After Four Decades, Egypt Attempting to Exorcise Ghost of Failed Nasser Economy : Mideast: The IMF has demanded a reform of one of the most cumbersome and costly economic structures in the world. But the Egyptians aren’t finding it easy.

Gen. Moustafa Azzouni recalls when the Egyptian army was entrenched along the front lines of the Suez Canal one day in 1973, but wasn’t going much further unless a new battery of rockets was constructed. Desperate, the commander dispatched a young supply captain to order needed concrete and iron bars to install the emplacement.

There wasn’t much hope. Ordinary requisition orders had a way of crawling to Cairo and disappearing. Telephone calls got transferred to the wrong office on the wrong floor. Invoices would get stamped and filed and alphabetized and forgotten.

With the future of the Sinai Peninsula at stake, Azzouni recalled recently from the safety of his desk, the young captain dumped the procurement process, made a few phone calls and had the concrete hauled in on trucks in less than a week.

“He forgot all about the rules and regulations of procurement and he went and got the commodities from wherever they were,” Azzouni said. “This type of unconventional thinking and unconventional behavior is very much what was needed, and unconventional thinking is what Egypt looks for today.”

Azzouni has since retired from the army and joined a new assault force of private entrepreneurs who are capitalizing on Egypt’s recent moves to dismantle nearly four decades of public management that, out of the socialist vision of fabled Arab leader Gamal Abdel Nasser, spawned one of the most cumbersome and costly economic structures in the world.

Now, as a critical link in negotiations to achieve peace throughout the Middle East, Egypt and its rapidly deteriorating economy have become a source of alarm for U.S. officials and other aid donors who fear that the country’s billions of dollars in debts could undermine the government of President Hosni Mubarak--and with it, many hopes for settling decades-old conflicts in the region.

At the urging of the International Monetary Fund, Egypt has embarked on a program of economic reforms that will not only introduce more private enterprise into the traditionally government-dominated economy, but do away with most of the Nasserite traditions upon which Egyptian economic and social life have been based for decades.

Pressed to stabilize its currency, cut budget deficits and check inflation that soared past 26% last year, Egypt is facing the uneasy prospect of phasing out $2 billion a year in subsidies on food, energy and other basic supplies that have been the lifeline for tens of millions of Egyptians between basic subsistence and poverty.

“What they (IMF officials) are asking finally of the Egyptians is to transform completely their economy and to demolish entirely the Nasserite system. They are asking for a complete economic revolution, and for many, it is a sentence of death,” said one Western diplomat.

Nasser began as early as the 1950s to attack the wide gaps that existed between wealthy businessmen and landowners and the poor by nationalizing private industry, nearly eliminating most private enterprise and using the proceeds to finance a vast network of social benefits for Egyptians. University educations were free, and graduates were guaranteed jobs in the public sector. Wages were low, but government subsidies and strict rent controls kept a decent life within reach of most Egyptian families.

Before long, many public companies were overburdened with employees who had little to do; they fell far into the red, kept going only by government subsidies. Rents remained low, so low that buildings fell into disrepair; new construction lagged far short of housing needs. Trade deficits soared when Egypt, forced to import 70% of its food to feed a population growing at an alarming rate, found itself unable to maintain competitive exports and ran dangerously short of foreign currency.

Peace with Israel in 1979 brought some relief in the form of a huge influx of aid from the West--$2 billion a year from the United States alone--but Egypt now has found itself unable to repay the debts and in its most precarious economic state in recent memory.

The deficit in the balance of payments, including worker remittances and international donor assistance, increased 168% in the last year alone, to $1.46 billion. Exports fell 22% last year. Unable to make payments on its more than $40 billion in foreign debts, Egypt fell $4.3 billion in arrears and faces a potential cutoff in U.S. aid unless a new agreement with the IMF is concluded soon.

To 55 million Egyptians--a number that grows by a million every eight months--those statistics meant that last year was by far the hardest in a string of hard years. A typical government employee who earned a salary of about $59 a month in 1988 got a 12% raise--to $66--last year. But inflation went up 27% by official count, 50% by the estimate of many Western economists.

Recalling the riots that were inspired when the price of bread was raised in 1977, Egyptian government officials have been uneasy over talk of phasing out subsidies for basic items such as bread and sugar, the staples of the typical Egyptian diet, although prices for chicken, macaroni, eggs, cooking oil, electricity and clothing all went up last year. The price of rice, another mainstay, went up 50%.

“The poor have weathered a very substantial reduction in their standard of living over the past year, and they’ve done it so far without riots,” said a Western analyst close to the IMF negotiations. “But one looks at this situation and says, things are beginning to go downhill. . . . How do you judge exactly where the economic squeeze will become tight enough that people will lose their patience with the government?”

Egypt has stalled on signing an agreement with the IMF, publicly voicing fears that the economic reforms being sought--rationalization of a pricing system that had gasoline priced cheaper than bottled water, lowering the $2.7-billion-a-year deficit, unifying an exchange rate that has kept the pound valued substantially above the true market and raising interest rates--will generate political instability.

Mubarak and many of Egypt’s left-wing politicians say they fear that the most unpleasant side effects of the IMF’s demands--particularly any phase-out of government subsidies--will be visited on the poor.

IMF officials and other analysts say much of Egypt’s foot-dragging has come not out of concern for the poor, but a desire to protect the middle-income merchants who would be stung by dramatic increases in interest rates and the entrenched bureaucracy of profiteers that has grown up around the country’s subsidy system.

In both lie the true source of power behind Mubarak’s regime, suggested one diplomat. By threatening them, he said, “what the IMF is saying is, ‘Please sign your death sentence.’ ”

“The fund is letting it be the last item on the agenda. Cutting down subsidies on basic foods can wait,” said a source close to the negotiations.

The IMF is arguing that implementing the reforms, albeit with gritted teeth, will pay off in the long run. Stabilizing the exchange rate and raising interest rates may be difficult at first, but both measures could in the long run encourage exports and, just as importantly, encourage Egyptians to begin saving their money at home again.