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Cablegate: World Bank Mulls Timing and Content of Its Next Financial

VZCZCXYZ0007
RR RUEHWEB

DE RUEHEG #2872/01 2670747
ZNR UUUUU ZZH
R 240747Z SEP 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 6998
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0345

UNCLAS CAIRO 002872

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, NEA/RA, EB/IDF
USAID FOR ANE/MEA MCCLOUD AND RILEY

USTR FOR SAUMS
TREASURY FOR MATHIASON AND HIRSON
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EFIN EG

SUBJECT: World Bank mulls timing and content of its next financial
sector loan in Egypt

REF: A) Cairo 2868; B) Cairo 2726

Sensitive but Unclassified. Please protect accordingly.


1. (U) Summary: The World Bank continues to prepare its next large
financial sector loan to Egypt, but is slowing presentation to the
World Bank Board somewhat, pending resolution of the Banque du Caire
privatization, among other conditions. World Bank staff senses some
reform hesitation at the Central Bank, a view not shared by the IMF
(ref a). End Summary.

2. (SBU) Treasury Attache met with World Bank staff working on
financial sector reform on Sept. 20. World Bank staff expressed
some concern that the Central Bank's commitment to financial sector
reform may have slowed. The World Bank noted that Governor El Okdah
had not spoken publicly about the Banque du Caire sale for some
time, and that the Governor had skipped the session with the
Parliament, instead sending Deputy Governor Tarek Amr and Minister
of Investment Moheildin to face the Parliament's tough questions.
In addition, when President Mubarak and Prime Minister Nazif were
forced to publicly defend the privatization plan, World Bank staff
opined that this could indicate Mubarak's and Nazif's disappointment
that the Governor had not been willing to take some of the public
criticism (ref b). The announcement for the sale advisor of Banque
du Caire has been anticipated for several weeks, but the World Bank
questioned whether it would be forthcoming during the month of
Ramadan (which ends October 13). It was the World Bank's view also
that the Governor had become a bit less forthcoming and more
defensive regarding information pertaining to the status of
restructuring the two remaining state-owned banks (Bank Misr and
National Bank of Egypt).

3. (U) The World Bank is still prepared to lend more budget support
to the Government of Egypt, assuming reform does not slow. Earlier
in the year, the World Bank had anticipated bringing their
Development Policy Loan (DPL) II to the Board in September, but now
is waiting at least until the Banque du Caire sale advisor is
announced, and more likely, waiting until the sale itself is
completed (anticipated in March 2008).

4. (U) When the World Bank's DPL I was approved in 2006, it
foreshadowed the conditions it would be seeking for a follow up
loan. In general terms, the phase two loan is envisioned to cover
areas such as: (i) the regulatory and supervisory framework for
banking and insurance, (ii) the restructuring of the state-owned
banks, (iii) reducing public ownership in the joint venture banks,
(iv) restructuring of the insurance industry, (v) modernizing budget
preparation, and (vi) improving public financial management and
corporate financial reporting. In addition to seeking greater
comfort that the Banque du Caire sale will come to fruition, some of
the specifics that the World Bank is focused on include: getting
greater clarity from the GOE on the plans for the remaining
state-owned banks, seeing at least one state-owned insurance company
privatized (as also benchmarked in the US Financial Sector MOU cash
transfer), and taking action on the draft Accountancy Law. The
Accountancy Law seeks to modernize the supervision/regulation of the
accounting industry in Egypt and has been in draft form since 2003
when the World Bank first recommended it be updated.

5. (U) The African Development Bank (AfDB) also wishes to be part of
the lending package to the GOE, as the AfDB indicated to the
Treasury Attache in early September. However, it remains somewhat
unclear how the World Bank and AfDB will divide these
responsibilities, and what the ultimate timing and amounts from the
two institutions will be. An AfDB negotiating team is expected to
visit Cairo in November.

-------
Comment
-------

6. (SBU) There are some areas in the proposed DPL II which are
either addressed in USAID's existing Financial Sector MOU, or which
are envisioned in the draft education, health and private sector
cash transfer MOU which should be signed soon. It will be important
for the US and the World Bank (and the AfDB if necessary) to
coordinate as we try to reward good performance, stimulate faster
reform and not undermine or duplicate each other's efforts. (Note:
When the original DPL and the AFDB companion loan were made in 2006,
there was some concern in the USG that the multilateral development
bank loans were undercutting USG assistance as they provided large

sums up-front, as opposed to the USG MOU which required some
performance before the bulk of the funds were disbursed. End Note.)
As we look to the more distant future, it is worth flagging that the
World Bank seeks to do a potential DPL III in 2009, assuming reform
momentum is adequate.

7. (SBU) This conversation with World Bank staff suggests that the
Bank is less positive than the IMF is on Egypt's reform momentum.
The IMF's concluding statement to its recent Article IV mission
(dated September 12, 2007) was very positive (ref a). The divergent
views from the two institutions may be a result of who their primary
interlocutors are. The World Bank tends to be less close with the
Central Bank, yet very close with the Ministry of Investment,
whereas the IMF is very close with the Central Bank, and less so
with the other ministries. It will be interesting to see if the
World Bank is capable of leveraging faster reform from the GOE.
JONES

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