlled or rationed commodities. The budgetary difficulties of the Central Government were aggravated to the extent of the Ministry of Supply’s expenditures on cost of living subsidies. Low prices tended to boost private consumption and to shift the burden of absorbing excess demand onto the balance of payments. Furthermore, the price structure became distorted, and, as a result, economic incentives for a rational allocation of resources and effort were probably impaired.

The policy of suppressing inflation should also be evaluated in relation to wage and productivity developments (Tables 6 and 7). The former table shows average gross wages,10 indices of such wages, and indices of real average gross wages.11 Indices of production, employment, and output per worker are given in Table 7. The tables reveal that, in the period surveyed and for all economic sectors combined, average gross wages in nominal terms rose by 31 per cent and in real terms by 19 per cent, while productivity increased by only 12 per cent. In the agricultural sector the disparity was even larger; here, nominal wages went up by 47 per cent, real wages by 33 per cent, and productivity by 1 per cent.

Table 6.

United Arab Republic: Gross Average Wages, 1959/60-1964/65

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Sources: International Monetary Fund, International Financial Statistics, and Ministry of Planning of the U.A.R.

In Egyptian pounds. Gross wages and salaries (including fringe benefits, but not including receipts amounting to LE 14-15 million a year under the existing profit-sharing scheme which applies to employees of nationalized industries) divided by employment figures.

Indices based on columns 1 and 2.

Columns 3 and 4 divided by cost of living index shown in Table 5.

Table 7.

United Arab Republic: Indices of Output, Employment, and Output per Worker, 1960/61-1964/65

(1959/60 = 100)

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Source: Ministry of Planning of the U.A.R.

Value added at constant prices.

Output divided by employment.

As indicated above, these wage increases did not result in equivalent increases in disposable incomes and private consumption, because they were offset by higher taxes and social security contributions. However, their impact on costs of production was not similarly offset. Therefore, entrepreneurial units probably experienced a cost-price squeeze on their profit margins. So far as profits still motivate productive effort in the U.A.R.—and they still do to a considerable degree, especially in the agricultural sector—economic incentives were thus undermined. Direct quantitative evidence of this profit squeeze is not available since the Ministry of Planning has not published statistics on profits for any year after 1960. The best one can do is to invoke the series on “nonwage income,” which the Ministry computes by subtracting wages from value added12 and issues annually. This series and the series on wage income and value added are given in Table 8, which shows that wages increased and that nonwage income declined as a fraction of value added. This shift in income distribution was, once again, even more noticeable in the agricultural sector than in the economy as a whole. Caution, however, must be exercised in interpreting the data in this table. The series on non-wage income is not a very satisfactory substitute for a series on profits because it includes, in addition to profits, depreciation allowances,13 interest, and rent. Additional available evidence of a decline in profit margins is given in the discussion of exports under the subsection “Balance of payments” below.

Table 8.

United Arab Republic: Wage Income, Nonwage Income, and Value Added, 1959/60-1964/65

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Source: Ministry of Planning of the U.A.R.

Gross wages and salaries (see fn. 1, Table 6).

Value added minus wage income including (in addition to rent, interest, and profits) depreciation allowances.

At current prices.

It is impossible to estimate how much prices would have increased, if inflationary pressures had not been suppressed. In this connection, however, it should be noted that, beginning in the second half of 1964, the U.A.R. authorities permitted some price increases deemed inevitable. As shown in Table 5, between 1963/64 and September 1966, these increases amounted to about 30 per cent in the cost of living and 23 per cent in wholesale prices.14 The table also shows changes in two subindices of the wholesale price index, the subindex for dairy products and the subindex for meat and fish, both dominated by items whose prices were either decontrolled or controlled leniently. It can be computed from the data tabulated that prices of dairy products rose by more than 59 per cent and that prices of meat and fish rose by 91 per cent between 1963/64 and September 1966, i.e., by two and one half to four times as much as wholesale prices in general.

Balance of payments

Current account

The First Plan allowed for a current account deficit totaling LE 580 million during its first four years and aimed at achieving, in the fifth year, a surplus of LE 40 million, reducing the over-all deficit to LE 540 million. Although the current account deficit amounted to LE 418 million in 1960/61–1964/65, or much less than the Plan target, the hoped-for transformation of the current account failed to materialize; in 1964/65 a considerable deficit was registered, amounting to LE 76 million.”15

Imports increased during the period reviewed not only in absolute terms but also in relation to GDP (Tables 9 and 10). The figures given in the tables (which are based on customs returns) indicate that this increase was partly attributable to the fact that the import content of consumption—along with consumption itself—increased appreciably. Moreover, despite an apparent decline in the import content of investment, a substantial rise occurred in imports of investment goods and unspecified goods (which, by and large, must be regarded as investment goods), reflecting the country’s intensified development effort.

Table 9.

United Arab Republic: Foreign Trade, 1955/56-1964/65

(Value in millions of U.S. dollars)

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Source: Customs data.
Table 10.

United Arab Republic: Foreign Trade and Production Ratios, 1955/56-1964/651

(In per cent)

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Sources: Ministry of Planning of the U.A.R., customs data, and Bent Hansen and Girgis A. Marzouk, Development and Economic Policy in the U.A.R. (Egypt) (Amsterdam, 1965).

Based on trade figures in Egyptian pounds.

These trends in imports did not bear out the expectations of the authors of the First Plan, who believed that the investment projects they had provided for would lead to a considerable degree of import substitution. In fact, import substitution was expected to be so extensive that imports of consumer and intermediary products, and even total imports, would decline in absolute magnitudes.16 Some replacement of imports by home production was achieved, notably by expanding output of fertilizers and petroleum. Nevertheless, the results attained fell far short of the Plan targets. In part this was due to adverse circumstances, not foreseen by the planners, as, for instance, the excessive over-all expansion of demand and the acceleration of the country’s already rapid rate of population growth which necessitated heavy imports of basic foodstuffs over and above those forecast in the Plan.

On the other hand, a number of the assumptions of the Plan proved unrealistic. According to the Economic Bulletin of the National Bank of Egypt, the Plan was based on “optimistic projections of the length of the gestation period of various industrial investments” and “faulty planning of inter-industry complementarity,” leading “to a larger and longer dependence by the new industrial projects on imported raw materials and semi-industrialized goods.”17

Of special interest is the experience with some industries established in the hope that they would save on imports of finished consumer products. What actually happened was that imports of such goods were replaced by increased imports of raw materials or spare parts. Indeed, it may be argued that the end result was a net increase in imports. One may reason that, if the new industries had not been created, in accordance with existing policy, consumer goods imports would have been severely restricted by the authorities. It proved difficult, however, to curb imports of intermediate goods needed by these industries, because such action would have meant idling part of the country’s productive capacity and laying off some of its workers.18 This explains, in part, the ineffectiveness of the U.A.R.’s rigorous system of import controls, the raison d’être of which is to restrain imports in general and imports of consumer goods in particular.

Imports increased from all major areas (see Table 9). However, there was a marked decline in the shares of total imports coming from the Far East (including Mainland China), Western Europe, and, especially, the East European countries. These declines were matched by an increase in the share of imports originating in the “Americas,” owing chiefly to stepped-up shipments of U.S. agricultural commodities under Public Law 480 and other aid programs.

The U.A.R. is one of only two or three countries whose exports (in dollar terms) have not risen at all over the last 17 years.19 In the years of the Plan, U.A.R. average annual exports increased some 8 per cent above their depressed levels in the preceding five years. From 1959/60 to 1964/65, exports rose about 12 per cent; but they increased less in absolute terms and declined more as a percentage of GDP than projected in the Plan.20 These data suggest that, although the country’s export performance improved during the Plan period, it was nevertheless disappointing.

There were three main reasons for this less than satisfactory export performance. One reason was the heavy damage to agricultural production inflicted by pests in 1961/62.21 A second was that population growth and rising incomes cut ever deeper into the country’s exportable surpluses. Third, there is considerable evidence of a weakening of producers’ incentives in the export sector.

As already mentioned, the policies of permitting extensive increases in wages and of holding the line on prices led, in all probability, to a squeeze on profit margins, particularly in agriculture, the main sector producing export goods. There are, unfortunately, no comprehensive data on prices, wages, and profits directly related to export production. The only relevant statistics available are given in Table 11. They show that between 1961/62 and 1964/65, increases in prices paid to farmers for the principal types of cotton grown in the U.A.R. were in the modest range of 5–11 per cent, i.e., much less than the general rise in wages over the same three years. However, there is a good deal of nonstatistical information confirming the argument made here. For one thing, it is reported that farmers are finding cotton cultivation much less profitable than before, and that this is a factor in their failure to take up their full area allotments.22 Until recently, there were also reports that rice farmers were complaining about rising costs and that, for this reason, many of them were trying to migrate to the cities; the authorities were therefore finding it difficult to expand rice production at a time when the High Dam project opened up large possibilities for expansion. To remedy this situation, the Government raised prices paid to farmers for rice by an average of 25 per cent in August 1966; it is too early to judge whether this increase will prove adequate. It is also understood that the textile industry, which contributes the largest share of the country’s industrial exports, is hampered by the deteriorating cost situation; textile exports, therefore, are being subsidized on a heavy and increasing scale.

Table 11.

United Arab Republic: Prices Paid to Cotton Growers, 1961/62-1964/651

(In tallaris per kantar2)

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Source: The Egyptian Public Organization for Cotton.

Prices paid by the Egyptian Public Organization for Cotton.

One tallari is equal to LE 0.20; one kantar is equal to 50 kilograms (110 pounds).

Despite the over-all lag in export growth, some progress was made in diversifying exports. The share of cotton exports in total exports declined between 1959/60 and 1964/65, or between the periods 1955/56–1959/60 and 1960/61–1964/65, while the shares of other export products, i.e., onions, rice, fuel, cotton yarn, and cotton piece goods increased (see Table 9).

In contrast, there were discouraging shifts in the direction of exports. Specifically, the proportion of total exports going to Eastern Europe under bilateral agreements increased, and there were corresponding decreases in the proportions sold to Western Europe and the Americas against convertible currencies. It is believed that these diverging movements reflected the policy of reliance on bilateralism and a deterioration of the competitive position of U.A.R. exports in Western markets.

The end result of these changes in imports and exports was that the trade deficit rose substantially from an average of US$125 million in 1955/56–1959/60 to an average of $299 million in 1960/61–1964/65, or from $103 million in 1959/60 to $312 million in 1964/65. Moreover, the trade deficit vis-à-vis the West European countries and the Americas widened considerably. At the same time, there was a big increase in the surplus gvis-à-vis the East European countries; by 1964/65 that surplus had exceeded the $110 million mark.

Invisible receipts rose more than expenditures, and, therefore, the surplus realized in this sector of the balance of payments increased (Table 12).23 Of the increase in receipts the largest share was contributed by Suez Canal dues, which have been one of the most reliable and expanding foreign exchange earners for the U.A.R. Tourist earnings are not listed separately in balance of payments statistics. However, the data published by the State Tourist Administration and shown in Table 13 indicate that foreign tourism in the U.A.R. went through a phase of stagnation, which ended in 1963. Beginning in 1964, there was a steep upturn in receipts, tourist arrivals, and nights spent by foreign tourists; further substantial gains were recorded in 1965 according to preliminary reports. It appears likely that tourism has now entered an era of rapid expansion and may, therefore, become a dynamic growth element in the balance of payments sector.

Table 12.

United Arab Republic: Balance of Payments, 1955/56-1964/65

(In millions of US. dollars)

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Source: Central Bank of Egypt.
Table 13.

United Arab Republic: Tourist Statistics, 1959-65

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Source: State Tourist Administration of the U.A.R.

Receipts in pounds, converted into U.S. dollars at the rate of LE 1 = $2.87156 for 1959-61 and at the rate of LE 1 = $2.30 for 1963 and subsequent years. For 1962 the conversion was made partly at the former and partly at the latter rate; the weights used were in proportion to the number of days in 1962, before and after the devaluation of the Egyptian pound.

On the expenditure side, “interest and dividends” (including a number of other items) displayed the highest rate of growth, as was to have been expected, given the considerable increase in the country’s external indebtedness. A further noteworthy development was the steady increase in government expenditures abroad from an average of $55 million in 1955/56–1959/60 to a high of $81 million in 1964/65.

The capital account and net foreign assets

The complexion of the capital account changed drastically during the period of the First Plan. The inflow of capital from abroad increased substantially from an average of $31 million annually in 1955/56–1959/60 to $262 million in 1960/61–1964/65, reaching a peak of $371 million in 1964/65. Much of this inflow represented U.S. assistance under P.L. 480 or other aid programs.24 Nevertheless, the volume of loans repayable in foreign currencies rose from the small figure of $14 million a year in 1955/56–1959/60 to $141 million in 1960/61–1964/65 and to the record level of $257 million in 1964/65. These statistics do not include the military credits received by the U.A.R. over the period reviewed.

The heavy increase in borrowing was paralleled by a significant rise in repayments. The outflow of capital, which was only $29 million, or 4.1 per cent of current receipts in 1955/56–1959/60, climbed steeply to $94 million, or 12 per cent of current receipts in 1960/61–1964/65. In 1964/65 such repayments were just under the $200 million mark and were equal to almost 22 per cent of current receipts. Here again, it should be mentioned that the figures just cited do not include repayments on military credits. Needless to say, at $200 million and 22 per cent of current receipts, repayment obligations must be considered as a heavy burden on the country’s balance of payments.

The surplus on the capital account, which had been negligible in the earlier period, rose to about $170 million in 1960/61–1964/65 and served to finance a large part of the current account deficit. The remaining part of that deficit was financed by a decline in net foreign assets, including the country’s IMF position. The decline amounted to about $282 million according to monetary statistics25 and somewhat less, i.e., $275 million, according to the balance of payments data in Table 12. Much of the decrease, it should be noted, represented an increase in short-term borrowing from foreign commercial banks. No doubt this method of financing was helpful for a while. Eventually, however, the problem of rolling over and further increasing a substantial volume of foreign banking facilities in the face of continuing balance of payments deficits and growing restlessness on the part of creditors proved unmanageable. As a result, the U.A.R. fell in arrears on part of these and some other obligations. At the end of the period reviewed, net foreign assets had fallen to a negative figure, i.e., to - $92 million.

République arabe unie: évolution de la situation pendant le premier Plan quinquennal, 1960/61–1964/65

Résumé

La R.A.U. ayant atteint les objectifs de croissance qu’elle s’était fixés dans le cadre de son premier Plan quinquennal (1960/61-1964/65), elle a pu, en dépit d’un nouvel accroissement de son taux de croissance démographique déjà élevé, relever sensiblement le revenu par habitant. En revanche, les efforts intensifs déployés simultanément dans les domaines du développement, des affaires sociales et de la défense pour réaliser des objectifs ambitieux ont épuisé les ressources du pays, ce qui a compromis son équilibre tant interne qu’externe.

Pendant la période étudiée, les augmentations des prix ont été relativement faibles grâce à l’application de mesures telles que le rationnement, les contrôles des prix et l’octroi de subventions. Simultanément, le gouvernement a autorisé des relèvements généraux des salaires considérablement supérieurs aux gains de productivité. Ces politiques ont eu pour effet de comprimer les marges bénéficiaires au point de décourager l’effort productif des divers secteurs, y compris la production destinée à l’exportation.

La demande excédentaire enregistrée dans l’économie se traduisit principalement par un accroisement des déficits de la balance des paiements. Les objectifs fixés par le Plan pour la production de biens pouvant se substituer aux importations n’ont pas été réalisés, et les importations se sont nettement accrues. Les exportations ont donné des résultats décevants, étant donné que la production destinée à l’exportation a progressé à un taux très lent, tandis que l’expansion de la consommation intérieure a réduit les excédents exportables. Ainsi, malgre l’accroissement de l’excédent au titre des invisibles, le déficit du compte courant s’est fortement accentué.

Ce déficit a été financé en faisant largement appel à des prêts à long terme et à des crédits-fournisseurs à moyen terme, en réduisant les réserves brutes à des niveaux trop faibles, en accroissant les soldes débiteurs des comptes de clearing et en augmentant le volume des engagements à court terme en monnaies convertibles. En raison de son importance, de la répartition défavorable de ses échéances et d’autres caractéristiques, la dette extérieure de la R.A.U. constitue pour la balance des paiements un très lourd fardeau, nécessitant une révision du calendrier des obligations.

República Arabe Unida: Examen de lo acontecido durante el Primer Plan Quinquenal, 1960/61–1964/65

Resumen

En su Primer Plan Quinquenal (1960/61–1964/65), la República Arabe Unida alcanzó las metas de crecimiento que había programado y por lo tanto pudo aumentar considerablemente el ingreso por habitante, no obstante un incremento de su tasa siempre elevada de crecimiento demográfico. Por otra parte, los intensos esfuerzos por lograr a un mismo tiempo objetivos de gran magnitud en materia de desarrollo, bienestar y defensa, gravaron excesivamente los recursos del país y redundaron en tensiones sobre el equilibrio interno y externo.

Los aumentos en los precios fueron relativamente pequeños en el período que se examina, debido a medidas tales como racionamientos, control de precios y subsidios. Al propio tiempo el Gobierno permitió amplios aumentos de salarios, los que excedieron considerablemente del incremento de la productividad. El efecto de todas estas políticas parece haber sido una reducción de los márgenes de utilidad suficiente como para desalentar el esfuerzo productivo en varios sectores, incluso en el de la producción para exportación.

El exceso de demanda en la economía derivó se reflejó principalmente en el aumento del déficit de la balanza de pagos. Las metas propuestas en el Plan tocantes a la sustitución de las importaciones no fueron logradas y las importaciones aumentaron en forma notable. Las exportaciones no alcanzaron un nivel satisfactorio, dado que la producción para exportación aumentó lentamente, en tanto que un creciente consumo interno de la producción absorbió una parte de los excedentes exportables. Así pues, a pesar de un aumento del superávit por concepto de invisibles, el déficit de la cuenta corriente se elevó considerablemente.

Ese déficit fue financiado mediante la utilización en gran escala de préstamos a largo plazo y de créditos a mediano plazo de proveedores, una disminución de las reservas brutas hasta llegar a niveles bajos inaprovechables, un aumento de los saldos deudores en la cuenta de compensaciones, y un incremento en el volumen de las obligaciones a corto plazo en monedas convertibles. Debido a su magnitud, a la desfavorable distribución de los vencimientos y a otras características, la deuda externa de la R.A.U. impuso una carga onerosa sobre la balanza de pagos, requiriéndose un reescalonamiento de los plazos de las obligaciones.

*

Mr. Gerakis, Senior Economist in the Western Division of the Middle Eastern Department, has been head of the Productive Services Division of the Research Department of the Bank of Greece, has taught economics at universities in the United States, and has written several articles in economic journals.

1

It should be noted that national income statistics, though improved in recent years, should still be treated with some reservations; it is likely that they overstate somewhat the rate of growth in the past five years. A major deficiency in the series in constant prices arises from the inclusion of the services sector at current values.

2

A feddan is equal to 1.038 acres.

3

This figure can be obtained by deflating each of the five annual investment figures for 1960/61–1964/65 by the implicit price deflator for the same year.

4

The above figures of LE 1,513 million and LE 1,470 million represent, respectively, 95.9 per cent and 83.2 per cent of the Plan objective of LE 1,577 million.

5

Reported in the Egyptian Gazette, November 25, 1966.

6

Tax revenues as a proportion of GDP rose over the period reviewed. There was, moreover, a substantial expansion in the coverage of pension and insurance plans and a steep increase in the rates of the contributions to these plans.

7

These estimates were obtained by subtracting from GDP at current prices the sum of current revenues of the budget, the surpluses of social insurance and pension funds, and the surpluses of enterprises, and then adding to the figures thus computed cost of living subsidies and interest transfers to the public.

8

See the final paragraph of this paper.

9

LE 418 million is the figure shown in the national income accounts; it differs from the comparable balance of payments figures in U.S. dollars given in Table 12, for two reasons: First, the former, in contrast to the latter, is based on customs returns for imports and exports. Second, in converting the latter into dollars, different conversion factors were used for the years covered, in order to allow adequately for the declining external value of the Egyptian pound.

10

Obtained by dividing the total wage and salary bill by employment figures. Included in the wage and salary bill are imputed wages for the employers’ own labor as well as fringe benefits (see, also, footnote 1 of Table 6).

11

Computed by dividing the indices of average gross wages by the cost of living index.

12

Value added may be defined as GDP minus indirect taxes.

13

Since depreciation allowances are included in value added.

14

These are increases over the average figures for 1963/64.

15

Large deficits have continued in 1965/66 and in 1966/67.

16

The projections of the Plan regarding imports were as follows (in millions of Egyptian pounds):

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See National Planning Committee, General Frame of the 5-Year Plan for Economic and Social Development (Cairo, 1960), pp. 88–90.

17

See National Bank of Egypt, Economic Bulletin, Volume XIX (1966), p. 127.

18

According to recent reports, the U.A.R. authorities have decided to scrap the industries which have definitely proved unviable.

19

This statement is based on the trade pages in International Financial Statistics covering the years 1948–65.

20

Although such a decline is nowhere explicitly mentioned in the Plan, it is implied in the Plan’s projections on GDP, on the one hand, and exports, on the other. As already noted, it was expected that GDP would rise by 40 per cent over the period of the Plan. It was projected that exports including customs duties would increase by 35.8 per cent and that exports excluding customs duties would rise by 35.2 per cent. See National Planning Committee, loc. cit., p. 84.

21

This is reflected in comparisons of average exports in 1955/56–1959/60 and in 1960/61–1964/65 but not, of course, in comparisons as between the years 1959/60 and 1964/65.

22

Some years ago, the problem confronting the authorities was a very different one, i.e., to enforce existing limitations on the area under cotton.

23

It can be calculated from Table 12 that the average annual surplus on invisibles was equal to $65.6 million in the five-year period ending in 1959/60 and to $104.3 million in the five-year period ending in 1964/65; it was equal to $114.8 million in 1959/60 and to $143.1 million in 1964/65.

24

I.e., $82 million in 1959/60 and an average of $121 million in 1960/61–1964/65.

25

According to monetary statistics, net foreign assets amounted to about $190 million at the end of June 1960.