Cablegate: Codel Gutierrez Meets Egyptian Central Bank Governor


DE RUEHEG #1101/01 1501359
R 291359Z MAY 08




E.O. 12958: N/A
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

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.

© Scoop Media

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