This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 CAIRO 001838 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ELA, NEA/RA, EB/IDF AND EB/OMA 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR NUGENT/ADKINS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: GOE MAKES SIGNIFICANT PROGRESS ON FINANCIAL SECTOR 
 
REFORM 
 
------------------------ 
Summary and Introduction 
------------------------ 
 
¶1.  (SBU) The GOE made substantial progress in financial 
sector reform in 2005 and is nearing completion of many of 
the benchmarks in the DSP-II Financial Sector MOU, signed in 
March 2005.  Post and the USAID Mission estimate the GOE 
will have met all of the benchmarks for the first three 
policy items in the MOU by September 2006.  Though the 
targets for meeting these benchmarks, as set out in the MOU, 
have all passed, post and USAID agree that the targets were 
not realistic at the time the MOU was signed.  The dates 
were set when negotiation on the MOU began in 2002 and were 
not adjusted when negotiations finally concluded in December 
¶2004. 
 
¶2.  (SBU) Following is an assessment of GOE progress on 
benchmarks in the MOU.  As noted above, the GOE is likely to 
meet the benchmarks for the first three policy items by 
September 2006, but will need more time to complete the 
benchmarks for policy items 4 and 6.  Policy item 5 has been 
completed, but disbursement of DSP funds tied to policy item 
5 is contingent on completion of the benchmarks for policy 
item 4 as well.  The informal assessment below is based on 
information gathered from GOE and private sector contacts, 
official GOE statements and websites and independent media 
reports.  The USAID Mission and GOE are close to finalizing 
the specific documentation that will be needed to certify 
that benchmarks have been met.  USAID will maintain this 
documentation at post and will seek Washington approval of 
disbursement of DSP funds as the benchmarks are met.  End 
summary and introduction. 
 
--------------------------------------- 
Policy Item 1 - Central Bank Management 
--------------------------------------- 
 
¶3.  (U) $25 million in DSP funds are tied to completion of 
the following three benchmarks for Policy Item 1: 
 
¶A.  The Central Bank of Egypt (CBE) will establish and 
appropriately staff units for: 
 
- Monetary Policy 
 
Status:  CBE established a Monetary Policy Committee (MPC) 
composed of members from various GOE ministries and CBE in 
June 2005.  The MPC has held regular monthly meetings since 
its establishment, setting the goals or Egypt's monetary 
policy and administering changes to interest rates 
accordingly. 
 
- Foreign Exchange Management and a Foreign Exchange Dealers 
System 
 
Status:  An interbank market for foreign exchange was set up 
in September 2004 and the convention governing interbank 
foreign exchange trading was formally adopted in December 
¶2004.  A Foreign Exchange Unit was also established. 
 
- 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 
 
Status:  CBE set up as monitoring unit to develop a long- 
term solution to the NPL problem.  In September 2004 it also 
established an Arbitration Committee to help resolve private 
sector NPL problems and other disputes between banks and 
borrowers. 
 
¶B.  CBE will hire the required competent advisors. 
 
Status:  CBE has hired numerous private sector bankers to 
work in the new units established at CBE.  USAID has funded 
the hiring of some of these advisors. 
 
¶C.  CBE will introduce an optional early retirement policy 
and compensation scheme for the CBE. 
 
Status:  CBE is still drafting an optional early retirement 
policy and compensation scheme, but anticipates introducing 
the policy by September 2006. 
 
-------------------------------------------- 
Policy Item 2 - Government Securities Market 
-------------------------------------------- 
¶4. (U) The U.S will disburse $25 million in DSP funds upon 
completion of the following three benchmarks for Policy Item 
2: 
 
¶A.  Implement a Primary Dealers System with dealers 
underwriting new government debt issuance through auctions 
and trading of government securities on the open market. 
 
Status:  The Primary Dealers System was launched on July 4, 
¶2004.  It allows 13 financial institutions registered with 
the Ministry of Finance, 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. 
The system is expected to establish a proper yield curve 
reflecting actual supply and demand for government debt and 
encourage a more efficient bond market. 
Further information on the Decree and Executive Regulations 
organizing the Primary Dealers System can be found at: 
 
www.mof.gov.eg/debt 
 
¶B.  Initiate trading of government bonds off the stock 
exchange in an open market where buyers and sellers may 
directly trade. 
 
Status:  The Primary Dealers System was restricted, in the 
first quarter of fiscal year 2004/2005 (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, 
but trading is still taking place on the stock exchange. 
 
¶C.  Establish the legal status of and launch operation of 
Repurchase Agreements for government securities consistent 
with international best practices. 
 
Status:  The legal status of Repurchase Agreements for 
government securities has been drafted, but has not yet been 
issued.  However, CBE is applying various open market tools 
to affect short-term interest rates and liquidity, including 
outright sales, repurchase and reverse repurchase auctions 
for Treasury bills and deposits. 
 
--------------------------------------------- -------- 
Policy Item 3:  Financial Sector Reform/Privatization 
--------------------------------------------- -------- 
 
¶5.  (U) The U.S. will disburse $100 million in DSP funds for 
completion of the following two benchmarks for Policy Item 
3: 
 
¶A.  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 (this audit will serve as the 
baseline measurement for completion of several other 
benchmarks in under this policy item). 
 
Status: The audit of the Bank of Alexandria has been 
completed.  Auditing of the other three state-owned banks 
will be completed in the next two months and will form the 
basis for calculation of other benchmarks under this policy 
item. 
 
¶B.  Divestment of GOE shares in the four largest joint 
venture banks. 
 
Status:  The GOE has 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 $150 million in DSP funds 
upon completion of the following benchmark for Policy Item 
3: 
 
¶A.  Privatization of the candidate bank (Bank of 
Alexandria). 
 
Status:  The audit and due diligence on the Bank of 
Alexandria have been completed and sale of GOE shares, to an 
anchor investor and through an IPO, have been announced, as 
have the terms of the sale.  CBE believes the sale will be 
completed by September 2006.  Citibank is acting as advisor 
for the sales strategy. 
 
¶7.  (U) The U.S. will disburse $200 million in DSP funds, on 
an annual pro rata basis, upon completion of the following 
benchmark for Policy Item 3: 
 
¶A.  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%. 
 
Status:  Progress on this benchmark can only be made upon 
completion of the audits of the four largest state-owned 
banks. 
 
¶8.  (U) The U.S. will disburse $250 million in DSP funds, on 
an annual pro rata basis, upon completion of the following 
benchmarks for Policy Item 3: 
 
¶A.  The share of NPLs as a proportion of all loans in the 
banking system will be reduced by 50% from the baseline 
determined by the audit of the four largest state-owned 
banks and the annual audit of private sector banks. 
 
Status:  According to the IMF, NPLs rose to over 25% of 
total loans in September 2004, compared to 20% in June 2003, 
and provisioning continued to fall.  Given the dearth of new 
credit, the recent behavior of these indicators mostly 
reflects improved classification of old loans and stricter 
enforcement of prudential regulations.  In early January 
2006, the government announced a new scheme for the 
repayment of public enterprise loans to banks, on the order 
of LE 32 billion, including LE 25 billion in irregular 
loans.  As a first step in the new plan, a cash settlement 
has been concluded for public sector debts of LE 6.9 billion 
to the Bank of Alexandria. 
 
¶B.  The cash recovery on NPLs will equal at least 20% of the 
book value of NPLs to be disposed of under the previous 
benchmark. 
 
Status:  Progress on this benchmark cannot be made until 
progress is made on the previous benchmark. 
 
--------------------------------------------- --------- 
Policy Item 4:  Strengthening the Financial Sector and 
Policy Item 5:  Corporate Governance 
--------------------------------------------- --------- 
 
¶9.  (U) The U.S. will disburse $50 million upon completion 
of the following 6 benchmarks for Policy Items 4&5: 
 
¶A.  Issuance of regulations that would: 
 
- Establish standards for real estate appraisal; 
 
Status:  The standards and the system for conducting the 
real estate appraisals are currently being prepared in 
cooperation with the Mortgage Finance Authority and the MOI 
through the national project for urban real estate 
registration being implemented by the Ministry of State 
Administration Development (MSAD). 
 
- Establish a real estate appraisal and certification 
program; 
 
Status:  Appraisers are currently required to sit for a 
course with the Mortgage Finance Authority in order to be 
certified. 
 
- Establish a national land title registration system, 
including procedures and appropriate information systems; 
 
Status:  The national land title registration system is 
still being developed and there are nine pilot projects 
ongoing in three governorates (three in Cairo, three in Giza 
and three in Qalyubeya).  The GOE is currently working on a 
deed (personal) registration system. 
 
- Reduce property transfer and/or registration fees to less 
than 1% of the transaction price; 
 
Status:  Registration fees have been reduced from 6% to 3% 
of the property amount.  The Ministry of Justice (MOJ) and 
MSAD are preparing a draft law to amend the current law, 
which would fulfill the benchmark.  The draft law is to be 
submitted to Parliament in March 2006. 
 
¶B.  Pass legislation to: 
 
- Define rules for joint property ownership; 
 
Status:  A draft regulation was submitted to MOJ in February 
2006 on divided co-ownership of moveable property. 
 
- Establish land ownership (title) certification for the 
purpose of securing land holding for residential or 
commercial property; 
 
Status:  The draft law being prepared by the MOJ and MSAD, 
should, according to MSAD, establish land ownership (title) 
certification.  Land ownership certification is still 
problematic. In Egypt, even if land is initially registered, 
ownership transfer is not registered. This is mainly due to 
cumbersome registration procedures and lack of awareness by 
the public. 
 
¶C.  Pass legislation and issue implementing regulations to 
enact modern bankruptcy procedures, including foreclosure 
and eviction and procedures that would facilitate joint 
lender/debtor resolution of outstanding debts. 
 
Status:  Regulation on bankruptcy procedures exists in the 
mortgage law.  Agents entitled to certify foreclosure, 
eviction, and other procedures are receiving preparation at 
the Mortgage Finance Authority, although foreclosure and 
evictions procedures remain extremely difficult to enforce. 
 
¶D.  Pass legislation, if required, and implementing 
regulations that would permit establishment of private 
credit bureaus. 
 
Status:  On August 30, 2005 CBE issued rules and procedures 
for the licensing of credit bureaus, and also issued 
approval to establish the first private credit bureau, the 
Egyptian Credit Bureau (ESTAILAM).  ESTAILAM will have 
responsibility for credit investigations and credibility 
ratings for bank loans, real estate transactions, financial 
leasing and commodity procurement.  The minimum required 
capital for credit bureaus is LE 5 million.  On January 16, 
2006, the CBE Board of Directors approved implementing 
regulations for the operation of credit bureaus; rules 
governing the exchange of data and information and the 
system CBE will employ to monitor credit bureaus. 
 
¶E.  Facilitate securitization through completion of 
legislative changes. 
 
Status:  Securitization regulations were introduced into the 
Capital Market Law in June 2004.  However, to date no 
securitization has been carried out.  According to industry 
sources, there are no strong financial notes meriting 
securitization. 
 
¶F.  Publish a corporate governance best practice code to 
generate awareness and encourage companies to comply with 
the code. 
 
Status:  Guidelines for private sector corporate governance 
have been issued by the Ministry of Investment, in the form 
of a Ministerial Decree No. 332/2005 in October 2005.  The 
guidelines were prepared in accordance with OECD corporate 
governance principles, and are not binding.  The guidelines 
apply primarily to share-holding and limited-liability 
companies, established under Law 159 for 1981 (the Companies 
Law) and Law 95 for 1992 (the Capital Market Law), in 
addition to brokerages.  Guidelines for public enterprise 
sector are under preparation and will be legally binding 
when issued.  The Ministry of Investment anticipates issuing 
these guidelines in April 2006. 
 
-------------------------------- 
Policy Item 6:  Insurance Sector 
-------------------------------- 
 
¶10.  (U) The U.S. will disburse $25 million in DSP funds 
upon completion of the following benchmark of Policy Item 6: 
 
Privatization of the candidate public insurance company. 
Status:  Ministry of Investment announced in mid-September, 
that Egypt has commissioned an international consortium to 
restructure its major state-owned insurance companies, 
opening the way for their privatization.  The ministry 
selected BNP-Paribas, Egypt's Commercial International Bank, 
and the New York-based insurance consultancy firm Milliman 
to do the job and signed a contract in February 2006.