Central Bank Governor Commits to Completing Financial

UNCLAS CAIRO 003541 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/ELA, NEA/RA, EB NSC FOR MIKE PASCUAL USAID FOR ANE/MEA MCCLOUD AND RILEY TREASURY FOR MATHIASON COMMERCE FOR 4520/ITA/ANESA/OBERG E.O. 12958: N/A TAGS: EAID PREL ECON EG SUBJECT: Central Bank Governor Commits to Completing Financial Sector MOU Benchmarks REF: Cairo 3365 Sensitive but Unclassified. Please handle accordingly. ¶1. (SBU) On December 17, the Ambassador and Econoffs met with Central Bank of Egypt (CBE) Governor Farouk El Okdah and the two Deputy Governors, Tarek Amer and Tarek Kandil, to cover a wide variety of end-of year issues. The Ambassador began by congratulating the Governor and Deputy Governor Amer for their reappointments to another four-year term and congratulating Deputy Governor Kandil for his recent promotion from Sub-Governor to Deputy Governor. The Governor thanked the U.S. for its continued support and noted great optimism about the health of the Egyptian economy. He did note concern that many of lower-income citizens were not benefiting from Egypt's strong growth, and he indicated that he had made this point to the Prime Minister and the rest of the cabinet. ¶2. (SBU) The Ambassador noted that the U.S. continues to be very supportive of the Egyptian financial reform effort, but noted concern over the large pipeline of undisbursed funds related to the incomplete benchmarks in the Financial Sector MOU. In particular, the Ambassador inquired about the two outstanding benchmarks under the CBE's control: 1) the status of the financial sector due diligence ("audits") of the public sector banks and 2) the prospects for the finalization of the Master Repurchase Global Agreement. ¶3. (SBU) Regarding the audits, the Governor and Deputy Governor Kandil indicated that the work is underway and the results should be ready for analysis in January or February. The Governor also recommitted to requesting the international audit firms to initiate the 2007 audit work immediately after the 2006 work is finished, so as to be in a position to make a subsequent disbursement request not long thereafter. The Governor expressed great optimism that there would be considerable progress shown on NPLs in the 2006 audit report; this contrasts with the less-optimistic indications we received from Deputy Governor Kandil when he met with visiting PDAS Liz Dibble (reftel). (Note: The disbursement which hinges on the completed audit reports is a pro rata disbursement which is based on progress towards: reduction of the non-performing loans, an increase the amount of cash recoveries made on those recovered assets, and the growth of growth of credit to the private sector. End note.) ¶4. (SBU) Regarding the Master Global Repurchase Agreement, the governor's initial reaction was that that the banks are so liquid, they have no reason to pursue "repos". While recognizing the banks' high liquidity levels, the Econoffs noted that various experts (IMF, World Bank and U.S. Treasury debt advisor) have identified this as a constraint to the development of a healthy financial sector, as the banks are looking for a CBE signal that these deals are fully sanctioned. Econoffs agreed that the Repurchase Agreement will not suddenly create a robust secondary market in government securities, but noted that the lack of such a Master Agreement was a possible constraint which, if eliminated, could increase the amount of trading taking place. The Governor concluded by saying that it would be no problem to put something in writing and send it to us early in the new year. The Governor's optimism on this benchmark was not consistent, however, with Deputy Governor Kandil's recent assessment that the market was still "2-3 years" from being ready for this (reftel). ¶5. (SBU) The Ambassador inquired about the process of the Banque du Caire privatization. The Governor indicated that the process was on track and that they expected to evaluate bids in the first half of the year and the sale would be finalized before July 2008. The deadline for bid submissions was on the December 17, the same day the meeting took place and we subsequently learned that an extension had been granted. The Governor made no mention of this. ¶6. (U) USAID Director of Policy and Private Sector thanked the CBE for their recent interest in micro, small and medium enterprises, and the Governor noted that 2008 would be the year when the CBE would get much more involved in M/SME issues. USAID also noted that he was pleased that some of the U.S. graduate schools for banking have shown interest in Egypt, and urged the CBE to help make these relationships long-term and sustainable, so as to not have to rely on donor assistance. ¶7. (SBU) The Treasury Financial Attache noted the concern expressed in the recent IMF Article IV and Financial Sector Stability Assessment which noted both the perception of the lack of independence of the CBE and the perception of conflict of interest of some members of its Board. The Governor made the general comment that there simply are not enough qualified people in Egypt to be able to staff a 15-person Board without having some perceived conflict. As a step to remedy this, he noted that none of bankers on the Board are permitted on the monetary policy committee or to participate in CBE discussions pertaining to individual banks. Also, he noted that to isolate himself from perceptions of conflict of interest, he would seek to step down as the chair of the General Assembly of the state-owned banks, so that he would not be seen as both a regulator and owner. RICCIARDONE