Cablegate: Eygpt's Economic Reforms Discussed with the Ambassador

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #3219/01 3111211
ZNR UUUUU ZZH
R 071211Z NOV 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7400
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0353

UNCLAS CAIRO 003219

SIPDIS

SIPDIS
SENSITIVE

STATE FOR NEA/ELA, NEA/RA
USAID FOR ANE/MEA MCCLOUD AND RILEY
TREASURY FOR MATHIASON AND HIRSON
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: PGOV ECON EG
SUBJECT: EYGPT'S ECONOMIC REFORMS DISCUSSED WITH THE AMBASSADOR

REF: CAIRO 2826

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY.

SUMMARY
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1. (U) The Ambassador hosted an economic roundtable on October 30
which included the IMF and World Bank representatives, as well as
banking and private sector leaders. While noting the generally
positive economic reforms to date, the group focused on many of
Egypt's development challenges, including: lack of investment in
human capital and physical infrastructure, subsidy reform, and the
need to reform pension, insurance and the fixed-income market as a
means to increase the country's credit efficiency.

IMF AND WORLD BANK GENERALLY UPBEAT, BUT CONCERNS NOTED
--------------------------------------------- ----------

2. (SBU) The IMF Resident Representative summarized the recent
Article IV mission (Reftel). The IMF remains upbeat on the Egyptian
economy and believes that growth is becoming more broad based. He
noted that the Article IV report should go to the IMF Board soon and
could be discussed before the end of November (note: it was not
listed on the most recently circulated Board calendar). The IMF
expects growth of about 7.5% in 2007, just slightly above 2006's
results. While the IMF noted the growth is increasingly broad
based, the impact on most Egyptians has been limited.

3. (SBU) The IMF rep noted that there will continue to be pressure
on inflation, but that generally the monetary and fiscal policies
have been sound, thus containing the inflationary pressure. He
noted that imports are booming as a result of the country's
increased wealth, thus much more inflation is being imported than
had previously been experienced. The IMF continues to view the
large deficit, and the quality of spending as one of the most
important issues that the government needs to tackle.

4. (SBU) The World Bank Resident Representative noted that the
reforms enacted to date had been successful, but that the next
generation of reforms would be harder. Among the next generation of
reforms he included: pension, civil service, and improving the
targeting of subsidies. While he was generally on the financial
sector reforms to date, he noted that banking supervision continues
to need improvement and that insurance reform needs acceleration.

PRIVATE SECTOR VIEWS
--------------------

5. (SBU) Yasser El-Mallawany, CEO of EFG-Hermes, noted that much of
Egypt's growth to date has been based largely on improved
perceptions of Egypt which, in turn, has led to greater increased
Foreign Direct Investment (FDI). While the increased FDI is clearly
good for Egypt, he noted that it is neither sustainable nor a good
strategy upon which to base long-term growth prospects for all
Egyptians. He noted that Egypt needs to use its current "window of
opportunity" to take the next leap to become integrated into the
global economy. He noted that infrastructure (particularly energy)
and human resources were two areas where the Egyptian government is
not dedicating adequate vision or leadership.

6. (U) Subsidies were discussed at length. While all agreed that
the current subsidies are inefficient, there was agreement on how
quickly the Government would or could take further action. The IMF
rep noted that subsidies constitute more of the government budget
than either wages or investment. (Note: combined, subsidies, wages
and debt service make up about three quarters of the Egyptian
budget, leaving very little for productive discretionary
investments). The IMF rep noted that the fuel subsidy is far and
away the most regressive subsidy so it should be fixed the most
urgently (note: for example, a World Bank study notes that the
richest quintile of the population receives 93% of the benefits of
the gasoline subsidy). Other participants, however, noted that the
political sensitivity of the subsidies will make it very difficult
for the government to address soon. The World Bank noted that it is
helping the government replace the food ration cards with direct
cash transfers and better targeting methods. Once this more
efficient system is functioning, it could be used as a mechanism to
increase welfare payments to the poor which will offset the impact
of subsidy cuts.

7. (U) The group discussed the best role for government in improving
the country's physical infrastructure. The government is pushing a
public private partnership (PPP) initiative, which is initially
focusing on schools and hospitals. Mallawany argued that the
Government needs to shift the PPP into those infrastructure projects
which will more immediately have commercial return (roads, ports,
airports), rather than to schools and hospitals which will always
have a large subsidy component. The IMF rep noted that the
experience globally with PPPs has been mixed and noted that there
will still be government liabilities even once the PPPs are
underway. What is most important, the IMF rep argued, is to improve
the quality of service.

8. (SBU) There was some discussion of the lack of investment in
productive enterprises in Egypt. The well-known phenomenon of a
small number of corporate clients chasing all the bank credit
continues. Banks continue to make money without extending much
credit, so there is little incentive for them to extend risky loans
to unknown clients. The same is true in mortgages, where very
little lending is taking place. Gamal Moharam, CEO of Piraeus Bank,
noted that there is very little long-term money available to banks
in Egypt, so banks cannot affordably extend long-term loans. This
led many in the group to note the inefficiencies and underdeveloped
status of the traditional sources of long-term money in Egypt,
particularly pension and insurance (two areas the U.S. is trying to
assist, either via the cash transfer program or traditional
technical assistance). Mallawany was very critical of the lack of a
fixed-income market in Egypt and the dearth of tradable securities.

9. (SBU) The group also discussed the government's inability to
effectively convey its vision or reform agenda to the Egyptian
population. The World Bank noted that without a good outreach
effort, the reforms were at risk, given that the public is not
inclined to trust the government. Abdel Latif, Chairman of Bank of
Alexandria noted that the government is trying hard to improve its
communication with people but blamed inaccurate and irresponsible
reporting by the media for the public misunderstanding. The
Ambassador and Econoffs encouraged the group to push the government
to do a better job of publicizing the program and its goals.

RICCIARDONE

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