Search

 

Cablegate: Egypt: Financial Sector Mou Update, Part I

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #5001/01 2261103
ZNR UUUUU ZZH
R 141103Z AUG 06
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 0537
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0176

UNCLAS CAIRO 005001

SIPDIS

SIPDIS

SENSITIVE

STATE FOR NEA/ELA, NEA/RA, EB/IDF AND EB/OMA
USAID FOR ANE/MEA MCCLOUD AND DUNN
USTR FOR SAUMS
TREASURY FOR NUGENT AND HIRSON
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: EGYPT: FINANCIAL SECTOR MOU UPDATE, PART I


Sensitive but Unclassified. Not for Internet distribution.

REF: A. Cairo 1838
B. Cairo 3746

------------------------
Summary and Introduction
------------------------

1. (SBU) Since the last update on the status of the Financial
Sector MOU (Ref A), the GOE has met all of the benchmarks for
disbursement of USD 25 million in DSP-II funds tied to Policy Item 1
- Central Bank Management. The GOE has indicated that it expects to
complete, by September 2006, all of the benchmarks for disbursement
of USD 25 million tied to Policy Item 2 - Government Securities
Market, and USD 100 million tied to the first part (public bank
audits and joint venture bank divestment) of Policy Item 3 -
Financial Sector Reform. Once all of these benchmarks have been
met, the GOE intends to request one large disbursement of funds.

2. (SBU) The GOE and the USAID Mission are close to finalizing a
Monitoring Program for the MOU that will specify the documentation
needed to certify that benchmarks have been met and funds can be
disbursed. Agreement on the Monitoring Program, however, awaits the
outcome of discussion between the USG and GOE regarding use of the
term "full financial due diligence" versus "audit" for the financial
assessments of the public banks required by benchmark 3.1. The
Ambassador has conveyed to the Minister of Finance the U.S. position
that the 2006 report may be called "full financial due diligence,"
but subsequent annual reports required by the MOU must be called
"audits." Post will report septel when GOE agreement has been
confirmed. End summary and introduction.

---------------------------------------
Policy Item 1 - Central Bank Management
---------------------------------------

3. (U) USD 25 million in DSP funds are tied to completion of the
following three benchmarks for Policy Item 1:

Benchmark 1.1 - The Central Bank of Egypt (CBE) will establish and
appropriately staff units for:

- Monetary Policy:

Completed - CBE established a Monetary Policy Unit in October 2005.
The unit provides support for the Monetary Policy Committee (MPC),
which was established in June 2005 and is composed of members from
various GOE ministries and CBE. The MPC is responsible for setting
overall monetary policy, including key interest rates.

- Foreign Exchange Management and a Foreign Exchange Dealers
System:

Completed - An inter-bank market for foreign exchange was set up in
September 2004 and the convention governing inter-bank foreign
exchange trading was formally adopted in December 2004. CBE also
established a Foreign Exchange Unit in December 2004 (an extension
of the previously-existing Foreign Exchange Dealings Chamber). A
foreign currency clearing mechanism was created in October 2005.

- Non-performing Loan (NPL) Management Unit responsible for setting
a national policy of dealing with NPLs, setting up and NPL data
base, monitoring recovery efforts and introducing an
arbitration/conciliation mechanism for NPLs:

Completed - CBE set up an NPL Management Unit in October 2005. The
unit supported efforts by the CBE, Ministry of Finance (MOF) and
Ministry of Investment (MOI) to develop a national NPL policy, which
was first announced in January 2006. Further details of the policy
were announced earlier this month (see para 8). The unit has also
set up an Arbitration Committee to conduct settlement negotiations
and a monitoring program to track implementation of negotiated
resolutions.

Benchmark 1.2 - CBE will hire the required competent advisors.

Completed - CBE has completely restructured bank management and
hired numerous private sector bankers to work in the new units
established at the bank. USAID has funded the hiring of some of
these advisors.

Benchmark 1.3 - CBE will introduce an optional early retirement
policy and compensation scheme for the CBE.

Completed - CBE announced its optional early retirement policy and
compensation scheme in two stages, the first in May 2006, for
employees aged 51 to 55, and the second in June 2006 for employees
aged 46 to 50. According to CBE Deputy Governor Tarek Amer, over
1000 employees (approximately 20 percent of CBE's workforce) have
taken the early retirement option and left CBE's personnel rolls.

--------------------------------------------
Policy Item 2 - Government Securities Market
--------------------------------------------

4. (U) The U.S will disburse USD 25 million in DSP funds upon
completion of the following three benchmarks for Policy Item 2:

Benchmark 2.1 - Implement a Primary Dealers System with dealers
underwriting new government debt issuance through auctions and
trading of government securities on the open market.

Completed - The Primary Dealers System was launched in July 2004.
It allows 13 financial institutions registered with the MOF,
including banks and bond dealers, to underwrite primary issues of
government securities and activate trading in the secondary market
through sale, purchase and repurchase agreements of government
securities. Information on the Decree and Executive Regulations
establishing the Primary Dealers System can be found at:
www.mof.gov.eg/debt.

Benchmark 2.2 - Initiate trading of government bonds off the stock
exchange in an open market where buyers and sellers may directly
trade.

Completed - The Primary Dealers System was restricted, in the first
quarter of FY 2004/05 (July - September 2004), to Treasury Bills in
order to ensure efficient functioning of the system. In October
2004 it was extended to bonds. A secondary market for government
securities, working through the Primary Dealers System, has
developed and trading is taking place off the stock exchange, i.e.,
over the counter, but the Capital Market Law requires that all over
the counter transactions be reported to the Capital Market
Authority.

Benchmark 2.3 - Establish the legal status of and launch operation
of Repurchase Agreements for government securities consistent with
international best practices.

Pending - A Repurchase Agreement template was drafted by the
Ministry of Finance and circulated to banks for comment via the CBE.
Amendments to the Capital Market Law to allow short selling are
still pending but are expected to be issued by September.

--------------------------------------------- --------
Policy Item 3: Financial Sector Reform/Privatization
--------------------------------------------- --------

5. (U) The U.S. will disburse USD 100 million in DSP funds for
completion of the following two benchmarks for Policy Item 3:

Benchmark 3.1 - Auditing of the four largest state-owned banks by an
internationally recognized impartial institution in accordance with
standards set by the International Accounting Standards Board
(IASB).

Pending - The audit of Bank of Alexandria (BOA) was completed in
late 2005, and according to CBE Deputy Governor Tarek Amer, auditing
of National Bank of Egypt, Banque Misr and Banque du Caire has been
completed by BDO-Seidman International, KPMG International and
Deloitte, Touche and Tohmatsu, respectively, but the reports have
not yet been released publicly.

Benchmark 3.2 - Divestment of GOE shares in the four largest joint
venture banks.

Completed - The GOE divested all of its shares in the four largest
JV banks, i.e., Misr-International Bank; Egyptian-American Bank;
National Societe Generale Bank and Commercial International Bank.

6. (U) The U.S. will disburse USD 150 million in DSP funds upon
completion of the following benchmark for Policy Item 3:

Benchmark 3.4 - Privatization of the candidate bank (BOA).

Pending - As reported in Ref B, on August 2, CBE and MOI announced a
short list of six candidates who will be allowed to carry out their
own due diligence on the bank. Final financial and technical offers
from the short listed bidders are due at the end of September. The
GOE audit and due diligence on BOA was completed in late 2005. In
accordance with the national NPL policy, the bank's NPL portfolio
(LE 6.9 billion) was settled in February 2006, using proceeds from
the Telecom Egypt IPO in December 2005. As noted in Ref B, GOE
contacts have given various estimates, ranging from September to
December 2006, for completion of the sale.

7. (U) The U.S. will disburse USD 200 million in DSP funds, on an
annual pro rata basis, upon completion of the following benchmark
for Policy Item 3:

Benchmark 3.5 - The private sector banks' share of new loans made in
the banking system during the previous calendar year will be equal
to at least 62.5 percent. Intermediate progress toward this goal
will be measured from the baseline determined by the initial audit
referenced in benchmark 3.1 and calculated each year by annual
audits of banks according to IASB standards. Pro-rata disbursements
against this benchmark may be made for annual increases in the
private sector banks' share.

Pending - Progress on this benchmark can only be measured when the
2006 full financial due diligence reports on the public banks are
issued.

8. (U) The U.S. will disburse USD 250 million in DSP funds, on an
annual pro rata basis, upon completion of the following benchmarks
for Policy Item 3:

Benchmark 3.6 - The share of NPLs as a proportion of all loans in
the banking system will be reduced by 50 percent from the baseline
determined by the audit of the four largest state-owned banks and
the annual audit of private sector banks.

Pending - Progress on this benchmark can only be measured when the
2006 full financial due diligence reports on the public banks are
issued. However, according to IMF, NPLs declined from approximately
26 percent of total loans in April/May 2005 to 25 percent by
December 2005. Beginning in June 2005, provisioning also increased
as a percentage of NPLs from around 53 percent in June 2005 to 55
percent in December 2005. Earlier this month, CBE Governor El Okdah
held a press conference to announce details of the national NPL
policy. El Okdah claimed that 46 percent of total NPLs in the
banking sector had already been resolved. After settlement of BOA's
NPLs in February 2006, the remaining NPLs held by public banks
totaled approximately LE 26.1 billion. These NPLs would be settled
with proceeds from the GOE's privatization program, including sale
of BOA, and revenues from issuance of a third cellular phone
license. El Okdah also noted that about one half of private sector
NPLs held by public banks had been resolved by individual bank
settlement units, supported by CBE's Arbitration Committee.

Benchmark 3.7 - The cash recovery on NPLs will equal at least 20
percent of the book value of NPLs to be disposed of under the
previous benchmark.

Pending - Progress on this benchmark can only be measured when the
full financial due diligence is completed on the remaining public
sector banks. However, according to CBE, of the 46 percent of total
NPLs that have been settled, 27 percent were collected, including
cash recoveries of 24 percent of the overall debts resolved.

9. (U) Post will report on GOE progress on Policy Items 4-6
septel.
RICCIARDONE

© Scoop Media

 
 
 
World Headlines

 

ALRANZ: Denounces US Senate Confirmation Of Judge Barrett

ALRANZ Abortion Rights Aotearoa denounces the US Senate’s confirmation of Judge Amy Coney Barrett to the Supreme Court seat formerly held by Justice Ruth Bader Ginsberg. “This action demonstrates the rank hypocrisy of the once-respected upper chamber ... More>>

OECD: COVID-19 Crisis Puts Migration And Progress On Integration At Risk, Says

Watch the live webcast of the press conference Migration flows have increased over the past decade and some progress has been made to improve the integration of immigrants in the host countries. But some of these gains may be erased by the COVID-19 pandemic ... More>>

Reporters Without Borders: Julian Assange’s Extradition Hearing Marred By Barriers To Open Justice

After monitoring four weeks of evidence in the US extradition proceedings against Wikileaks publisher Julian Assange, Reporters Without Borders (RSF) reiterates concern regarding the targeting of Assange for his contributions to journalism, and calls ... More>>

OHCHR: Stranded Migrants Need Safe And Dignified Return – UN Migrant Workers Committee

The UN Committee on Migrant Workers has today called on governments to take immediate action to address the inhumane conditions of migrant workers who are stranded in detention camps and ensure they can have an orderly, safe and dignified return to ... More>>