Daily News Egypt met with African Development Bank’s (AfDB) leaders, the Vice President of the bank Khaled Sherif and Country Manager Leila Mokaddem.
During his first visit to Egypt, Sherif said that Prime Minister Sherif Ismail asked the AfDB to fund the railway sector, to which the bank will do so after conducting feasibility studies and studying the current situation to evaluate.
What is the purpose and results of your current visit to Egypt? In addition, what are the meetings held with officials and their results?
The AfDB is fielding this high-level dialogue mission from 2-8 October, led by me as vice president for regional development, integration and business delivery, along with Mohamed El Azizi, director deneral for the North Africa operations, and accompanied by Leila Farah Mokaddem, country manager of the AfDB in Egypt.
This is my first official mission to Egypt, during which time I have held high-level dialogues with the GoE and Donor Partners on the strategic partnership between AfDB and Egypt and discussed the ongoing support the bank provides, especially with the three-year programmatic budget support linked to the GoE’s structural reform agenda. We also discuss the priority of the coming years on how we can support Egypt’s economic agenda and support resource mobilisation for public and private transformational investments.
So far, we have met with the prime minister, ministers of investment, irrigation, finance, and electricity as well as the governor of the Central Bank of Egypt (CBE) along with a breakfast meeting with the main donors working in Egypt. The meetings have been fruitful to both review our existing programme of assistance and discuss the future lending and support that we plan to provide to the government.
Should we expect a new agreement between the bank and the government?
Since 2015, the bank has accelerated its investments in Egypt, it has approved a total of 11 grants totalling $18.3m to build capacity in various entities, such as Egyptian Agency of Partnership for Development, Institute Of National Planning, MOIIC, Nasser Social Bank, as well as carrying out actuarial study for the universal healthcare law. In addition, the bank has approved a total of seven loans amounting to $1.14bn, which includes the two tranches of the budget support operation amounting to $1bn.
Going forward, the bank is committed to approving the last tranche of the budget support operation for $500m in January 2018 as well as financing the expansion of the Abu Rawash wastewater treatment plant in 2017 with a fund of $150m.
There are still $650m to continue financing projects until the end of 2017 and January 2018. After completing the finance programme of 2015-2018, we will negotiate with Egypt a new finance agenda in 2018 and agree on the sectors to finance.
The bank remains committed to the government’s structural reform measures through the third tranche of the budget support operation. The proposed amount is $500m to be considered by the board in January 2018. This operation is being coordinated using the same reform matrix as the third tranche worth $1bn of the World Bank’s loan.
Pipeline for AFDB in Egypt
The bank’s intervention going forward will need to be adjusted during the medium-term review of the Country Strategy Paper (CSP) in January 2018 and could focus on the following:
Informal settlements and job creation: employing youth and upgrading informal settlements.
Wastewater, clean water, and environment: launching projects in those sectors, such as urban wastewater treatment plants.
Renewable energy: supporting the government’s feed-in-tariff programme, renewable energy agenda, as well as transmission and distribution infrastructure.
SMEs: support to SME growth and job creation through lines of credit (LoCs) and other instruments.
Agriculture: developing the irrigation sector for agricultural growth.
What is your evaluation to the government performance after receiving two tranches of the loan to support the government’s reform programme?
The bank has supported the government’s ambitious reform programme since the start of the budget support operation and through the triggers and actions that have been achieved. The government was successful in implementing critical reforms that address the budget deficit and availing pubic resources for critical job-rich investments.
The subsidy reforms will allow to direct additional resources as well as improve access of public services to the poorest and most vulnerable people. The monetary policy and measures put in place by the CBE months ago have been critical to ensure the overall viability of a market-driven economy. These steps, while painful, were more than necessary.
So far, we have released the first and second tranche of the World Bank, a total of $1bn. The support of the AfDB and the World Bank is in line with the IMF support package of $12bn. We are committed to supporting the government’s reform programme and are thus going to support the third and final tranche, and we will focus on three pillars: pillar 1 “enhancing fiscal consolidation”, pillar 2 “ensuring sustainable energy supply”, and pillar 3 “enhancing the business environment”.
Can Egypt request new support for the budget?
Apart for the three-year commitment of $1.5bn from AfDB for budget support, we do not foresee any reasons for additional requests for budget support. Such a decision rests, however, with the government of Egypt.
The discussion with the government last week has focused on the timing of the third tranche of the budget support operation. The government will sustain its reforms’ agenda while strengthening the social safety nets programme.
What are the areas the bank will support in the coming few years?
In the next few years, we plan to support the three main areas, which we have mentioned. We will also support the government in the form of technical assistance and capacity building for specific activities that will be discussed during the mid-term review of the partnership strategy with Egypt 2015-2019. For example, we plan to finance the establishment of an energy efficiency unit at the Ministry of Petroleum. We are also in discussions with development partners to coordinate our assistance in the coming years within the interstate compact agreement with the G20 Compact with Africa.
What is your opinion regarding the current economic reforms taken by the government o Egypt related to the liberalising of the Egyptian pound, cutting oil subsidies, and raising the interest rate at banks?
The reforms taken by the government are meant to address the structural weaknesses affecting the economy. These were also part of the reform programme with the IMF under the three-year IMF Extended Fund Facility (EFF) amounting to $12bn. The liberalisation of the exchange rate, as well as the introduction of a VAT and continuing with energy subsidy reform to strengthen the fiscal position, have all had significant effects. Foreign exchange shortages are resolved and interbank market activity is recovering. Egypt has regained investors’ confidence as shown in the great appetite for Egypt’s Eurobond sale in January 2017 and private sector remittances and portfolio investments have increased considerably.
What other reforms are needed to prove the success of the government’s reform programme?
Egypt’s exports need to be recovered. After the devaluation, Egypt is supposed to see a mediate improvement in trade balance. However, we saw that imports collapsed and did not see the exports rebounded. I think the resolution is to create a real private sector (a commercial private sector) through investing in SMEs.
What are the new projects the bank is going to finance after the meeting with the prime minister?
The prime minister asked the bank to provide fund in railways sector. We are going to engage in financing this sector after conducting our studies and study the current situation to evaluate.
What is the size of funds allocated to the energy sector?
The bank’s portfolio consists of a total of 29 operations. The total commitment is valued at $2.34bn out of which 87.1% has been disbursed as of 22 September. The energy sector comprises 48% of the lending program. In 2017, the bank approved three private sector renewable energy operations under the government’s second feed-in tariff programme amounting to $54m.
What are the bank’s plan to develop new projects in Upper Egypt and women?
The bank is committed to address regional disparities in the country and helping the poor in Upper Egypt, especially smallholder farmers was the $70m rural income and economic enhancement project (RIEEP) implemented by the former Social Fund for Development. RIEEP had funded nearly 80,000 SMEs, an increase of 317 percent from the target, and created more than 70,000 jobs. An estimated 43 percent of this funding went to women-owned enterprises.
What is the size of fund allocated for SMEs?
The Bank’s two loans to the National Bank of Egypt—the first of $140m and a further loan of $200m million—have helped nearly 200 small and medium-sized enterprises (SMEs) access vital funding and boost their product lines and sales, as well as creating more than 11,500 new jobs. Going forward, the bank plans to continue to support, LOCs to commercial banks to ensure private sector growth, and job creation. Since 2010, the bank provided $400m for SMEs.
Do you have other programs to support SMEs other than bank financing?
We do not mind to support SMEs but through financial institutions or agencies as we are not able to finance SMEs directly.
We have three strategies to finance SMEs: first is through banks, and we will continue financing those banks through long-term finance and provide guarantees. The other strategy is that we have a North African platform (initiative), which includes junior SMEs in the North Africa region, and they have potential to grow, and we have provided them directly support and technical assistant. We are still in the process of deciding the amount of fund will be allocated for this initiative. Furthermore, we will fund small financial institutions that provide loans for SMEs in Egypt.
Do you have any intentions to launch new fund for new sector that the bank didn’t finance before?
A new area for support in the coming year 2018 will be to support the upgrading of informal settlements along with a focus on job creation with fund of approximately $80m with Ministry of Housing. This is foreseen to be prepared and presented to our board in 2018 subject to headroom issues and the priorities of the government to support this programme.
What is your prospect for foreign direct investment (FDIs) in Egypt? Do you think it will be in energy or should we expect more diversified inflows?
Through the Ministry of Investment and International Cooperation, Egypt is seeing an increase in foreign direct investments (FDIs) flows compared to previous years. We commend the government for taking actions such as approving the new Investment Act and changes in the industrial licensing all of which will lead to an increase in FDI and private sector investments. The key points for increased FDI flows will be to ensure that they are job rich and that they create employment and job opportunities. The focus of the initial FDI flows are likely to remain in the traditional sectors in which Egypt has a comparative advantage, such as energy, petrochemicals, textiles, and food processing.