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Cablegate: Egypt: Financial Sector Cash Transfer Implementation

VZCZCXYZ0004
RR RUEHWEB

DE RUEHEG #2620/01 2351115
ZNR UUUUU ZZH
R 231115Z AUG 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 6634
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0321

UNCLAS CAIRO 002620

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, NEA/RA, EB/DIBBLE
USAID FOR ANE/MEA MCCLOUD AND DUNN
USTR FOR SAUMS
TREASURY FOR IA/MATHIASON/HIRSON/MURDEN/ABDELRAZEK
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EFIN PREL EAID EG
SUBJECT: EGYPT: FINANCIAL SECTOR CASH TRANSFER IMPLEMENTATION
RESUMED


Sensitive but Unclassified. Please protect accordingly.

REF: Cairo 1932

-------
Summary
-------

1. (U) After several months of waiting for the Central Bank of
Egypt (CBE) to provide draft terms of reference (TORs) for
international audit firms' work in the state-owned banks, we now
have bilaterally-agreed TORs and the auditors can get down to
business. This ends the worrisome delay in the process leading to
the next disbursement of funds under the Financial Sector Reform
cash transfer.

-----------
The Problem
-----------

2. (U) The next disbursement of funds under the Financial Sector
MOU cash transfer program requires audit firms working to
international standards to provide data from the state-owned banks
on progress towards: (i) reducing non-performing loans (NPLs), (ii)
cash recovery of the NPLs, and (iii) growth in private banks' share
in total bank lending. "Pro rata" disbursements over the coming
three years of $475 million depend on this progress. Per reftel,
Embassy was concerned about delays in starting the audits.

------------------------------------------
Governor reviews the CBE's accomplishments
------------------------------------------

3. (U) On July 8, the Ambassador, Treasury attache, econoff, and
USAID met with Governor El Okdah to inquire about the TORs. The
Governor started with a very positive review of the financial-sector
reform program, saying that he had accomplished 80 percent of the
goals that he had set for himself. He said that by 2008, all
Egyptian banks would finally be solvent thanks to energetic measures
on NPLs, including substantial cash recoveries from an "amnesty"
program for smaller loans. He noted that bank credit to the economy
was increasing. Although he worried about growing dependence of the
GOE debt market on capital inflows, he was also clearly delighted to
show the Ambassador a Citibank report showing Egypt as having the
world's highest foreign-exchange reserves relative short term
external debt and noted that the high level of reserves should
contribute to a possible investor upgrade soon (Citibank projects an
upgrade later in 2007).

4. (U) The Governor went on to tout the CBE's institutional
strengthening, which he said USAID's project grants had supported
very substantially. (COMMENT: The Governor may have been lobbying
for approval of his large pending request for additional USAID
project funding, much of which is proposed for salaries. END
COMMENT.) In response to the Ambassador's question, he assured us
that he was establishing management systems which should sustain the
high-quality personnel that USAID's assistance had allowed the CBE
to recruit. The Governor also announced that he was negotiating a
two-to-three year extension in EU assistance for the CBE's banking
supervision function, an area that the USG could potentially be
interested in assisting in, particularly given the link to bank
performance in the cash transfer program. The Governor also hinted
that he would prefer to retire at the end of him term later this
year, but that President Mubarak wanted him to stay. The Governor
did not mention the GOE's decision to privatize the Banque du Caire,
which was publicly announced two days after the Ambassador's
meeting.

--------------------------------------
Governor pledges fast action on audits
--------------------------------------

5. (U) When the Ambassador shifted the conversation to the key
question of the cash transfer and the need for mutually agreed TORs
for the state-owned bank audits, the Governor assured us that he
could move very rapidly to get audit firms to work and generate the
data needed once the USG approved his TORs, citing a extremely
optimistic 30-day implementation goal. (NOTE: Participants learned
later that the CBE had sent TORs to USAID/Egypt's offices just
before the meeting with the Ambassador. END NOTE.) The Treasury
attache noted that the TORs would need careful review, and the
Governor indicated he was open to any language suggestions from the
USG, as long as a new "audit" of the banks was not requested. The
Ambassador agreed to review the TORs and respond to the Governor


quickly so that the international firms could begin their work.

---------------------
New TORs are accepted
---------------------

6. (U) Immediately following the meeting with the Governor, Embassy
coordinated with Washington agencies to provide comments on the
TORs. The goal of the suggestions was to ensure that the firms
would cover the audits with certification letters with more
specificity about adherence to international standards. We
presented compromise text to the CBE on July 26 and on August 16 the
CBE accepted the language and indicated that the international audit
firms would commence work immediately.

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

7. (SBU) This process has brought to a close a worrisome,
open-ended period of delay in the CBE's implementation of actions
essential to implementation of the Financial Sector cash transfer.
(As soon as the new audit information is complete, it will be
reviewed against the 2005 baseline audits to determine what amount
should be disbursed.) We can only speculate on the reasons for the
CBE's long delay, aside from the absence of any sense of urgency on
the balance of payments side. We discount the Governor's
implication that he was waiting for USG guidance on desired changes
in the TORs; the ball was clearly in the CBE's court. However, given
that the privatization plans for the Banque du Caire were announced
shortly after the meeting with the Ambassador, it seems likely that
action on the state-owned bank audits was caught up in internal GOE
debates over bigger issues in the GOE's financial-sector reform
program. Interestingly, CBE staff have separately informed us that
other CBE actions were in fact sidetracked for this reason. The GOE
insisted at the time of negotiating the cash transfer that it had
its own long-term financial reform program, but that it could not,
at least at that time, commit to more specific privatization
actions. The Banque du Caire announcement lends that claim
increased credibility, which is good news.

RICCIARDONE

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