VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1101/01 1501359
ZNR UUUUU ZZH
R 291359Z MAY 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9391
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0408

UNCLAS CAIRO 001101 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA AND EEB/IDF 
USAID FOR ANE/MEA MCCLOUD AND DUNN 
TREASURY FOR MATHIASON AND DENNIS 
COMMERCE FOR 4520/ITA/ANESA 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EG
SUBJECT:  CODEL Gutierrez meets Egyptian Central Bank Governor 
 
Sensitive but unclassified.  Please handle accordingly. 
 
¶1.  (U) Summary: Codel Gutierrez met with Central Bank of Egypt 
(CBE) Governor Farouk el Okdah on May 25 for a wide ranging, 
substantive conversation.  Key themes raised were on banking sector 
reform, high commodity prices, mortgage sector development, and 
unemployment. End Summary. 
 
¶2.  (U) El Okdah began by introducing some of the steps taken by the 
CBE to reform the banking sector.  He noted that when he took the 
job 4.5 years ago, 80% of foreign currency was traded on the black 
market, half of the banks were insolvent, and 60% of banks were 
controlled by the public sector. 
 
¶3. (U) El Okdah ticked off several accomplishments of their 
aggressive reform program.  The number of banks has been reduced 
from 60 to 40 and all are solvent, the total of non-performing loans 
has dropped from 30% to 10-11%, and all but 3 banks (note: Banque du 
Caire to be sold in June) are privately owned.  El Okdah quoted a 
World Bank report which judged the reforms "far-reaching, 
comprehensive, and unprecedented."  He said USAID was one of the 
first partners to support the reform program, and that they have 
been excellent allies throughout the process. 
 
¶4. (U) Chairman Gutierrez asked for El Okdah's thoughts on how 
commodity prices were affecting the reform effort.  El Okdah noted 
that Egypt is heavily dependent imported commodities, so the recent 
price increases has been a major contributor to the current high 
inflation.  He noted that poor Egyptians spend 70% of their income 
on food, so they bear the brunt of high prices.  The current high 
inflation (16.4%) is the third inflationary period since he took 
office in 2004, and he was not optimistic that Egypt will see 3-4% 
inflation anytime soon. 
 
¶5. (U) In response to El Okdah's comment that biofuels are 
contributing to the high food prices, Rep. Bacchus said U.S. popular 
opinion was shifting away from ethanol production because of the 
high cost and environmental impact of its production.  El Okdah 
commented that while people can carpool, they cannot go without 
food. (Note: High food prices and the impact on the poor has become 
a major theme with most of our interlocutors, and President Mubarak 
highlighted this issue in his address at the World Economic Forum.) 
 
 
¶6. (U) Chairman Gutierrez asked about the supervisory environment in 
Egypt.  El Okdah noted that the Central Bank regulates the banks and 
is working with the European Union to improve its supervision 
capacities.  He noted that the non-bank financial institutions are 
regulated by several entities under the purview of the Ministry of 
Investment, but that his staff also sits on the boards of non-bank 
financial institutions so they can contribute to the ongoing 
improvements and that there was a proposal to unify all the 
non-banking supervisors into a single supervisory agency.  He argued 
that the Egyptian oversight system is adequate to keep all the 
vulnerabilities in check. 
 
¶7. (U) Rep. Watt asked if the Central Bank anticipated privatizing 
the remaining two state-owned banks.  El Okdah said there were no 
plans to do so, but that the management of the banks has been 
professionalized and that these banks now follow the same 
regulations as the private banks.  He underlined the CBE's 
commitment to privatize the Banque du Caire within several weeks. El 
Okdah observed that Citibank is the only major American retail bank 
in Egypt. 
 
¶8. (U) Rep. Moran asked how Egypt could develop a middle class 
without a better functioning mortgage system.  He noted that home 
ownership was one of the most important keys the United States' 
economic success.  El Okdah agreed and noted that the government was 
trying to stimulate the nascent mortgage industry.  Mortgages were 
not even legally available until 2004, as a result of inadequate 
legislation.  The credit bureau just opened in Egypt two months ago 
and will be fully-operational in July 2008.  The mortgage market 
remains tiny, but has grown significantly in three years.  In 2007, 
there were 1.5 billion Egyptian pounds (USD 277 million) in 
mortgages compared to 20 million Egyptian pounds (USD 3.7 million) 
in 2004. 
 
¶9. (U) Several members wondered about unemployment in Egypt.  El 
Okdah said Egypt needs to create 700,000 jobs a year, which will 
require an investment rate of 26% of GDP.  Savings and investment 
rates are traditionally low in Egypt.  Investment as a percent of 
GDP was 17% in 2004 and has risen to 22% now.  He noted that 
unemployment is approximately 11.5% and going down.  Egypt's main 
problem over the next five years, he argued, is having adequate 
skilled labor.  El Okdah also described Egypt's public education 
 
system as ineffective. 
 
¶10. (U) Chairman Gutierrez and Rep. Moore asked about wage levels. 
El Okdah noted that wages were keeping up with inflation in the high 
growth sectors such as oil and gas, construction, agribusiness and 
telecommunications.  However, he noted that pensioners and civil 
servants are the ones suffering as their wages are low and are not 
market based, so the wages do not respond to supply and demand 
pressures. 
 
¶11. (SBU) The Codel also met President Mubarak and with the banking 
committee of the American Chamber of Commerce.  President Mubarak 
raised his concerns about rising food prices and the impact of US 
biofuel subsidies on commodity markets.  Several AmCham members also 
raised this issue with the CODEL. 
 
¶12. (U) CODEL Gutierrez did not have the opportunity to clear this 
cable before departing post. 
SCOBEY