EYGPT'S ECONOMIC REFORMS DISCUSSED WITH THE AMBASSADOR

UNCLAS CAIRO 003219 SIPDIS SIPDIS SENSITIVE STATE FOR NEA/ELA, NEA/RA USAID FOR ANE/MEA MCCLOUD AND RILEY TREASURY FOR MATHIASON AND HIRSON COMMERCE FOR 4520/ITA/ANESA/OBERG E.O. 12958: N/A TAGS: PGOV ECON EG SUBJECT: EYGPT'S ECONOMIC REFORMS DISCUSSED WITH THE AMBASSADOR REF: CAIRO 2826 SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY. SUMMARY -------------- ¶1. (U) The Ambassador hosted an economic roundtable on October 30 which included the IMF and World Bank representatives, as well as banking and private sector leaders. While noting the generally positive economic reforms to date, the group focused on many of Egypt's development challenges, including: lack of investment in human capital and physical infrastructure, subsidy reform, and the need to reform pension, insurance and the fixed-income market as a means to increase the country's credit efficiency. IMF AND WORLD BANK GENERALLY UPBEAT, BUT CONCERNS NOTED -------------- -------------- ¶2. (SBU) The IMF Resident Representative summarized the recent Article IV mission (Reftel). The IMF remains upbeat on the Egyptian economy and believes that growth is becoming more broad based. He noted that the Article IV report should go to the IMF Board soon and could be discussed before the end of November (note: it was not listed on the most recently circulated Board calendar). The IMF expects growth of about 7.5% in 2007, just slightly above 2006's results. While the IMF noted the growth is increasingly broad based, the impact on most Egyptians has been limited. ¶3. (SBU) The IMF rep noted that there will continue to be pressure on inflation, but that generally the monetary and fiscal policies have been sound, thus containing the inflationary pressure. He noted that imports are booming as a result of the country's increased wealth, thus much more inflation is being imported than had previously been experienced. The IMF continues to view the large deficit, and the quality of spending as one of the most important issues that the government needs to tackle. ¶4. (SBU) The World Bank Resident Representative noted that the reforms enacted to date had been successful, but that the next generation of reforms would be harder. Among the next generation of reforms he included: pension, civil service, and improving the targeting of subsidies. While he was generally on the financial sector reforms to date, he noted that banking supervision continues to need improvement and that insurance reform needs acceleration. PRIVATE SECTOR VIEWS -------------- ¶5. (SBU) Yasser El-Mallawany, CEO of EFG-Hermes, noted that much of Egypt's growth to date has been based largely on improved perceptions of Egypt which, in turn, has led to greater increased Foreign Direct Investment (FDI). While the increased FDI is clearly good for Egypt, he noted that it is neither sustainable nor a good strategy upon which to base long-term growth prospects for all Egyptians. He noted that Egypt needs to use its current "window of opportunity" to take the next leap to become integrated into the global economy. He noted that infrastructure (particularly energy) and human resources were two areas where the Egyptian government is not dedicating adequate vision or leadership. ¶6. (U) Subsidies were discussed at length. While all agreed that the current subsidies are inefficient, there was agreement on how quickly the Government would or could take further action. The IMF rep noted that subsidies constitute more of the government budget than either wages or investment. (Note: combined, subsidies, wages and debt service make up about three quarters of the Egyptian budget, leaving very little for productive discretionary investments). The IMF rep noted that the fuel subsidy is far and away the most regressive subsidy so it should be fixed the most urgently (note: for example, a World Bank study notes that the richest quintile of the population receives 93% of the benefits of the gasoline subsidy). Other participants, however, noted that the political sensitivity of the subsidies will make it very difficult for the government to address soon. The World Bank noted that it is helping the government replace the food ration cards with direct cash transfers and better targeting methods. Once this more efficient system is functioning, it could be used as a mechanism to increase welfare payments to the poor which will offset the impact of subsidy cuts. ¶7. (U) The group discussed the best role for government in improving the country's physical infrastructure. The government is pushing a public private partnership (PPP) initiative, which is initially focusing on schools and hospitals. Mallawany argued that the Government needs to shift the PPP into those infrastructure projects which will more immediately have commercial return (roads, ports, airports),rather than to schools and hospitals which will always have a large subsidy component. The IMF rep noted that the experience globally with PPPs has been mixed and noted that there will still be government liabilities even once the PPPs are underway. What is most important, the IMF rep argued, is to improve the quality of service. ¶8. (SBU) There was some discussion of the lack of investment in productive enterprises in Egypt. The well-known phenomenon of a small number of corporate clients chasing all the bank credit continues. Banks continue to make money without extending much credit, so there is little incentive for them to extend risky loans to unknown clients. The same is true in mortgages, where very little lending is taking place. Gamal Moharam, CEO of Piraeus Bank, noted that there is very little long-term money available to banks in Egypt, so banks cannot affordably extend long-term loans. This led many in the group to note the inefficiencies and underdeveloped status of the traditional sources of long-term money in Egypt, particularly pension and insurance (two areas the U.S. is trying to assist, either via the cash transfer program or traditional technical assistance). Mallawany was very critical of the lack of a fixed-income market in Egypt and the dearth of tradable securities. ¶9. (SBU) The group also discussed the government's inability to effectively convey its vision or reform agenda to the Egyptian population. The World Bank noted that without a good outreach effort, the reforms were at risk, given that the public is not inclined to trust the government. Abdel Latif, Chairman of Bank of Alexandria noted that the government is trying hard to improve its communication with people but blamed inaccurate and irresponsible reporting by the media for the public misunderstanding. The Ambassador and Econoffs encouraged the group to push the government to do a better job of publicizing the program and its goals. RICCIARDONE