CODEL Gutierrez meets Egyptian Central Bank Governor

UNCLAS CAIRO 001101 SENSITIVE SIPDIS STATE FOR NEA/ELA, NEA/RA AND EEB/IDF USAID FOR ANE/MEA MCCLOUD AND DUNN TREASURY FOR MATHIASON AND DENNIS COMMERCE FOR 4520/ITA/ANESA E.O. 12958: N/A TAGS: ECON EFIN EG SUBJECT: CODEL Gutierrez meets Egyptian Central Bank Governor Sensitive but unclassified. Please handle accordingly. ¶1. (U) Summary: Codel Gutierrez met with Central Bank of Egypt (CBE) Governor Farouk el Okdah on May 25 for a wide ranging, substantive conversation. Key themes raised were on banking sector reform, high commodity prices, mortgage sector development, and unemployment. End Summary. ¶2. (U) El Okdah began by introducing some of the steps taken by the CBE to reform the banking sector. He noted that when he took the job 4.5 years ago, 80% of foreign currency was traded on the black market, half of the banks were insolvent, and 60% of banks were controlled by the public sector. ¶3. (U) El Okdah ticked off several accomplishments of their aggressive reform program. The number of banks has been reduced from 60 to 40 and all are solvent, the total of non-performing loans has dropped from 30% to 10-11%, and all but 3 banks (note: Banque du Caire to be sold in June) are privately owned. El Okdah quoted a World Bank report which judged the reforms "far-reaching, comprehensive, and unprecedented." He said USAID was one of the first partners to support the reform program, and that they have been excellent allies throughout the process. ¶4. (U) Chairman Gutierrez asked for El Okdah's thoughts on how commodity prices were affecting the reform effort. El Okdah noted that Egypt is heavily dependent imported commodities, so the recent price increases has been a major contributor to the current high inflation. He noted that poor Egyptians spend 70% of their income on food, so they bear the brunt of high prices. The current high inflation (16.4%) is the third inflationary period since he took office in 2004, and he was not optimistic that Egypt will see 3-4% inflation anytime soon. ¶5. (U) In response to El Okdah's comment that biofuels are contributing to the high food prices, Rep. Bacchus said U.S. popular opinion was shifting away from ethanol production because of the high cost and environmental impact of its production. El Okdah commented that while people can carpool, they cannot go without food. (Note: High food prices and the impact on the poor has become a major theme with most of our interlocutors, and President Mubarak highlighted this issue in his address at the World Economic Forum.) ¶6. (U) Chairman Gutierrez asked about the supervisory environment in Egypt. El Okdah noted that the Central Bank regulates the banks and is working with the European Union to improve its supervision capacities. He noted that the non-bank financial institutions are regulated by several entities under the purview of the Ministry of Investment, but that his staff also sits on the boards of non-bank financial institutions so they can contribute to the ongoing improvements and that there was a proposal to unify all the non-banking supervisors into a single supervisory agency. He argued that the Egyptian oversight system is adequate to keep all the vulnerabilities in check. ¶7. (U) Rep. Watt asked if the Central Bank anticipated privatizing the remaining two state-owned banks. El Okdah said there were no plans to do so, but that the management of the banks has been professionalized and that these banks now follow the same regulations as the private banks. He underlined the CBE's commitment to privatize the Banque du Caire within several weeks. El Okdah observed that Citibank is the only major American retail bank in Egypt. ¶8. (U) Rep. Moran asked how Egypt could develop a middle class without a better functioning mortgage system. He noted that home ownership was one of the most important keys the United States' economic success. El Okdah agreed and noted that the government was trying to stimulate the nascent mortgage industry. Mortgages were not even legally available until 2004, as a result of inadequate legislation. The credit bureau just opened in Egypt two months ago and will be fully-operational in July 2008. The mortgage market remains tiny, but has grown significantly in three years. In 2007, there were 1.5 billion Egyptian pounds (USD 277 million) in mortgages compared to 20 million Egyptian pounds (USD 3.7 million) in 2004. ¶9. (U) Several members wondered about unemployment in Egypt. El Okdah said Egypt needs to create 700,000 jobs a year, which will require an investment rate of 26% of GDP. Savings and investment rates are traditionally low in Egypt. Investment as a percent of GDP was 17% in 2004 and has risen to 22% now. He noted that unemployment is approximately 11.5% and going down. Egypt's main problem over the next five years, he argued, is having adequate skilled labor. El Okdah also described Egypt's public education system as ineffective. ¶10. (U) Chairman Gutierrez and Rep. Moore asked about wage levels. El Okdah noted that wages were keeping up with inflation in the high growth sectors such as oil and gas, construction, agribusiness and telecommunications. However, he noted that pensioners and civil servants are the ones suffering as their wages are low and are not market based, so the wages do not respond to supply and demand pressures. ¶11. (SBU) The Codel also met President Mubarak and with the banking committee of the American Chamber of Commerce. President Mubarak raised his concerns about rising food prices and the impact of US biofuel subsidies on commodity markets. Several AmCham members also raised this issue with the CODEL. ¶12. (U) CODEL Gutierrez did not have the opportunity to clear this cable before departing post. SCOBEY