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Cablegate: Nazif Affirms Importance of Esf, Pledgest Continued Reform


DE RUEHEG #2098/01 2691349
P 251349Z SEP 08

C O N F I D E N T I A L CAIRO 002098



E.O. 12958: DECL: 09/23/2018

REF: A) CAIRO 931 B) CAIRO 397 C) CAIRO 1370 D) CAIRO 1560 E) CAIRO 730 Classified by Ambassador Margaret Scobey for reason 1.4 (d).
1.(C) SUMMARY: In a meeting with the Ambassador, Prime Minister Nazif said that it is essential that the GOE continue with its economic reform program, including privatization, and maintain high growth levels. He said that Egypt has been able to "weather a difficult year" but that "we can't take a second blow." He said inflation was the biggest challenge, and would prevent further subsidy adjustments in the near term, but was also concerned about developments in international financial markets. On ESF, Nazif appears to distance himself from the Ministry of International Cooperation's (MIC) position of "no new projects" after FY 2008 (ref a), and called ESF a "symbol of friendship and partnership." He reitereated earlier comments that the level per se was not as important as the fact that it is "a way to bring in know-how that we couldn't get any other way." The prime minister downplayed concerns about the draft media law (ref b) and observed that efforts to censor the internet would not be effective. "As long as I am prime minister, we will not censor the internet, or remove Facebook." In a discussion about Ayman Nour, he repeated the GOE position that Ayman Nour's case is a criminal one, not a human rights case, and that mention of Nour by POTUS was very upsetting to President Mubarak. END SUMMARY.

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2.(C) Ambassador called on Prime Minister Ahmed Nazif on September 22 to review the status of the economic reform program and ESF issues, accompanied by econ counselor (notetaker). She opened by delivering Secretary Rice's Eid greetings to the prime minister, for which he was grateful. He asked about recent developments in US financial markets. He said Egypt has been able to weather a difficult year, noting that inflation remains very high. He described inflation in Egypt as "imported," with about 80 percent of it attributable to increasing food and energy prices. Nazif said the GOE had addressed this with the "May package" of a thirty percent wage hike to government employees, offset by tax hikes and a reduction in energy subsidies. With these measures, combined with high growth rates, the GOE brought the budget deficit within targets, but, he cautioned, "we can't take a second blow." The GOE hopes to maintain growth at 6.0-6.5% percent this year, but Nazif said this is a minumum.

3.(C) When asked about plans for continued reform, Nazif explained that the GOE had made its commitment to economic reform clear at the WEF in Sharm in May 2008. Now, he said, "we need action." A major goal of the GOE right now is to fix internal market mechanisms, and to improve internal trade. Egypt needs distribution centers for wholesale and retail trade outside of Cairo and Alexandria. This, he said, would create investment opportunities and jobs, and allow the development of a more structured market. It will increase competition in the market and smooth retail prices. It will be up to the private sector to create these distribution points, but the problem they face is land. The GOE is working to identify and provide small parcels (about 50 acres) to private commercial developers.

4.(C) Another major goal is to revitalize the privatization process. The GOE plans to rehire the consultant for the Banque du Caire privatization as a signal to the markets that the GOE still intends to sell the bank (ref c). They are also looking at other ways to privatize firms including mass privatizations, as was done in eastern Europe. These programs will be announced at the NDP party conference in November.

5.(C) On the issue of energy, the prime minister observed that energy prices in Egypt did not change between 1992 and 2004. Since 2004, gasoline prices have risen 75 percent, and diesel, 120%. Under current economic circumstances and inflation rates (24 percent year-on-year in August 2008), it would be hard, he said, to raise prices again. The GOE target is single digit inflation by mid-2009. The Egyptian pound, he said, is sometimes seen as slightly undervalued, and if it were to strengthen somewhat this would have an impact on inflation. Nazif also noted that the composition of Egypt's foreign reserves in terms of currency closely reflect the breakdown of its foreign debt, thereby protecting Egypt from currency movements. Once inflation is down, he hopes that the GOE can restart the reform program and return to accelerated growth rates. Economic Assistance -------------------

6.(C) The Ambassador reminded Nazif that the Administration has proposed $200m in ESF for Egypt in 2009, but that Congress has not taken any action as yet. She underlined that even at $200m, Egypt is one of the USG's largest aid recipients. She said USAID would like to continue to focus on health, education and poverty eradication. Nazif agreed, commenting that "the economic assistance is a symbol of our cooperation. The value is not the money, but in the partnership, in the flexibility of the assistance, and for the expertise." The significance, he said, is in those two things: "it has been a symbol of friendship and partnership, and it is channeled to areas where it is difficult to use Egyptian government funds." "It is a way to bring in know-how that we couldn't get any other way." "We should keep it intact."

7.(C) The Ambassador outlined what we have been told by MIC's Fayza Aboulnaga; that the Egypt government does not accept this level, and that no new projects will be signed using FY 2009 money (ref a). This, she explained, was forcing USAID to make decisions on ongoing programs. One area that will be affected will be salary support for Egyptians who have been recruited internationally, and outside the civil service system, to work within the reform units at the economic ministries. USAID will phase out ESF support for these experts, and suggests that the GOE program local currency to cover these costs. Nazif responded that the GOE was "a little disappointed" in the process of setting the new ESF level, and "that is the reason that Fayza is taking this approach." Nazif said that the USAID support for these reform units has been very helpful, and remain critical to getting the right people on board as they cannot be paid under Egypt's current civil service pay scale. "It will put us into trouble," he said, "if we don't find a way to pay for this."

8.(C) In discussing the future of the overall program, the Ambassador underlined that it is important to the U.S. to remain engaged in projects that directly benefit the Egyptian people. "We have a significant military assistance program. We want to maintain our economic assistance as well," she said. She noted that there is no support within the Administration for using ESF for debt relief, and that it did not make economic sense. Nazif did not disagree. She noted that the idea of an endowment, or foundation, has not been rejected, but that it would require Congressional action. The Ambassador also said that the D&G program continues to garner Congressional attention, and cautioned that an endowment would not get Egypt out from under this requirement. Nazif observed that "we do not see the foundation as a way out of D&G programming," adding that the U.S. and Egypt agree on the basics of the program. Media law ---------

9.(C) The Ambassador noted the importance of not backtracking on progress made in media freedom, and expressed concern about press reports about the draft media law (ref b). Nazif said that the draft law had been misrepresented in the press, and that the intent of the law would be to create a media regulator, with the authority to issue licenses to media outlets, and was not based on recent Arab League resolutions regarding the media (ref d). The prime minister observed, however, that the GOE continued to be concerned about the potential for using the internet, and Facebook in particular, to incite violence, as was the case leading up to the April 6 Mahalla riots (ref e). He agreed that banning Facebook and limiting internet access was not effective, but said the GOE would monitor the internet closely. However, "as long as I am prime minister," he said, "we will not censor the internet, or remove Facebook." Ayman Nour ----------

10.(C) The Ambassador noted that the President would be speaking about D&G in New York that day at a democracy luncheon, and the issue of Ayman Nour's continuing detention could arise. Nazif responded that such a public statement would not do Ayman Nour any good. He said President Mubarak becomes very upset every time that President Bush raises the case, as he considers it a criminal, rather than a human rights, case, and that raising it publicly would not help Nour. The Ambasasdor responded that the USG continues to take this case very seriously, and would continue to raise it. Nazif commented that the Egyptian government would always talk to the US about these issues privately. SCOBEY

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