Patrick Werr: Even Gamal Abdel Nasser sought out the IMF for a loan

Gamal Abdel Nasser, the Egyptian president in 1968. He was one of many of the country’s leaders to negotiate loans from the IMF. ImageForum

One of the remarkable things about the Egyptian economy is its cyclical nature: every 14 years or so, the government’s finances deteriorate so badly it is compelled to seek out the IMF or at least implement harsh IMF-style reforms. You can almost set your clock by it.

The government of Ahmed Nazif floated the currency and slashed tariffs in 2004. Hosni Mubarak’s government, after the war to free Kuwait, signed an IMF agreement in 1991.

Anwar Sadat’s signed one in 1976, triggering bread riots.

But the most improbable accord must certainly be that of president Gamal Abdel Nasser, whose government signed a standby agreement with the IMF – an organisation that is the very symbol of capitalism – in 1962, when the socialist firebrand’s battle against free markets was at its fiercest.

What is curious is that Abdel Nasser was facing the very same problems as his less ideologically inclined successors: a balance of payments deficit caused by an overvalued currency and a budget deficit caused by huge subsidy bills and a lack of a proper tax base.

Abdel Nasser cut his teeth on socialism when he nationalised the Suez Canal in 1956. When the British, French and Israelis invaded in response, he quickly nationalised their assets too. Soon he had taken over most of the banking system.

With an eye towards the Sov­iet experience, he had come up with the country’s first five-year development plan, an ambitious series of projects that included building the Aswan High Dam, and he needed assets to pay for it. In 1961 he went after much of the rest of the economy.

On July 21 of that year, the government announced it was taking control over 267 companies that traded on the stock market. It sent central bank officials to Cairo’s financial district where they pasted the text of three new laws on the doors of the elegant, neo-classical stock exchange.

A crowd had gathered to learn what had happened.

“People were screaming and crying and cursing,” a stockbroker who witnessed the scene that morning related to me 30 years later. “Others were totally stunned.”

At the same time the state took over all companies with more than 100 employees, giving it a virtual monopoly over imports and control over most of the country’s export trade as well.

Egypt at the time was part of the United Arab Republic, its short-lived union with Syria created in 1958. The nationalisations spooked the Syrians and partly because of this they announced, on September 28, 1961, that they were seceding from the union.

Abdel Nasser pushed forward with his campaign against the private sector the following year, arresting members of the upper classes and seizing their property.

Egypt had emerged from the Second World War with foreign reserves equal to four years’ worth of imports, but the military government that ousted the monarchy in 1952 depleted them and borrowed yet more money to finance a rapid development programme.

Domestic debt grew by more than 17 per cent per year and foreign debt even faster.

The government expanded the money supply, creating upward pressure on prices.

Just as it was about to deplete its foreign reserves, the cotton crop failed, ironically because of a poor Nile flood, the last such calamity before the Aswan dam was finished 10 years later. Cotton at the time was Egypt’s main export.

By early 1962, Egypt had less than US$20 million left in its foreign reserves.

In return for a standby credit arrangement of 20 million Egyptian pounds, the government devalued the Egyptian pound from the $2.87 it had been at since 1949 to about $2.30. It raised domestic interest rates and announced a bit of belt- tightening.

The balance of payments continued to deteriorate in fiscal 1962-63. The government was increasing its spending on the Yemen war and working to match the Israeli military. It continued to increase wages while leaving domestic prices steady, triggering a black market in many commodities and forcing people to queue for rice and meat.

At one point in late 1963, free reserves fell to as low as $11m.

The government negotiated new loans from the IMF in 1963 and drew them down immediately and the following year drew down even more. In 1964 it sold more than $30m in gold holdings to meet short-term obligations.

It seems it is not easy to manage the Egyptian economy, no matter what your ideological outlook is. Let’s hope that the IMF agreement the current government reached in November is the last that an Egyptian government will ever have to sign.

Patrick Werr has worked as a financial writer in Egypt for 26 years

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