High defence spending severely damaged the Egyptian economy and in 1977 President Anwar Sadat decided to obtain a peace settlement with Israel. He announced the Sadat Initiative and offered to go to Jerusalem and plead the Arab cause before the Knesset. This offer was accepted and Sadat visited Israel to meet Menachem Begin (19th - 21st November).

Although criticised by the Palestine Liberation Organization (PLO) and the governments of Syria, Libya and Algeria, Sadat had discussions with Begin at Leeds Castle and Camp David. In September 1978, with the support of Jimmy Carter, the president of the United States, Sadat and Begin signed a peace treaty between the two countries. As a result both men shared the Nobel Peace Prize in 1978.