Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 32190-EG

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND INTERNATIONAL FINANCE CORPORATION

COUNTRY ASSISTANCE STRATEGY

FOR

THE ARAB REPUBLIC OF EGYPT

FOR THE PERIOD FY06-FY09

May 20, 2005 Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

The date of the last Country Assistance Strategy for Egypt was June 5, 2001

CURRENCY AND EQUIVALENTS Unit of Currency = Egyptian Pound (LE)

1US$ = 5.8 LE (average during April 2005) Fiscal Year: July 1 – June 30

ABBREVIATIONS AND ACRONYMS

AAA AfDB AML/CFT CAS CBE CDS CGA CMA DAG DPR EC ESW EU FATF FDI FIAS FSAP FY GASC GAFI GATS GDP GEF GER GFI GOE GTZ IBRD ICA ICT IDF IFAD IFC IMF KfW

Analytical and Advisory Activity African Development Bank Anti-Money Laundering and Combating Financing of Terrorism Country Assistance Strategy Central Bank of Egypt City Development Strategy Country Gender Assessment Capital Market Authority Donor Assistance Group Development Policy Review European Commission Economic and Sector Work European Union Financial Action Task Force Foreign Direct Investment Foreign Investment Advisory Service Financial Sector Assessment Program Fiscal Year General Authority for Supply of Commodities General Authority for Investment General Agreement on Trade and Services Gross Domestic Product Global Environment Facility Gross Enrollment Rate Gross Fixed Investment Government of Egypt German Agency for Technical Cooperation International Bank for Reconstruction and Development Investment Climate Assessment Information and Communication Technology Institutional Development Fund International Fund for Agric. Development International Finance Corporation International Monetary Fund German Development Credit Agency

LIBOR MDG M&E MENA MIC MIGA MOF MOE MOU MTEF NCW NDP NIB NPL ODA OECD OED PEP-MENA PER PESW PIC PPI PBDAC PPP PSB QAG QIZ R & D SFD SME SOE SWAP TA TDO UN UNDP USAID WBI WTO

London Interbank Offered Rate Millennium Development Goals Monitoring and Evaluation Middle East and North Africa Middle Income Country Multilateral Investment Guarantee Agency Ministry of Finance Ministry of Education Memorandum of Understanding Medium-Term Expenditure Framework National Council for Women National Democratic Party National Investment Bank Non Performing Loan Official Development Assistance Organization for Economic Cooperation and Development Operations Evaluation Department Private Enterprise Partnership for Middle East and North Africa Public Expenditure Review Programmatic Economic/ Sector Work Public Information Center Private Participation in Infrastructure Principal Bank of Dev. and Agr. Credit Public Private Partnership Public Sector Bank Quality Assurance Group Qualifying Industrial Zone Research and Development Social Fund for Development Small/Medium Enterprise State Owned Enterprise Sector Wide Approach Technical Assistance Total Debt Outstanding and Disbursed United Nations United Nations Development Program US Agency for International Develop. World Bank Institute World Trade Organization

MANAGERS AND STAFF RESPONSIBLE FOR THIS CAS

IBRD Vice President Country Director Task Manager

IFC

Vice President Director Task Manager

Christiaan Poortman Emmanuel Mbi Farrukh Iqbal Assaad Jabre Sami Haddad Margaret Henderson

ACKNOWLEDGEMENTS

The World Bank Group greatly appreciates the cooperation of Government of Egypt in the preparation of this CAS. Government officials gave generously of their time and ideas at various stages and the final product has benefited greatly from their inputs. Non-government stakeholders were also consulted during the preparation of the CAS and their contributions are also appreciated. By its design, a CAS is a group effort and the Egypt CAS has been no exception to this rule. Within the Bank, the team effort was reflected in the fact that numerous staff provided suggestions and ideas at several country team meetings and written comments on various drafts. We are grateful to all who have contributed to this CAS. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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TABLE OF CONTENTS Page

EXECUTIVE SUMMARY ......................................................................................................................... iii

I. COUNTRY CONTEXT............................................................................................................................ 1

A. Economic Growth, Poverty, and Human Development Trends..................................... 1 B. Political Context ............................................................................................................. 4

II. DEVELOPMENT AGENDA AND MEDIUM TERM PROSPECTS ................................................ 5

A. The Development Agenda.............................................................................................. 5 B. Medium-term Macroeconomic Prospects..................................................................... 15

III. EGYPT-WORLD BANK GROUP PARTNERSHIP FOR FY06-09............................................... 16

A. Implementation of Previous CAS ................................................................................ 16 B. Salient Aspects of Proposed CAS ................................................................................ 19 C. Expected Outcomes of CAS and Bank Support ........................................................... 23

IV. MANAGING RISKS............................................................................................................................ 31

A. Country Creditworthiness and Exposure to the Bank Group....................................... 31 B. Implementation Risks................................................................................................... 31

ANNEXES

Annex: 1 CAS Results Framework (FY06-09)................................................................. 34 Annex: 2 CAS Completion Report ................................................................................... 42 Annex: 3 Private Sector Development Strategy................................................................ 88 Annex: 4 World Bank Institute Strategy........................................................................... 97 Annex: 5 Macroeconomic Simulations............................................................................. 98 Annex: A1 Egypt at a Glance.......................................................................................... 100 Annex: B2 Selected Indicators of Bank Portfolio Performance and Management......... 102 Annex: B3 Proposed IBRD Lending Program................................................................ 103 Annex: B4 Summary of Non-lending Services............................................................... 104 Annex: B5 Social Indicators ........................................................................................... 105 Annex: B6 Key Economic Indicators ............................................................................. 106 Annex: B7 Key Exposure Indicators............................................................................... 108 Annex: B8 Operations Portfolio (IBRD/IDA/Grants) .................................................... 109 Annex: B8 (continued) Statement of IFC’s Held and Disbursed Portfolio .................... 110 Annex: C Egypt: Country Financing Parameters........................................................... 111

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TABLES Table 1: Baseline Medium-Term Macroeconomic Scenario 16 Table 2: Indicative Assistance Program of the Bank (Fy06-09) 30

BOXES Box 1: Egypt and the Nile Basin Initiative 11 Box 2: Egypt’s Public Debt 32

FIGURES: Figure 1. GDP Growth 1 Figure 2. Investment Trends 1 Figure 3. Fiscal Deficit to GDP Ratio 2 Figure 4. Gross Primary School Enrollment 3 Figure 5. Demographic Transition 4

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EXECUTIVE SUMMARY i. The key development objectives of the Government of Egypt (GOE), as expressed in its

planning documents, are the “achievement of high and sustainable GDP growth” and the “alleviation of poverty and attenuation of income disparities.” To achieve these objectives, the Government seeks to make more use of the private sector as a development agent as well as better leverage the role of the public sector in the economy. Broadly speaking, the growth-enhancing potential of the private sector is to be harnessed through improving the business climate across a broad range of policies (covering trade, finance, and taxation, among others) while the complementary role of the public sector is to be strengthened through enhancing the provision of public services such as infrastructure, education, and macroeconomic stability, among others. Inter alia, this two-pronged growth strategy is expected to help Egypt cope with the challenge of reducing unemployment in the context of a growing labor force. Government also intends to pursue equity through redesigning social policies to meet national welfare objectives in a more effective and efficient manner. In addition, for disadvantaged groups that are unable to participate in the mainstream of economic growth or who are adversely affected by economic reforms, Government intends to strengthen its social safety net system so that more of the vulnerable are covered by it, and its effectiveness is enhanced through administrative decentralization, community-based approaches, and the use of NGOs. Finally, inter-regional equity is to be improved in part through targeted investments in Upper Egypt.

ii. There is a broad overlap between the thinking of the GOE and that of the Bank Group with regard to Egypt’s key development challenges and reform agenda. The Bank Group proposes to help the GOE achieve its goals by aligning its support over the next four years (FY06-09) to three key strategic objectives, namely, facilitating private sector development, enhancing the provision of public services, and promoting equity.

iii. With regard to facilitating private sector development, support by the Bank, IFC, MIGA and FIAS will be directed to achieving three specific outcomes. These are: (a) a financial sector that is more efficient, and responsive to private sector needs; (b) an international trade regime that features lower transaction costs and (c) a business climate that features lower transaction costs for starting, running and shutting down business operations.

iv. With regard to enhancing the provision of public services, Bank Group support will be devoted to ensuring that (a) fiscal and monetary policy are consistent with the requirements of macroeconomic stability; (b) there is an increase in the supply and improvement in the efficiency of infrastructure services (such as power, transport and telecommunications, among others); (c) the quality and relevance of education is improved at all levels; (d) air and water quality are improved and water resources are managed efficiently; (e) the coverage, quality and financial sustainability of the social insurance system is improved and (f) public sector agencies become more accountable.

v. With regard to promoting equity, Bank Group support will aim to (a) improve the coverage and effectiveness of safety nets; (b) reduce disparities between Upper and Lower Egypt; (c) improve access and quality of healthcare for the poor; and (d) reduce gender disparities.

vi. Measures to achieve the above goals and implement the above strategies have already been introduced. The Cabinet appointed in July 2004 has embarked on a far-reaching reform program. Some bold reform measures have already been initiated while plans have been announced for others. At the same time, the growth rate of the economy has picked up, helped by

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policy reforms and favorable external developments. Thus, the political and economic context for the present CAS is very different from that prevailing at the time the last CAS was prepared (June 2001). The earlier CAS was introduced at a time when economic growth was slowing and the political will to pursue reforms appeared to be waning. The current context features both a revival of growth and of interest in reforms. There now exists a remarkable opportunity for the Bank Group and other development partners to harness their financial and technical support for Egypt to an improving economy bolstered by a credible reform program.

vii. In view of the much improved context, the Bank can make available more support than has been possible in recent years. A base case program of $500 million a year on average is proposed in order to support the key development objectives of the CAS over FY06-09. From a structural policy and macroeconomic perspective Egypt is already considered to be in the base case and the objective of Bank Group financing and analytic support would be to maintain the present macroeconomic and reform status.

viii. A high case lending scenario with an average commitment of $700 million per annum is also envisaged. Included in the high case are two quick-disbursing loans to support financial sector reforms that are considered central to improving the climate for private sector development. The triggers for moving to the high case will be twofold: first, evidence of implementation of substantive financial sector reforms and second, a financing plan for meeting the total funding needs of the financial sector reform program that shows at least 10 percent of funding being obtained from non-debt-creating sources. Adherence to such a financing plan will help contain the rise in public debt that is expected from the restructuring of the financial sector.

ix. Finally, a low case scenario, with a lending envelope limited to $250 million per annum, would result from policy-driven deterioration of the main macroeconomic indicators or a significant dilution of the current program of structural reform. On the macroeconomic side, a weakening of the good monetary and exchange rate policies followed in recent years or a deterioration in the consolidated fiscal deficit for reasons unrelated to the proposed trade, tax and financial sector reforms, would raise concerns about the sustainability of a 5 percent or higher growth trajectory. On the structural side, a significant dilution of the present program of trade, tax, investment climate and financial sector reforms would create similar concerns. If such conditions arise, the Bank would move to a low case lending program of about $250 million per annum.

x. The program to be supported by the CAS could face risks from both external and domestic sources including: a slowdown of growth in OECD countries that are important sources of demand for Egyptian goods and services; regional instability that could affect tourism and foreign investment flows; domestic social and political tensions that may result in economic disruption and interruption of reform momentum; and weaknesses in the institutional capacity to manage the reform process. Some reassurance can be drawn from the fact that the external environment is presently favorable and that Egypt has successfully managed an ambitious reform program in the 1990s. The Bank can mitigate the risks as well by providing strategic and high-impact financial support, continuing to demonstrate the expected benefits of selected reforms through quality analytical work, and helping to build coalitions of support within Government, civil society and the international community. However, what is likely to be of decisive importance in the success of this CAS is the degree of ownership of the reform agenda exhibited by the Government of Egypt. At present, this is demonstrably high.

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xi. The following issues are suggested for the consideration of the Board:

• Is the CAS structured to adequately meet the needs of a middle-income client of the Bank Group? Is the mix of analytic work and financial support appropriate? Is the proposed strategy sufficiently flexible?

• Given the specific circumstances of Egypt today, is the emphasis on facilitating private sector development, enhancing the provision of public services, and promoting equity appropriate?

• Are the risks to the CAS adequately described and addressed?

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Figure 1. GDP growth in Egypt

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I. COUNTRY CONTEXT

A. Economic Growth, Poverty, and Human Development Trends Growth and Macroeconomic Trends

1. Egypt experienced high growth in the second half of the 1990s following the adoption of a structural adjustment program. A structural adjustment program was undertaken by the Government of Egypt in 1991 to cope with the severe macroeconomic instability that had arisen in the second half of the 1980s. Between 1986 and 1990, this instability was reflected in high fiscal deficits (reaching 15 percent of GDP), high inflation (exceeding 20 percent in some years), large current account deficits, and currency volatility (the black market premium on the Egyptian pound exceeded 70 percent on two occasions in this period). Partly as a result of this instability and partly as a result of an ongoing slowdown in world economic demand, economic growth in Egypt collapsed to 1 percent in FY91. The stabilization and reform effort that was launched thereafter had quick and substantial effects. Over the next four years, the fiscal deficit fell to 1.3 percent of GDP while inflation returned to single-digit values. A sharp devaluation of the pound resulted in significant improvement in the current account position, virtual elimination of the black market premium, and rapid accumulation of foreign exchange reserves. A major privatization effort was undertaken, resulting in the sale of about 21 percent of all SOE assets between 1991 and 1998. Trade was gradually liberalized, with the average tariff rate falling from 27.8 in 1991 to 20.5 in 1998. The economy revived and grew by around 4 percent per annum on average during FY92-95 before accelerating to a 5.5 percent average during FY96-00.

2. Economic growth and investment levels faltered after 2000. After the strong run-up of the late 1990s, Egypt’s GDP growth rate decelerated between 2000 and 2003, averaging only around 3.2 percent per annum. The loss of growth momentum was accompanied by a decrease in both private and public investment. Private investment has declined from around 11 percent of GDP in 1998 to around 8 percent currently. This low level is a cause for concern since it is widely believed that private investment must serve as the main engine of future growth and employment. Public investment has fallen from around 15 percent of GDP in 1998 to around 8 percent currently. While helpful from a short-term debt management perspective, this decline is also a cause for

Figure 2. Investment trends in Egypt

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concern since it may have compromised the infrastructure base that Egypt needs for future growth. At 16 percent of GDP, the domestic investment rate in Egypt is about two-thirds of the level observed in the top ten fastest-growing lower middle income countries in the world.

3. Fiscal deficits have been rising, leading to concerns about fiscal and public debt sustainability. Fiscal deficits began rising after FY98, following a long period of improvement. Austerity measures, principally with respect to public investment, undertaken in the context of the Economic Reform and Structural Adjustment Program reduced the fiscal deficit from 15 percent in FY91 to around 1 percent between FY95 and FY98. Since then, however, the deficits have risen steadily and stood at 7.6 percent of GDP at end-FY04 (using the broad definition of the public sector) or 2.7 percent of GDP (using the consolidated definition).1 The net public debt level corresponding to the consolidated deficit, as derived from data published by the Central Bank of Egypt, stood at 88 percent of GDP at end-FY04.

4. A growth revival now appears to be underway helped by policy reforms and favorable external developments. The growth rate of the economy picked up in 2004, rising to 4.4 percent. This was most likely due to certain policy reforms as well as to favorable external developments. A key domestic policy reform consisted of the flotation of the Egyptian pound in early 2003. Despite some hitches in the initial management of the float, the substantial depreciation (of about 35 percent) that occurred during 2003 helped boost Egypt’s foreign exchange earnings from such sources as tourism and manufactured exports, thus contributing to the growth pick-up. A key external development that worked in Egypt’s favor during 2004 was the increase in world economic demand. World economic growth rose from 2.7 percent in 2003 to 4.0 percent in 2004, helping increase traffic (and Government revenues) through the Suez Canal as well as demand for key Egyptian exports. Foreign exchange earnings have also been boosted by exports of recently-developed gas resources and by rising oil prices.

Poverty and Human Development Trends2

5. Poverty was reduced during the second half of the 1990s. Between FY96 and FY2000, the poverty incidence rate declined from 19.4 percent to 16.7 percent. This decline may be attributed in part to the overall growth of the economy during that period. The two regions (Lower and Metropolitan Egypt) that grew the fastest during this period also experienced the most rapid rates of poverty reduction. By contrast, Upper Egypt grew the slowest and actually experienced an increase in poverty. In more recent years, the poverty situation may have deteriorated since the average growth rate of the economy has been lower than in the late 1990s and since inflation has been somewhat higher. More information on poverty trends during FY00-FY05 will become available once the 2005 Household Income and Expenditure Survey is completed and analyzed.

1 A new fiscal reporting system was adopted by Egypt in FY00. This distinguishes between three definitions of the public sector. The first and narrowest definition covers only the central government, local administration and public service authorities. The second (“broad”) version includes as well the accounts of the General Authority for the Supply of Commodities (GASC) and the National Investment Bank (NIB). The third (“consolidated”) definition incorporates the Social Insurance Funds (SIFs). The consolidated concept yields lower deficit and debt levels since the SIFs are a net source of financing. 2 See Annex B5 for achievements to date with respect to specific Millennium Development Goals (MDGs).

Source : Calculated from MoF data published by CBE

Figure 3: Fiscal Deficit - to - GDP Ratio

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Deficit, Old Series Deficit, Budget Sector, NIB & GASC Deficit, Budget Sector, NIB, GASC & SIFs

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6. Egypt has a good record in providing education to its citizens. Educational attainments in the country have been rising steadily. Between 1980 and 2002, gross primary enrolment rates rose from 73 percent to 96 percent while secondary enrolment rates rose from 50 percent to 85 percent, a performance that is among the best in the MENA region as well as among lower middle income countries. Nevertheless, many challenges remain, chief among these being the improvement of education quality, the achievement of cost effectiveness, and the provision of access to underserved groups in remote locations.

7. Steady progress has been made in improving health indicators but significant challenges remain. Life expectancy at birth increased from 55.5 years in 1980 to 68.9 years by 2002, thus catching up with the MENA average which is currently at 68.6 years. Over the same time period, the under-five mortality rate fell from 173 per 1000 to 39, a performance that is substantially better than the average in MENA which fell from 134 to 54. Maternal care has also improved and maternal mortality rates are now estimated to be around 84 per 100,000 live births. As with education, however, important challenges remain. Significant inequities persist in health outcomes: among the poorest income quintiles, infant mortality rates stood at 76 per 1000 live births, compared to 30 among the highest quintile households. At the same time, the impact of the demographic transition, rapid urbanization and changing lifestyles is contributing to proportionate increase in non-communicable diseases and injuries. This shift in disease profile will necessitate changes to the health services that will significantly increase the cost of health care. Unless this transition is carefully managed, this could lead to a major cost escalation in the health sector without commensurate improvements in health outcomes, which could negatively affect labor productivity. Thus, Egypt faces the dual challenge of improving access to health care and health outcomes among the poor while raising the quality and efficiency of health services to meet the rising demand for more costly health services.

8. Safety nets for the poor exist but can be much improved. The public safety net system in Egypt consists of various subsidies, employment programs, and cash transfer arrangements. However, there is much room for improvement in the cost-effectiveness of the safety net and its coverage of the poor. There are major targeting issues amongst the different programs since many of them benefit the non-poor more than the poor. Approximately one million families in Egypt are covered by cash transfer programs but only about 15 percent of these families qualify as poor by the national poverty line criterion. Moreover, for those that do have access, such transfers are meager and make up only around 5 percent of their total income.

9. Substantial progress has been made with respect to gender disparities. As a result of past investment in human capital, Egypt has made substantial progress in closing gender gaps in education, health, and economic participation. The average gross enrollment rate (GER) for girls has progressively improved over time at both primary and preparatory levels and the gap with boys has been reduced. Relatively greater improvement has been achieved in Upper Egypt where average GERs were lowest for girls. Improvements in access to public health and information have resulted in lower maternal mortality rates, higher contraceptive rates and lower fertility. There has also been progress in women’s economic empowerment, as reflected in the increase in women’s participation in the labor force from 18 percent in 1994 to 22 percent in 2004 and in women’s access to credit (for SMEs) rising from 10

Figure 4. Gross primary school enrollment in Egypt

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percent in 1994 to 27 percent in 2004. Legislative efforts have helped empower women. These include the Family Tribunal Law, the Nationality Law and the Family Court Law as well as measures strengthening a woman’s right to divorce, all of which have built stronger legal rights and privileges for women and children.

10. Egypt is currently undergoing a demographic transition which offers both challenges and opportunities. The share of the working age population in Egypt’s total population has been increasing since the early 1990s. Projections suggest that this increase will continue until it plateaus at about 67 percent in 2020. If the economy manages to absorb the incremental labor force through the creation of productive private sector jobs, this could boost economic growth and increase the savings rate. Combined with declining fertility, this would create the potential for a virtuous cycle leading to further growth acceleration as the lower number of children per worker would help to increase per capita investment in human capital. On the other hand, a failure to create sufficient productive employment opportunities would likely exacerbate social pressures. At almost 11 percent (higher for fresh graduates, especially women), unemployment is already quite high and a focus of attention in policy making circles.

B. Political Context 11. Political stability and economic reforms. As is well known, stability and continuity have been prominent features of Egypt’s political system for several decades now. This system has proved able to accommodate both rapid and substantial changes in the nature and content of economic policies, a prominent example from the 1990s being the adoption of a comprehensive structural adjustment program in 1991 and more recent examples being the flotation of the currency in 2003 and the reinvigoration of reform efforts in 2004.

12. The Cabinet appointed in July 2004 has embarked on a far-reaching reform program. The mandate of the new government is to improve living standards, promote investment, reduce unemployment, contain inflation, and improve the performance of the financial system and of administrative bodies. Some bold reform measures have already been initiated while plans have been announced for others. The government plans to facilitate private sector development through improving trade policies, financial sector performance, and business regulations. The scope for the private sector is to be expanded through further privatization and public-private investment partnerships in such areas as infrastructure projects. Public sector reforms will aim at enhancing the provision of public goods (such as physical and social infrastructure) and improving the delivery of public services in general.

13. The success of the reform effort will depend, in part, on its social consequences. The success of the reform effort will partly depend on public support which, in turn, will depend on whether the consequences of the reforms are perceived to be inequitable and burdensome for vulnerable groups. Since some of the reforms will have an impact on employment and price levels in certain sectors and for certain commodities, it will be important to ascertain which

Figure 5. Demographic Transition in Egypt

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groups are most likely to be affected and to design measures to mitigate the impact on these groups.

14. A more open and competitive political system is in prospect. Recently, at the recommendation of the President, Parliament changed the relevant clauses in the Constitution to allow for multiple candidates to run for the office of the President with the winner to be chosen in a direct and secret balloting procedure. It is likely, therefore, that a more competitive political system may develop in the future, providing a new vent for the full range of public opinion that prevails in the country. The new system of choosing the President will be applied in the elections that are due in September 2005.

II. DEVELOPMENT AGENDA AND MEDIUM TERM PROSPECTS

A. The Development Agenda 15. The key development objectives and targets of the Government of Egypt are expressed in the Fifth Five Year Plan for Socio-Economic Development covering the years 2002-2007. The introductory part of this document sets out a longer term – twenty year – vision as well. Among important elements of Egypt’s long term vision of development are the “achievement of high and sustainable GDP growth” and the “alleviation of poverty and attenuation of income disparities.” The strategy for achieving these objectives is set out in general terms in the Five Year Plan document and in more specific terms in policy papers produced by the governing party, the National Democratic Party. 3 More recently, the top priorities of the current Cabinet have been listed in a 10-point program announced by the Prime Minister in an address to the Egyptian Parliament.

16. According to these sources, Egypt seeks to achieve growth with equity by making more use of the private sector as a development agent as well as by changing the role of the government in managing the economy. Broadly speaking, the growth-enhancing potential of the private sector is to be harnessed through improving the business climate across a broad range of issues (including trade, finance, and taxation, among others) while the complementary role of the public sector is to be strengthened through enhancing the provision of public services such as infrastructure, education, and macroeconomic stability. Inter alia, this two-pronged growth strategy is anticipated to help Egypt cope with the challenge of reducing unemployment in the context of a growing labor force. Government also intends to pursue the equity objective through redesigning its social policies to incorporate social insurance mechanisms that meet national welfare objectives in an effective and efficient manner. In addition, for disadvantaged groups that are unable to participate in the mainstream of economic growth or who are adversely affected by economic reforms, Government intends to strengthen its social safety net system so that more of the vulnerable are covered by it, and its effectiveness is enhanced through administrative decentralization, community-based approaches, and the use of NGOs. Finally, inter-regional equity is to be improved through targeted investments in Upper Egypt.

17. It would be fair to say that there currently exists a broad overlap between the thinking of the GOE and the Bank Group regarding Egypt’s key development challenges and reform agenda. There is concurrence on the objective of pursuing broad-based growth in order to meet employment and poverty challenges, and also on the importance of using the private sector as the 3 While these papers do not necessarily describe actual Government policies in all cases, they provide a strong sense of the future policy agenda reflecting the thrust of thinking within top policy-making circles. Topics covered include monetary policy, taxation reform, management of public utilities and economic organizations, public debt management, education, health, social insurance, industrial policy, development of small and medium enterprises, private sector participation in infrastructure projects, capital market development, and trade and investment policies.

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main engine of growth while facilitating its ability to do this through strategic public investments in infrastructure and human resource development. There is agreement as well regarding the point that growth by itself will not necessarily resolve the special challenges faced by regions such as Upper Egypt and, therefore, the growth strategy will have to be supplemented by some specific measures aimed at regional equity.

18. With regard to the reform agenda discussed in detail below, such areas as the financial sector, the trade regime, taxation, and the regulatory regime were identified as high priority areas for structural reform in discussions among the GOE, the Bank Group, and other donors in recent years. For example, the reforms announced for the financial sector echo elements of the Financial Sector Assessment Program (FSAP) completed by the Bank and the IMF in December 2002. Similarly, the restructuring of the tariff system is in line with recommendations made by the Bank in discussions related to a possible policy-based loan in 2003 while customs reform measures currently being implemented are linked to a program supported by technical assistance from many development partners. The tax reform bill currently before Parliament has benefited from technical advice from the IMF and many of the regulatory or investment climate reforms being considered are connected with ongoing advisory work of the Bank under the rubric of the Investment Climate Assessment.

Facilitating Private Sector Development 19. Financial sector challenges. The Egyptian financial sector is characterized by inefficiency and weaknesses in intermediation due primarily to the dominance of state ownership. In the banking subsector, four major state-owned banks account for almost 58 percent of assets, earn lower net interest margins than private banks, have higher operating costs and have been slow to modernize and innovate. The quality of their portfolios is widely considered to be poor. The insurance subsector is also dominated by public ownership and is under-developed in the sense of having annual premium income of less than 1.1 percent of GDP and offering only a limited range of services, in some cases not even extending to the coverage of basic risks. Non-bank financial institutions such as the mortgage market, financial leasing, and venture capital remain limited in scope and activity. The stock market remains thin with trading confined largely to 30 or so companies, despite recent positive trends in market capitalization (up 36 percent to LE 234 billion in 2004), trading volume (up 30 percent to LE 36.1 billion in 2004) and average valuations (the Capital Market Authority (CMA) general index rose by almost 51 percent in 2004). Other challenges include that of expanding access to financial services, through electronic payment mechanisms and/or through non-bank channels such as the postal network, for example.

20. To improve the performance and soundness of the financial sector, Government has proposed a series of bold measures as follows:4

• In the banking subsector, reform objectives include: merging the six most poorly performing banks with larger, better-performing banks, privatization of public sector shares in joint venture banks and operational restructuring of the public sector banks (PSBs); privatization of one of the big four PSBs (namely Bank of Alexandria) and recapitalization of some other PSBs; and setting up at the Central Bank of Egypt of a unit for monitoring non-performing loans and a referee committee to streamline the process of rescheduling non-performing loans, loan recovery and repossession of collateral.

• In the insurance subsector, reform objectives include: privatizing one of the state-owned insurance companies; major restructuring of the remaining state-owned companies; encouraging private sector participation; strengthening of insurance regulations and the

4 The description of reform objectives and measures is taken from a paper entitled Financial Reform Program: 2005-2008 issued by the Ministry of Investment in October 2004.

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underlying accounting principles and commercial codes; and achieving full compliance with GATS commitments regarding the liberalization of this sector.

• In the capital markets subsector, reform objectives include: improving corporate governance through better information disclosure, more vigorous enforcement actions and compliance with international codes and standards; and increasing market liquidity and efficiency through allowing margin trading and establishing a primary dealers system.

• In the mortgage market, the goal is to create a more active, competitive and sustainable mortgage market by establishing a transparent system to protect property rights and streamline real estate registration; facilitating foreclosure procedures; improving housing affordability; and reducing lending and funding risks for mortgage lenders and investors in mortgage securities.

• The financial sector reform program also includes measures related to financial leasing

companies, factoring, and venture capital. In particular, steps are being considered to improve the credit information system that should in turn improve access to credit, especially for small and medium firms. Finally, an important objective of the reform program is to strengthen financial regulations and supervision. Towards this end, steps have been taken to separate the monetary policy function from the bank supervision function within the central bank, and to unify all non-bank financial services policies under one ministry (namely the Ministry of Investment).

21. Trade-related issues. Egypt carried out significant trade policy reforms during the 1990s. However, there was a slackening of the reform effort at the turn of the decade, especially when viewed in comparison to changes taking place in other parts of the world. Egypt’s export performance deteriorated in this period, contributing to the slowdown in overall economic growth. To regain momentum in this area, the government adopted a floating exchange rate system in 2003 and took steps to improve the functioning of the interbank foreign exchange market in 2004. In addition, it has recently introduced a number of measures that aim to enhance the competitiveness of domestic industry. These include: reducing the number of tariff bands from 27 to 6, cutting the average (weighted) tariff rate from 14.6 percent to 9.1 percent, and removing fees and surcharges on some imports so as to bring Egypt into compliance with commitments made to the WTO. Import liberalization is to be complemented by measures to simplify custom procedures, rationalize the regime under which imports are inspected for compliance with Egyptian standards, develop transport infrastructure (roads, airports and sea ports), provide assistance to SMEs in foreign marketing, and facilitate insurance against export risks. The government also intends to take maximum advantage of free trade and partnership agreements and opportunities with the EU, the US and Arab countries. Recently, Egypt has entered into a Qualifying Industrial Zones (QIZ) agreement that will allow it to export certain products (especially textiles) to the US market without quota restraints and free of tariffs.

22. The GOE is aware that Internet technologies can enhance trade and competitiveness, not least as marketing channels. E-commerce, though increasing, remains constrained by legal and administrative barriers. However, awareness of e-commerce potential is growing and some enabling legislation (notably on e-signatures) has been developed. Challenges include strengthening laws and regulations on electronic transactions, including electronic contracting, e-payment, security, privacy, crime and protection of intellectual property rights; as well as increasing access to information and communications infrastructure, particularly outside major urban areas.

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23. Privatization. Despite substantial privatization during the 1990s, the stock of state-owned companies remains significant. The current Cabinet intends to follow an asset management approach with the objective of maximizing returns from the restructuring or sale of state-owned companies. Ultimately, the idea is to greatly reduce the number of state-owned companies so as to minimize the involvement of the state in areas where private sector enterprises can function effectively. Significant progress has been made since July 2004 in that 19 companies have already been sold; another 83 are listed for sale during the remainder of 2005.

24. Tax rates and administration. Tax rates are currently as high as 42 percent for many corporations although many others are able to take advantage of one or the other of the numerous tax exemption schemes that have been introduced in the last few decades. To reduce the burden of taxes and reinvigorate the business environment, the government has recently submitted a draft tax law to Parliament in which it proposes to cut marginal corporate and personal income tax rates to 20 percent, streamline exemption rules so as to reduce tax avoidance and create a more level playing field for different types of business ventures, increase the penalties for tax evasion, and strengthen the institutional capacity of the Tax Department in order to improve tax collection while minimizing arbitrary and unpredictable treatment of taxpayers.

25. Other investment climate considerations. The government is currently working on a detailed program for fast tracking and streamlining of bureaucratic procedures for investments with the aim of upgrading the business environment and introducing further deregulation. Recent actions towards this end include: restructuring of the leadership and management of GAFI, establishing a Board of Trustees to clarify its mission and mandate, establishing a Board of Directors with a majority of private sector members to provide a better link with business developments and needs, and specifying a plan to shift GAFI’s priorities from regulation to investment promotion and investor advocacy; and opening a “one-stop shop” to handle foreign and domestic investment registration and information needs. The government has also started to offer business support services such as licensing and building permits, customs and tax information via the Internet on a limited basis. There is considerable scope to enhance such “e-government” programs that can help to reduce processing time and transaction costs.

Enhancing Provision of Public Services

26. Maintaining macroeconomic stability. Recent macroeconomic performance suggests that while Government has kept inflation and interest rates low on average, it has not been able to keep fiscal deficits and the public debt from rising to levels that could jeopardize long run sustainability. The Government recognizes the importance of controlling the fiscal deficit and has plans to reduce the deficit over the medium run through both restraining public expenditures and increasing public revenues. Towards these ends, there are plans to redesign subsidies, control the growth of public sector employment, cut unnecessary or “luxury” expenditures in government departments, rationalize tax exemptions, and improve the performance of the tax collections department. Some actions have already been taken in this regard. For example, the subsidy on diesel fuel and electricity has been reduced in recent months.5 Also, as already noted, a new tax law has been proposed that should help improve tax collections in the medium run. Government expects that the reduction of corporate tax rates and the restructuring of tax administration procedures that are part of its reform program will lead to higher tax collections within three years of implementation due to increased business activity, a broader tax base, fewer exemptions, and lower rates of evasion. Increased business activity is also expected from the reforms being pursued with respect to the investment climate. This too should help increase the revenue to GDP

5 Prices of selected grades of diesel and gasoline have been adjusted upwards at least twice over the last twelve months. There are plans as well to increase electricity rates by 5% per annum over the next five years.

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ratio over time. However, during the next two years, Government expects the fiscal deficit and public debt to increase for two reasons: to finance much-needed public investments to facilitate a private sector response to the structural reforms being undertaken and to reflect an initial period of declining revenues as tax and tariff rates are cut.

27. The pace and sequencing of various fiscal actions noted above need to be analyzed further to ensure that macroeconomic stability is preserved as the reform program proceeds. In particular, the funds needed for the resolution of the NPL problem in the banking sector will impose a substantial strain on the fiscal accounts and the public debt. To alleviate this pressure in a credible manner it may be necessary to move more aggressively on certain items of current expenditure such as subsidies. Attention will also need to be paid to strengthening treasury functions within the budgetary system so as to improve transparency and reduce total borrowing needs. Finally, more attention will need to be paid to contingent liabilities that may reside in the pensions system.

28. Enhancing public investments. As already noted, there has been a significant reduction in the rate of public investment in recent years. While this reduction has helped restrain an even larger increase in the fiscal deficit, it may have compromised the infrastructure base on which private sector investment relies. Since the success of the ongoing reform program depends to a large extent on the investment supply response of the private sector, Government plans to facilitate a positive response by changing some key policy parameters as well as by making strategic infrastructure investments in areas such as electricity generation and transport, for example, and supporting more competitive provision of telecommunications services.

29. A key aspect of Government’s strategy is to increase the involvement of the private sector in public infrastructure investments. Relevant options include variants of build-own-operate/transfer arrangements. Government is presently discussing ways to make such arrangements commercially attractive for the private sector and has sought technical assistance from various sources. Discussions focus on elimination of certain restrictions on private sector participation, setting quality standards for participation, and establishing clear legal rules for the selection of investors through transparent and competitive procedures. At the same time, Government is conscious of the need to ensure that the resulting arrangements do not create private monopolies and that they are embedded within a regulatory and supervisory framework that protects the public interest, especially in such services as utilities or public transportation. It is expected that public-private partnerships will be sought most actively in such sectors as transportation, telecommunications, tourism and real estate development. In the case of telecommunications infrastructure, the government has taken a number of measures to improve access and quality of service, including support for competitive Internet service provision (the sector is private sector-driven and about 180 Internet Service Providers are now active); a broadband initiative (2003); incentives to increase diffusion of personal computers; and the establishment of a universal (telecommunications) service fund. However, the challenge of improving rural access remains.

30. Improving water resource management. Egypt has about 950 cubic meters per year per capita of water resources, lower than the MENA average of 1,200 cubic meters. Growing urbanization and the expansion of agriculture to formerly desert lands has increased the competition for the relatively fixed supply of river and ground water while putting pressure as well on the quality of these water resources. Water quality is declining, especially in the Delta, due to insufficiently treated industrial and municipal discharges, inadequate sanitation coverage in rural areas and heavily-polluted drainage canals. In certain areas, groundwater and shallow water aquifers are severely contaminated. In addition, there are concerns about supply/demand imbalances for the future, weaknesses in service delivery, reliability and transparency, and the fiscal/financial sustainability of current arrangements. The Government recognizes that top

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priority must be given to improving water resource management and has sought technical assistance on appropriate sector policies and practices. Among the key objectives of its evolving water management strategy are: expanding the water network coverage in urban and rural areas through an accelerated investment program and improvement in service delivery; rationalizing water consumption for both municipal and agriculture demands (through improving the fee collection system, minimizing illegal leakages from water networks, expanding metering systems and increasing public awareness about water conservation); and reducing water pollution (for example, through projects aimed at preventing wastewater seeping into groundwater, diverting potable water networks from areas relying on sanitary trenches, and improving agricultural drainage). There is a regional dimension to the management of water resources as well, necessitated by the fact that Egypt depends almost entirely on the Nile for its water and the Nile is shared by nine other riparian states (see Box 1).

31. Improving air quality. Egypt suffers from poor air quality due to practices such as the burning of agricultural residues, an aged stock of automobiles, and certain industrial activities. A recent assessment showed that the annual damage from air pollution is about LE 6.4 billion (2.1 percent of GDP in 1999) and is reflected largely in premature mortality and morbidity. Local damage costs due to the burning of agricultural residues were approximately LE 700 million (US$150 million in 1999/2000). In the absence of remedial measures, further economic activity will lead to an increase in damage costs of almost 25 percent by 2010. In this regard, the reduction of subsidies on gasoline and electricity in recent months should help tilt incentives in favor of more efficient energy consumption. Other actions being considered include: (a) reducing concentration of pollutants in the transport and agricultural residues sectors; (b) increasing the share of natural gas in the industrial sectors (with emphasis on small-and-medium industry) and in the transport sector particularly for city buses and micro buses; (c) using the Clean Development Mechanisms of the Kyoto Protocol to increase revenues from the trading of certified emission credits; and (d) disseminating information to the public on air pollution and its health risks.

32. Supporting growth through better education and training. Government attaches high priority to strengthening the country’s educational system. While much has been achieved in the last two decades, it is recognized that much more needs to be done to equip Egyptians adequately for the twenty-first century and to build an “information society” or “knowledge economy” in the country.6 Towards this end, Government intends to pursue a strategy aimed at: improving the quality of education at all levels, including pre-schools (through developing and maintaining national standards and strengthening monitoring, accreditation and quality assurance processes); making curricula at various stages more relevant to the needs of domestic and international labor markets (and thereby enhancing the employability of graduates); decentralizing the locus of decision making to schools and communities as appropriate (so as to increase local and parental ownership of the educational process, improve accountability of teaching staff, and enhance quality); improving access to quality education services to currently disadvantaged populations in Upper Egypt and poor urban areas, including working children and disabled; and improving the performance of training institutes (in part through linking them better with private sector sources of demand). Such a program will also require improving access of schools to information infrastructure (connectivity) at reasonable cost.

6 The foundations of the knowledge economy will be strengthened not only by initiatives in education but also by measures related to private sector development, especially those that facilitate ICT and financial sector reform. Such measures should help build a more dynamic information and innovation infrastructure.

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Box 1: Egypt and the Nile Basin Initiative

Egypt is the most downstream of the 10 riparian states of the River Nile. Except along the Mediterranean coast and the Sinai, rainfall over most of Egypt is close to zero and, although there are some non-renewable groundwater resources, surface water resources outside the Nile Basin are extremely limited. So Egypt is totally dependent on the flows of the Nile, which account for 96-98 percent of the country’s renewable freshwater resources and provides for 95 percent of the country’s population, who live within a narrow strip along its banks. With populations and water demand growing among all riparian states, the future management of Nile waters is a major challenge, best met through cooperative efforts to optimize river flows and food and power production, reduce drought and flood shocks and water losses, and ensure a water-secure future for all. Until recently, there was no inclusive mechanism to address this challenge; instead there has been a long history of dispute over Nile waters. The Nile Basin Initiative (NBI) set out to change that in 1999. The NBI has made considerable progress since 1999. A basin-wide program of projects is under implementation, with the objective of building trust and capacity and laying the foundation for joint investment. The NBI is now pursuing a joint multi-track investment strategy at the sub-basin level, involving: (i) investments responding to urgent needs on the ground through irrigation and fishery development, watershed management, flood preparedness, and power interconnection; and (ii) longer term large scale investments in hydropower, flood control, river regulation and environmental management that address comprehensive and integrated basin development. Egypt is playing an active role in all of the basin-wide and sub-basin programs. With 85 percent of the Nile flow into Egypt coming from Ethiopia through Sudan into Egypt, there are major opportunities in the ‘Eastern Nile’ for joint development. A recent agreement among the Eastern Nile states promises to facilitate such outcomes as improved river regulation and flow, efficient use of water for productive purposes, access to new energy sources (Egypt plans to add 1000 MW of electricity every year), and better flood control and reduced sedimentation. The potential for meeting Egypt’s grain and meat demand from within the basin is being actively pursued, an approach that will be greatly facilitated by Egypt’s offer to share its successful experience in irrigated agriculture and marketing. This will lead to the Egyptian private sector exploring opportunities for cooperative investments with private sector entities in other basin countries, with some partnerships already emerging – for instance, in the manufacture of pipes and the establishment of abattoirs in Ethiopia. The regional agenda may slow Egypt’s own plans in the short run; however, continued positive engagement with the NBI should lead to significant economic and political benefits, along with a potentially accelerated program, in the medium term. Gaining broader stakeholder understanding through civil society discourse and commitment at the highest political levels for the NBI is important.

33. Some characteristics of education financing in Egypt present a special problem. Most of the education budget is directed towards salaries of teachers and other administrative staff, leaving very little for other areas such as investment or maintenance and other recurrent cost items. There are 1.2 million employees in the education sector of which 800,000 are teachers while the rest are non-teaching staff. All are paid low salaries to the extent that quality cannot be easily improved without revising compensation levels, an issue that is common to other government services as well. Recognizing this problem, Government intends to: (a) use the current budget more cost-effectively through reallocation of resources among different items. For example, savings can be derived from using textbooks over multiple years or from making changes in the design specifications of school buildings. These savings could then be directed to better maintenance of schools, more opportunities for teacher training and the payment of incentives to good teachers;

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and (b) encourage community participation and the establishment of private schools and universities. The private sector presently accounts for only 7 percent of enrollees in pre-university education (except at the pre-school level where there is a greater share of the private sector). This needs to be increased threefold in order to reduce the pressure on the Government budget for education. Provided they follow prescribed national standards, private schools and universities can help improve the quality and market relevance of education as well.

34. There is broad agreement between Government and the World Bank on key objectives and programs in education. Many of the areas of focus of the Ministry of Education are those that the Bank is supporting through its ongoing projects and sector dialogue. For example, the Government’s recent move to increase access to and improve quality of preschools is supported by the World Bank and several other donors through the recently approved Early Childhood Education Enhancement Project. The Bank also supports the efforts of the Ministries of Finance and Education to review public expenditures in the education sector in order to identify areas of inefficiencies and waste. The implementation of the recommendations emerging from the ongoing PER exercise should help the MOE in reallocating resources towards cost-effective approaches, which in turn would help improve schooling quality. One area where the Bank would propose greater focus is increased collaboration and harmonization among donors supporting the education sector.

35. Improving quality and efficiency of health services. Demands on the government health system are rising as a result of demographic and epidemiologic transition. The increasing burden of chronic and geriatric diseases, the need to provide a more equitable distribution of health care to low-income people and people living in rural and frontier areas, and the demand for higher quality and better service, are already straining public resources. The Government recognizes the need to (a) improve the quality and efficiency of the existing government health care delivery system by reducing fragmentation, introducing greater managerial autonomy and accountability, and contracting of services where appropriate; (b) place greater emphasis on prevention and primary care; and (c) enhance management of public funds, including the Health Insurance Organization, through the introduction of modern information systems and management practices.

36. Fostering greater accountability in the public and private sectors. Government plans to improve the performance of public sector agencies through strengthening their governance and management structure. This could include introducing performance monitoring and evaluation (M&E) frameworks, ensuring regular performance evaluations for senior management, developing sound and unified accounting rules for the treatment of profits among state-owned enterprises, improving the information databases used by public sector units for their investment and service delivery objectives, and requiring a higher level of information disclosure to the public on service delivery targets and achievements through such means as publishing the minutes of key meetings on official websites (such as the Investment Portal). Implementing these ideas in key sectors such as health and education services should be given high priority. Government also recognizes the importance of good corporate governance in the private sector. Towards this end, it has set up an Institute of Directors whose mandate is to strengthen corporate governance practices, provide research and technical advisory services to enhance compliance with laws and regulations and promote awareness of benefits of good corporate governance. The mandate of the Institute has recently been widened to go beyond listed companies to encompass all companies registered under GAFI.

37. Addressing urban challenges. Cities in Egypt have been suffering from low municipal capacity, poor urban planning, inadequate land and housing policies, low levels of local investment in basic infrastructure relative to needs, and deteriorating environmental conditions in several areas. The National Democratic Party’s report, “Preservation of Agricultural Lands and

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Management of Urban Development in Egypt” (September 2004), defines Egypt’s major urban challenges in the coming 20 years as: a) preserving scarce arable land from informal urbanization; b) upgrading 1105 squatter and slum settlements in Egypt, in which some 15.7 million inhabitants now live; and c) enhancing service delivery capacity to accommodate an expected increase of 26 million in Egypt’s population by 2020. These challenges are complex and underscore the need for innovative approaches and solutions, including partnerships with the private sector. Egypt’s cities and metropolitan governments represent the institutional counterparts for private sector investors, and their ability to form effective partnerships hinges critically on the quality and efficiency of the services they are able to offer. Over the past two years, Government has successfully piloted the City Development Strategy (CDS) in Alexandria. It is now ready to mainstream this as a preferred approach to strategic planning by making it mandatory for other governorates.

38. Improving government services. Since the public sector has a substantial and pervasive presence in the Egyptian economy, the quality of development in the country is substantially affected by the quality of human resources in the public sector, the organizational framework within which public services are delivered, and the costs of maintaining the current size of the civil service.7 Government is fully cognizant of the centrality of civil service reform to long term growth in Egypt. However, mindful of political sensitivities, it prefers to deal with the problem in a piecemeal and gradual fashion. At the moment, its approach encompasses ideas for outsourcing some civil service functions (such as building maintenance), limiting new hires, exploring the possibility of part-time and short-term contracts for new hires rather than offering them lifetime employment as has been the norm so far, introducing better performance monitoring systems, and allowing greater flexibility to local administrations with respect to deployment of civil servants. Under the aegis of the Organizational Development Initiative, Government proposes to: assess the functions of different government agencies in relation to their mandates; assess the scope for decentralization of selected functions; strengthen institutional capacity building among municipalities and governorates so as to enable them to carry out decentralized assignments effectively; and encourage civil society to be more involved in the selection, design, implementation and monitoring of certain public services. Furthermore, Government is open to adopting new methods of service delivery where possible as shown by the case of the CDS noted above.

39. Redesigning social policy. Social policy also has a part to play in achieving a diversified and competitive economy that generates growth and new jobs. Egypt already possesses several components of a social protection system that can play such a growth-facilitating role. However, these components may have to be redesigned so as to make them more effective and compatible with the needs of an economy that will be functioning in a more competitive world. Critical areas in this regard are: the social insurance system (including health insurance) which needs to be made financially sustainable; training and skill development programs that need to be properly aligned with market demands; and labor market regulations that need to ensure a better balance between the rights of workers and the need for adequate flexibility for enterprises to adjust workforce levels and compensation. With regard to the last mentioned point, a new Labor Law was enacted in 2003 whose implementation should help Egypt move towards the necessary balance. Finally, safety nets for the poor are also an important aspect of social policy in Egypt and a prominent instrument to promote equity as discussed in the next section.

7 Analytical work suggests that government consumption, in part reflecting expenditures on the civil service, has a negative impact on growth in Egypt. At present, expenditures on wages and salaries absorb a significant chunk (31%) of current expenditures. This is because the civil service is large relative to the size of the economy (5.5 million people and approximately 29% of the labor force).

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Promoting Equity

40. Strengthening safety nets. Helping the poor is an important collective preference in Egyptian society and there exist both private and public social safety nets to support those who are unable to earn adequate incomes. The public safety nets presently consist of subsidy programs (such as for food and energy), public employment programs (such as those operated under the Social Fund for Development) and cash transfer programs (such as those managed by the Ministry of Social Affairs and Insurance). Government is keenly aware that concerns exist about the effectiveness and efficiency of some safety net programs. In recent months, it has begun to place special emphasis on the need to redesign safety net programs with a view to improving their efficiency and facilitating the social adjustment to the ongoing reforms, thereby making the reforms themselves more sustainable. A dialogue on relevant issues and sharing of international experience occurred in Luxor, Egypt in February 2005. This dialogue was facilitated by the World Bank and involved relevant members of the Egyptian Cabinet (led by the Prime Minister) and counterparts/experts from Mexico and Brazil. Following this meeting, GOE organized a Social Reform policy group within the Cabinet that is charged with assessing various reform options with a view to presenting recommendations for action.

41. Improving access to health care. Health is an important dimension of national welfare. In Egypt, all employees (and their families) in the public sector, as well as in certain private companies, are entitled to (partial) health insurance. However, those who are self-employed, or working in informal private sector enterprises, do not have employment-based health insurance coverage and must rely for support on public or private safety nets. 37 percent of Egyptian households from the lowest wealth quintile are reported to have no access to insurance, compared to 15 percent of the highest quintile. Providing access to quality health care for a broad segment of the population, especially the less well-off, and doing so in a cost-effective manner, is an important objective of public policy in Egypt. Towards this end, Government plans to reform the health insurance system and find ways to extend coverage to those not presently covered. It also plans to devote more resources to primary health care programs, strengthen the administration of the public health system, improve the public health information system, and expand the participation of NGOs and local communities in the planning and delivery of health services.

42. Decreasing interregional disparities. Upper Egypt, and in particular rural Upper Egypt, has the highest incidence of poverty in the country: 34 percent of the people there are poor and half of all poor Egyptians live there. In addition, while poverty fell between 1995/96 and 1999/2000 for the rest of Egypt, it increased in rural Upper Egypt, suggesting that the region is not well linked to the mainstream of the economy. Government is mindful of the special developmental challenges of Upper Egypt, and has been diverting a rising share of public expenditures to that region (from 19 percent in the fourth Five Year Plan to 25 percent in the fifth Five Year Plan). Additional public resources are needed, not only to reduce disparities in access to services and public infrastructure, but also to better support income generating activities. In Upper Egypt, the poorest (lowest two quintiles) comprise agricultural laborers, landless farmers, as well as farmers with very small landholdings (less than one feddan). Specific activities to promote agricultural productivity and growth, as well as develop non-farm rural economic opportunities, will be required.

43. Decentralizing public service delivery. At present, most public services in Egypt are delivered by central ministries operating through their own (de-concentrated) local staff. Budget and administrative control is exercised by ministries or by appointed Governors who head local administrations. This level of centralization is not necessarily compatible with the optimal choice and efficient delivery of local priorities. Using community organizations and NGOs to define public service needs and to monitor delivery can be particularly useful and cost-effective for rural development purposes, for improving the poverty-reducing impact of social funds, and for

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delivering health and education services. Even within the present system, however, there are opportunities for expanding local initiative. Some local administrations have negotiated the bureaucratic and legal space to tackle local development issues in a more flexible manner. For example, in Qena governorate, health care workers can draw supplemental income from funds generated by co-payments on health services imposed under the authority of the local Executive Council, leading to improved morale and better staffing and utilization of health care facilities. Furthermore, measures to promote fiscal (expenditure and revenue) decentralization are under consideration. Finally, the authorities have launched an E-Government initiative that should also help achieve significant decentralization of some public services. The program has so far been implemented on a pilot basis, involving selected urban and rural administrative districts. The task ahead is to improve monitoring and evaluation and, on that basis, scale up successful models.

B. Medium-term Macroeconomic Prospects Base Case

44. In the base case scenario, Egypt should experience growth of 5 percent on average during FY06-09. This scenario is based on three key points. First, the economy is already growing at close to 5 percent (provisional estimate for FY05) and the momentum from this should carry over into subsequent years. Second, external demand is likely to stay broadly favorable. Third, a raft of domestic policy reforms have been initiated, boosting the credibility of the economic management of the present Government. There is much confidence that the announced reforms will be successfully implemented and new ones will be initiated. However, concerns remain about the fiscal position and the impact of rising international interest rates.

45. Present growth momentum. An economic growth rate of 4.8 percent has been recorded in the first half of FY05 (up from 4.2 percent the year before). This is expected to accelerate in the second half, based on current trends in investment and exports. Total export earnings have grown by 34 percent in the first half of FY05 while total investments have grown by 10.5 percent (in nominal terms). Business community expectations are positive as well, as revealed by the “Business Barometer” put out by the Egyptian Center for Economic Studies in January 2005. Respondents to this semi-annual survey anticipate an increase in output and sales, and are guardedly optimistic as well about short term employment and investment growth.

46. Prospects for external demand. External developments are likely to stay favorable with respect to world economic demand and oil prices.8 Over the CAS period, world economic growth rates are likely to exceed the average that has prevailed over the last five years. Prospects for higher exports of oil and gas (and for higher FDI in those sectors) and for higher tourism flows are particularly favorable. Expanding world economic demand and trading opportunities available under various trade agreements should raise Egypt’s merchandise exports. Oil prices are likely to stay high in the short run before declining to around $30 for the medium term. This should strengthen Egypt’s balance of payments and fiscal position since the country is a (small) net exporter.

47. Rising international interest rates. Domestic interest rates have declined recently due to excess liquidity in the banking system and high inflow of foreign funds seeking to exploit the gap between domestic and foreign interest rates. However, this situation is not expected to last much longer. World interest rates are likely to be higher over the next few years, with the six month LIBOR rising from 1.6 percent in 2004 to an average of 4.1 percent in 2005-06. As world interest rates rise, there will be pressure on domestic interest rates to rise in Egypt.

8 A strong link exists between the GDP growth rates of Egypt and OECD countries over the last 15 years. The simple correlation between these two variables for the period 1988-2003 is 0.70.

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48. Fiscal position. The ratio of the consolidated fiscal deficit to GDP is expected to rise in FY06-08 due to higher spending on debt servicing and lower revenues from trade and income tax rate reductions. After that it should decline as growth continues at 5 percent and tax collections begin to increase as a result of tax administration improvements. The net public debt ratio is expected to decline modestly over the CAS period under base case assumptions. However, it should be noted that the high level of the deficit and the public debt limits the room for maneuver and makes the economy more vulnerable to interest rate and other shocks.

Table 1: Baseline medium-term macroeconomic scenario

2004 2005 2006 2007 2008 2009 Growth Rates (percent) Real GDP 4.4 5.0 5.0 5.0 5.0 5.0 Real Consumption 4.5 4.8 3.8 3.8 3.8 3.6 Real Gross Domestic Investment 3.0 5.4 8.2 8.1 8.0 7.9 Export Volume 22.7 10.5 12.5 12.0 10.7 10.1 Import Volume 13.4 16.3 9.0 7.6 7.9 7.5 GDP deflator 10.0 8.0 6.5 5.0 5.0 4.5 Ratios to GDP (percent) Gross Domestic Investment 16.5 16.3 16.7 17.3 17.8 18.5 Fiscal Balance (consolidated) -2.7 -3.4 -4.5 -4.5 -4.5 -4.4 Net public debt (consolidated) 88 89 87 86 86 85 Current Account Balance 4.5 4.0 3.7 3.7 3.7 3.5

Alternative scenarios

49. External or domestic shocks could cause growth to drop from one to two percentage points below the base case scenario. Two types of adverse developments (or their combination) could trigger lower growth. First, unfavorable exogenous shocks such as lower OECD growth, a sharp spike in world interest rates, or an adverse regional geopolitical event (such as a terrorist attack) could occur. These would affect growth through reducing foreign demand or domestic supply or both, depending on their nature and duration. The economy’s resilience would partly depend on the quality of the policy response, and partly on the soundness of the financial system and investment climate. Second, a slowdown of reform efforts, in particular a failure to strengthen the financial system and improve the investment climate as needed in the face of stiffer international competition, would put at risk the sustainability of growth in the 5 percent range and most likely lead to lower private investment (including foreign direct investment) and higher unemployment. Simulations of two macroeconomic scenarios – “External Shock” and “Policy Shock” – described in Annex 5, show that both types of developments will likely reduce the investment rate in Egypt by up to 6 percentage points of GDP in the medium term. In this context, Egypt will face difficulties in meeting its financing needs.

III. EGYPT-WORLD BANK GROUP PARTNERSHIP FOR FY06-09

A. Implementation of Previous CAS 50. The World Bank Board discussed the previous CAS for Egypt in June, 2001. Over the next three years (FY02-04), the scenario that prevailed came closer to the low case than the base case that was outlined in the CAS. Policy reforms slowed, the fiscal deficit continued to rise, and lending declined.

51. Slowdown of policy reforms. The CAS period saw a lack of forward movement in several areas of reform including trade, foreign exchange management, finance, and privatization. Some

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actions were taken but in a manner and at a pace that reduced the likelihood of a timely positive impact. For example, a free trade agreement was signed with the European Union after several years of negotiation but key liberalization measures within this agreement were loaded into the outer years. In the meantime, the tariff system remained relatively complicated (with 27 bands) and an impediment to trade (with an average tariff level of 15 percent or so). The exchange rate was floated in January 2003 but an ad hoc system of administrative guidance was imposed on the key foreign exchange market players quickly thereafter. The parallel market did not disappear for the next eighteen months or so. While a Financial Sector Assessment Program (FSAP) exercise was undertaken, little effort was made to implement its main recommendations though some progress was made through the issuance of new laws and regulations pertaining to capital requirements, banking supervision, credit concentration, and connected lending.9 Finally, the speed of privatization slowed down relative to the vigorous pace set a few years earlier.

52. For the Bank, while the dialogue over structural reforms remained inconclusive, that pertaining to other issues, such as poverty, gender and education, improved substantially. During the CAS period the Bank and the Government collaborated on several pieces of analytical work that led to both a better and a shared understanding in such areas as poverty trends, gender achievements, and education sector needs. The spirit that marked this collaborative effort bodes well for the future as the shared understanding feeds into policy and project design and leads to faster implementation.

53. Deterioration of fiscal performance. The CAS period also saw the continuation of a rise in the fiscal deficit. During FY02-04, the consolidated public sector deficit increased from 2.5 percent of GDP to 2.7 percent. The quality of the deficit continued to worsen in the sense that capital expenditures declined from 4.0 percent of GDP to 3.7 percent while current expenditures (including civil service salaries, subsidies and debt service payments) continued to rise (from 22.6 percent of GDP to 23.2 percent) and revenue performance deteriorated from 27.5 percent of GDP to 26.8 percent.

54. Decline in lending. The above developments were associated with a decline in Bank lending. Two rounds of discussion regarding a possible policy-based loan for Egypt failed to produce an agreement, partly because the adverse economic impact from such external events as the attacks of September 11 (in 2001) and the war in Iraq (in 2003) was smaller than anticipated, thereby reducing the urgency and need for external assistance, and partly for lack of timely action on selected trade, tax and financial sector measures. The lending pipeline, already in decline by 2000, registered commitment levels of 0, 50, and 12.4 million dollars respectively during FY01, FY02 and FY03. However, the last year of the CAS period, FY04, saw a substantial surge in lending (to $340.6 million) due to a large loan for a new airport terminal.

55. Improvement in portfolio performance. Despite the overall decline in the quantity of lending, the quality of the outstanding portfolio improved over the CAS period. At the end of FY02, five of the Bank’s 18 projects were in problem status, with a very low disbursement ratio (about 7 percent). Egypt was on the Bank-wide watch list for countries with commitments at risk above 33 percent. Today, there are only two problem projects, with commitment at risk of around 2 percent, and a disbursement ratio of over 18 percent. Improvements have been achieved through increased efforts to build implementation capacity, restructure projects, cancel unutilized amounts, and even close some projects (e.g., PBDAC project was closed in December 2003.) Project effectiveness delays have been markedly reduced. In FY03-04 effectiveness delays ranged between 3 and 7 months with an average of about 4 months, compared to an average of 14

9 Another achievement following the FSAP was the fulfillment of all legal and institutional requirements in accordance with the FATF recommendations and measures. This resulted in the removal of Egypt from the list of non-cooperating countries and territories in February 2004.

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months in the two years prior to that. Effectiveness was speeded up by enhanced collaboration with the Ministry of International Cooperation and diligent intervention of the line ministry concerned at each and every step of the process mandated in Egypt for aid-supported projects. Project implementation was successfully improved through dedicated, proactive support to the procurement and disbursement process at the project level by the Country Department. As of July 31, 2004, the Bank had approved 110 projects for Egypt, valued at about $7 billion, of which about $4.5 billion had been disbursed. The current active portfolio has 18 projects (including the recently effective Airports Project) with a commitment value of about $1.025 billion.

56. Selected lessons of previous CAS. The implementation of the previous CAS unfolded differently from initial expectations and the Bank made several strategic and tactical choices some of which are of relevance to the design of the new CAS program. First, as Egypt graduated from IDA in 1999, the Government’s approach to borrowing changed. This was indeed recognized in the previous CAS which emphasized that IBRD projects would need to be packaged together with donor grants to meet Government requirements for a 40 percent grant element. During CAS implementation, it became clearer that coordinated approval and implementation in the context of differing donor project processing and approval cycles resulted in longer preparation periods and higher processing costs. Several loans have in fact occurred but a year or two later than projected in the CAS. To the extent that the Government remains interested in minimizing the cost of funding for donor-supported projects, the Bank will need to factor in the need for more timely consultations with likely grant-making partners so as to contain project processing times and costs.

57. Second, the previous CAS had assumed that structural reforms in Egypt would occur in the context of Bank policy-based lending. It became apparent during CAS implementation that while the Government valued the Bank’s knowledge in designing structural reform measures it did not necessarily want to implement these measures when these were specified as part of the conditionality associated with a policy based loan. Eventually, many of the measures (e.g. exchange rate reform, tariff restructuring and rationalization of tax rates) discussed during the preparation of the policy based loan were implemented as part of the Government’s reform program and have resulted in Egypt beginning this CAS in a strong base case scenario. Lessons from this experience have been incorporated into this CAS being designed in a holistic manner (as described in paragraph 64).

58. Third, the previous CAS had attempted to focus the Bank’s lending assistance on areas where Government’s commitment was clear. Despite these efforts, some projects were dropped and others cancelled without significant disbursement. Two major changes have occurred in the design of this CAS which should considerably reduce this risk for the future. First, Government has designated lead donors in relevant sectors, thus making it easier to determine where the Bank’s own efforts should be focused and with whom to conduct discussions regarding coordination and harmonization of efforts. Second, specific activities included in this CAS have been validated with the Government and it has been agreed with the authorities that project preparation would not commence in earnest before the authorities pre-approve the Bank loan amount. Such a pre-approval would reduce the likelihood of projects being dropped after significant preparation has been undertaken and would reduce the time needed for ratification and effectiveness upon Board approval.

59. Finally, the previous CAS had focused the Bank’s non-lending assistance on discrete deliverables with a limited time horizon. During CAS implementation, the Government’s interest was in a more sustained and lengthy process of engagement (e.g. in poverty analysis and strategy design). Non-lending support during the upcoming CAS will therefore increasingly focus on a long-term programmatic engagement with focused outputs (e.g. the Public Expenditure and Fiduciary Management work or the Poverty and Social Impact Analysis).

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B. Salient Aspects of Proposed CAS 60. The political and economic context for the present CAS is very different from that prevailing at the time the last CAS was prepared. The earlier CAS was introduced at a time when economic growth was slowing and the political will to pursue reforms appeared to be waning. The current context features both a revival of growth and of interest in reforms. There now exists a remarkable opportunity for the Bank Group and other development partners to harness their financial and technical support for Egypt to an improving economy bolstered by a credible reform program.

Results Framework

61. The content and expected outcomes of the CAS have been expressed in a Results Framework (attached as Annex 1). Starting with the overarching objective of achieving growth with equity the Framework identifies three intermediate strategic objectives based on discussions with Government and consultations with other stakeholders. These strategic objectives are: (a) facilitating private sector development; (b) enhancing the provision of selected public goods and (c) promoting equity. These objectives are further disaggregated into a set of 13 outcomes that the Bank expects to influence through the CAS as well as a larger set of intermediate outcomes that can be monitored to track progress towards the achievement of the CAS outcomes. The framework also identifies various financial and advisory interventions by the Bank Group that are intended to contribute towards the achievement of these outcomes.

62. The Results Framework is intended to be flexible in application. It provides an initial sense of strategic direction for Bank assistance but should be thought of as remaining open for change if evolving Government priorities and external developments so warrant. While a list of proposed Bank financial and analytical support activities is provided for the next four years, this is intended to be tentative, especially for the outer years. The choice of certain analytic activities reinforces the intention to stay flexible. For example, we anticipate providing analytic assistance to evaluate public expenditure priorities and to examine the poverty and social impact of various reforms. However, the exact content of activities in these two categories will be determined each year in consultation with the Government.

63. The Results Framework is also intended to be a monitoring tool. The scope of monitoring will cover the 13 outcomes shown in Annex 1. The frequency of monitoring will be once a year. The mechanisms will be as follows: for macroeconomic and related outcomes the relevant monitoring data will be obtained from the key economic ministries, while for sectoral outcomes relevant data will be obtained through project supervision missions. These data will feed into the CAS Progress Report scheduled for FY08 and the CAS Completion Report scheduled for FY10.

64. The CAS approaches the link between Bank instruments and the achievement of reforms in a holistic fashion. The Bank has an understanding with Government whereby financial assistance will be concentrated in a limited number of high-priority sectors and projects while analytic and advisory work will be expanded in scope and content to incorporate a broader range of reform issues and measures. It is expected that the current reform momentum will continue and will not necessarily be linked to individual projects. Dialogue and action on reforms will be the objective of the total program of assistance provided by the Bank rather than mostly that of the financial assistance component of it.

Consultations with stakeholders

65. In the course of preparing the CAS, consultations were held with government officials as well as with representatives of the private sector and of civil society (including women’s groups). Specific events included: (a) several meetings with key Ministers, both on a one-on-one basis and

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in groups; (b) two workshops with civil society groups and one with the private sector; and (c) a meeting with local government officials and NGOs in a governorate in Upper Egypt.

66. These consultations validated the importance of the goal of achieving growth with equity in Egypt and provided support for the specific framework suggested for the CAS, namely, the three strategic objectives discussed in Section IIA above. As might be expected, support for the first two objectives (private sector development and provision of public services) was strongest within the private sector while support for the third pillar (promoting equity) was strongest among representatives of civil society. Consultations at the sub-national level proved useful in providing an appreciation of the scope for decentralizing the delivery of public services in Egypt. Evidently, much can be done in a decentralized manner without necessarily changing the formal political structures that govern center-local relations in the country.

Coordination with Development Partners

67. Owing to its size, strategic location, and geopolitical position, Cairo houses an extensive presence of representatives of bilateral, Arab regional, multilateral, and UN agencies. The Donor Assistance Group (DAG) is the main formal vehicle for the exchange of information and coordination of efforts among donors, and serves, to a lesser extent, as a coordinator between donors and the Government. The DAG meets on monthly basis in Cairo at the level of heads of development assistance departments (for bilaterals) and heads of agencies or operations (for development institutions). Numerous DAG specialized subgroups were formed on topics such as health, education, private sector development, gender, poverty, governance and water resource management. Those subgroups meet on a regular basis to facilitate technical consultations among specialized staff. Frequent consultations by the Bank with donor representatives in Cairo have been critical to ensure effective collaboration with them. Such efforts have allowed the Bank to mobilize financial support from other donors for many ESW activities and for almost every project in the current portfolio (notably collaboration with EC in human development projects, with KfW in water and irrigation projects, and IFAD in rural development projects).

68. The main donors in terms of financial transfers continue to be the USAID and the EC. USAID programs in Egypt are increasingly supporting efforts in the education, governance (democracy), and financial sector domains as compared to ongoing programs in the water, environment, and large infrastructure domains and annual ODA is expected to gradually come down to approximately $400 million. EC assistance for Egypt is expected to support efforts in the water, governance, and innovation and R&D domains during the current MEDA program that is expected to end in 2006. Additional EC resources, possibly twice as large as those currently available, are expected to be negotiated under the aegis of the new European Neighborhood Policy. More recently, the AfDB announced that it plans to significantly enhance its support to Egypt with emphasis on power generation, financial reforms and transport.

69. As noted above, cooperation with development partners has been close and effective in recent years. There is every likelihood that this state of affairs will continue both because of the degree of goodwill that exists and because of the overlap in future areas of interest. For example, both the EU and USAID propose to support Government efforts towards improving the environment for private sector development and, in particular, reforming and restructuring the financial sector. These are focal areas for the Bank Group as well and we expect to see both upstream cooperation in analytical work and downstream collaboration in project implementation. In this connection, a Financial Sector Donors Sub-group has been formed to coordinate efforts and ensure complementarity in both technical and financial support provided to the government. One outcome of this group is the joint World Bank-EU project for modernizing the payments system at the CBE. Similarly, we expect to continue to collaborate with the AfDB through arranging parallel financing in infrastructure projects. The framework and priorities of

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the CAS have been discussed with key development partners while strategic documents of partners, such as the country assistance strategy of the AfDB, have been shared with the Bank. Discussions are also expected on the EU’s Action Plan for Egypt currently being prepared under the aegis of the new European Neighborhood Policy. Finally, greater efforts are expected to be made in coming years to coordinate development strategies and projects with the various regional Arab funds.

Capacity Building

70. The proposed CAS has also been designed with a stronger emphasis on capacity building to accompany the change in the government’s role in the management of the economy. The World Bank Institute (WBI) is expected to play an important capacity building role in support of operations. Building on results of a baseline evaluation of WBI activities in FY03 and on a strong partnership between WBI and country operations thanks to the location of a senior staff in the Cairo Office, WBI activities will focus primarily on two CAS pillars, strengthening the public sector role in implementing reform in these areas: (i) facilitating private sector development; and (ii) enhancing the provision of selected public services.

71. Activities will be specifically targeted at Egyptian high-level officials to improve dialogue/discuss options on key policy reforms and support implementation (see Annex 4). The targeting of senior officials with decision making capabilities has proven effective over the past two years in moving reform agendas. A second set of activities targeted to the “middle tier” of officials and other stakeholders will be developed to support reform implementation and broaden support. The in-country activities will be complemented by regional and global WBI activities.

Country Financing Parameters

72. Cost Sharing. Country Financing Parameters for Egypt (see Annex C) have been agreed with the Government. Government shapes the development program through a comprehensive planning process that has been in place for several decades now. While the process is driven largely by central and local authorities, consultative mechanisms have been built into it that allow for feedback from non-government sources as well, especially the private sector. Strong ownership of the program is also shown by the fact that the Government finances the bulk of development spending through its own resources and seeks bilateral and multilateral assistance for a modest part of it. For example, public investment amounted to around $6.3 billion in FY04 while gross medium and long term external borrowing was around $1.3 billion. Egypt also receives official grants (around $900 million in FY04) but these are not necessarily applied to development projects.

73. The Bank’s disbursements to Egypt have averaged around US$82 million annually over the past four years. This is equivalent to only around 1.3 percent of public investments and about 0.1 percent of GDP. While small in overall terms, Bank finance is deployed strategically by Government and Bank projects are well aligned with development priorities and plans. Bank financing and expenditures on Bank-financed projects are included in the government’s budget. Measures being taken to further assure Government commitment to projects financed by the Bank have been outlined earlier (see paragraph 58). Project implementation performance has improved significantly in recent years (see paragraph 55). Flexibility regarding the Bank’s financing share in individual operations (up to 100 percent) is welcomed by the borrower and in the instances where this is used may contribute to faster implementation. Cost sharing arrangements for future projects would continue to be determined by individual project context with the expectation that Government counterpart funding will be forthcoming in all or most projects. The Bank also expects to co-finance many projects with other development partners (see paragraph 69). The Bank’s financing share is expected to be higher in social sector and lower in infrastructure investments.

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74. Recurrent Cost Financing. While high, Egypt’s fiscal deficit and public debt are sustainable under the base case assumptions of the Bank’s lending program, namely, a 5 percent growth rate for the economy, implementation of trade and tax reforms, and new external debt commitments of $500 million per annum for the next four years (see Box 2 and paragraph 96). Under these assumptions, the consolidated fiscal deficit is expected to rise to about 4.5 percent of GDP by 2008 before beginning to decline (see Table 1 and paragraph 48) while the net public debt is expected to rise to 89 percent of GDP before tapering off. Given the extremely modest size of typical Bank disbursements relative to current expenditures in the budget ($82 million versus $19 billion), it is unlikely that recurrent cost financing by the Bank per se will have a major impact on the fiscal deficit and the public debt. Egypt continues to finance the bulk of its recurrent cost needs from its own resources and relies on donor financing only for project-specific reasons. The Bank’s current portfolio devotes a relatively modest share to the financing of recurrent costs (ranging from 3 to 5 percent, mainly for project operating costs). The track record on sustainability of Bank-financed projects has been improving. No country-level limit is proposed on Bank financing of recurrent costs for projects in Egypt but it is expected that the share will remain at the current modest levels. In determining the relevant share in individual projects, the Bank would take into account sustainability issues at the sector and project levels.

75. Local Cost Financing. Rising fiscal deficits in recent years show that domestic tax and non-tax revenues have been insufficient to meet current and capital expenditures in Egypt. Additional funds have also been needed for the broader public investment program implemented by state owned enterprises. In recent years, the required funds have been raised largely through domestic debt as the Government of Egypt has followed a cautious external debt acquisition policy. Two factors suggest that the financing profile will need to change over the coming years. First, trade and tax reforms currently being implemented or proposed, will reduce the revenue base somewhat for the next few years, thereby increasing the need to borrow. Second, the cost of domestic debt is high relative to that of foreign debt and, now that the potential for depreciation is much lower (following the significant adjustment of the exchange rate during 2003), it would be appropriate to adjust the currency composition of the total debt. For both these reasons, Government is likely to seek larger amounts of external financing for the development program. The Bank would support this move. Disbursements for local expenditures have been significant in the recent years, amounting to 74 percent, 78 percent, and 83 percent of investment lending disbursements in FY02, FY03, and FY04 respectively. Given the experience to date and the nature of the proposed lending program, it is expected that a significant proportion of future disbursements will also be made against local costs. The financing of foreign costs alone would not enable the Bank to help eligible development projects meet their objectives.

76. Taxes and duties. Tax revenues amount to about 13.7 percent of GDP in Egypt. This is divided between income taxes (5.7 percent), sales taxes (5.4 percent) and taxes on trade (2.5 percent). The marginal income tax rate is currently 40 percent and is slated to be cut to 20 percent under a law being considered in parliament (see paragraph 24). The proposed law also envisages measures to improve tax administration. The sales tax ranges from 5 percent to 40 percent (4 bands), with the highest rate applying to luxury goods and other items that are not material in Bank-financed projects. Taxes on trade (customs duties) have recently been cut from an average of 14.6 percent to 9.1 percent (see paragraph 21) and now range from 5 percent to 40 percent (6 bands) with a few higher rates for items that are also not material in Bank-financed projects (e.g., luxury cars, cigarettes and alcoholic beverages). Bank-financed projects are taxed at the same rates as the country’s normal rates. Given the moderate nature of the tax and duty regime, and the further improvements in prospect, the Bank may finance all taxes and duties associated with project costs.

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C. Expected Outcomes of CAS and Bank Support 77. The Bank Group’s support for private sector development (as elaborated in Annex 3) is centered around the following priorities: i) reforming the financial sector; ii) integration into regional and global economies; iii) improving the regulatory climate for business; iv) strengthening cooperation between the private and public sectors; v) privatization; vi) supporting small and medium enterprises; and vii) improving the quality of infrastructure services. These priorities have been refashioned into specific CAS outcomes listed below. The Bank, IFC, MIGA and FIAS all have roles to play in the achievement of these outcomes and propose to use several instruments at their disposal. For example, it is expected that, in addition to investments in private companies, IFC will also use its technical assistance facility, PEP-MENA, to provide support as necessary. For the Bank, analytic and advisory work independent of lending will continue to be an important instrument.

Facilitating private sector development 78. Increased efficiency of the financial sector and greater responsiveness to the needs of the private sector (CAS outcome 1.1). As already noted, Government has ambitious plans for increasing the role of the private sector in the banking and insurance sectors as well as in improving regulatory and supervisory arrangements in the financial sector as a whole. It has already requested and received the support of several important development partners such as USAID and the EC. Government has asked the Bank to play a coordinating role in this area in addition to providing needed technical and financial assistance. In response, the Bank has begun providing technical assistance towards an assessment of the nature and scope of the restructuring that is likely to be required in the banking sector. It is expected that this will be followed by a Financial Sector Restructuring Loan in FY07. The Bank is also able to offer policy advice in the area of financial services diversification, including through the postal network and online channels. IFC’s proposed support covers a range of possibilities including, but not limited to, investments in privatized banks and other financial sector entities, deepening of the financial sector through new products or developing bond markets, financial services for SME development (particularly through PEP-MENA), and advisory assistance for privatization.

79. Three other activities deserve mention. First, the Bank has begun preparing a project to create an efficient enabling environment for a mortgage market. This project would establish a market-based liquidity facility, strengthen the regulatory framework, and modernize property rights registration, thereby helping invigorate what is presently a moribund mortgage market. Prior to starting work on the project, the Bank had provided substantial policy and technical advice in this area. Second, the Bank has provided technical assistance to improve the functioning of capital markets through establishing an Institute of Directors. Improvements in corporate governance in the private sector could also be instrumental in building a broader and deeper capital market through increasing the level of confidence of potential market participants. Third, the Bank Group is providing technical assistance to build capacity to follow up on initiatives related to anti-money laundering and combating financing of terrorism (AML/CFT). There are plans to develop a certificate program for AML/CFT compliance officers.

80. Lower transactions costs pertaining to international trade (CAS outcome 1.2). As noted earlier, a restructuring of trade tariffs was announced in September 2004 and there are plans to further reduce transactions costs through improvements in customs and standards administration as well as through implementation of a range of free trade agreements recently signed by the Government with such partners as the EU, the US, and neighboring Arab and African countries. The Bank and the IMF have worked closely with the authorities in these areas in recent years and

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stand ready to continue their technical assistance programs as needed. It is expected that Egypt’s trade policy environment will continue to be reviewed and re-assessed in future analytical work, especially in the proposed Development Policy Review (FY07). In particular, analytic work will evaluate the scope for efficiency gains through liberalizing trade in services and enhancing trade facilitation.

81. Reduced transactions costs for operating businesses (CAS Outcome 1.3). An Investment Climate Assessment conducted by the Bank recently has revealed a number of impediments to the expansion of private investment in Egypt. Among these are access to land, access to finance, especially for SMEs, and the tax environment (covering both rates and administration). In addition, earlier surveys conducted under the Doing Business initiative have revealed high transactions costs related to registering, operating and closing businesses. The Government has recently asked for deeper analysis in four areas, namely, (a) access to finance: focusing on both the demand and the supply side for financial institutions, cost of funding, credit policies, rising liquidity ratio of the banking system, diversity of financial products, financial leasing, and non-performing loans from the enterprises side; (b) access to land, focusing mainly on issues of allocation of land, state land management and property registration; (c) free zones and their prospects within the recent global trend, and (d) industrial land. In addition, the Bank is working with the Government to develop a national Public Private Partnership (PPP) Strategy. Through PEP-MENA, IFC can provide technical assistance to improve the business enabling environment.

82. The Bank proposes to help lower business transactions costs through both specific investments and continued analytic and advisory assistance. In the former category, the Alexandria Growth Pole project is being prepared with a view to helping the city of Alexandria strengthen the management of existing municipal assets, especially land and properties, so that they can be leased, sold or otherwise converted into more productive assets. Inter alia, the project will help to better integrate the urban poor into the local economy through slum upgrading, public-private partnerships, local area initiatives and community-based approaches. Regarding analytic work, an Urban Sector Study is proposed for FY07. Its main objective will be to complete analytical work on challenges facing the urban sector especially with regard to regional competitiveness, public-private partnership in housing supply, service delivery, protection of agriculture land from the uncontrolled expansion of informal urban settlements and suggest options for reform in this sector. Finally, follow up data gathering is expected both under the aegis of the Investment Climate Assessment and that of the Doing Business initiative. With regard to utilities/infrastructure, in particular telecommunications, the Bank in association with other development partners, is well-positioned to advise the government on issues including: options for improving connectivity, including through broadband, regulatory incentives for open network provision, alternative telecommunications networks and other new technologies, and on financing options for rural communications. This assistance will be delivered through a series of policy notes and dialogue with relevant stakeholders.

83. Costs can be lowered and investments facilitated by guarantee facilities as well. MIGA provided its first political risk insurance guarantee in Egypt to a Spanish investor in FY04. The project involved a management contract awarded by the Cairo Governorate for the management of solid waste. A particular focus of MIGA’s efforts in Egypt in the future will be to support investments in the agribusiness, manufacturing and services sectors, which tend to be dominated by SMEs. MIGA will also market its Small Investors’ Program, which provides streamlined coverage to SMEs, throughout the MENA region.

Enhancing the provision of public services 84. Fiscal and monetary policy consistent with macroeconomic stability (CAS outcome 2.1). At the Government’s invitation, the Bank has begun to work on the management and

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prioritization of public expenditures in Egypt. The current work program includes assessments of public expenditures on education, health, transport and water as well as on the sustainability of the public debt. It is proposed that other critical areas of inquiry will be addressed through future policy notes prepared under the aegis of a series of Public Expenditure Reviews. Other aspects of macroeconomic management, such as monetary and exchange rate policy, fall primarily within the domain of the IMF and the Bank proposes to keep on top of relevant developments through periodic consultations with the IMF and through its own routine economic monitoring.

85. Expanded supply and improved efficiency of infrastructure services (CAS outcome 2.2). The success of the reform program will depend to a large extent on the depth of restructuring and streamlining of government bodies responsible for infrastructure and the investment supply response of the private sector. Government plans to facilitate this response not only by changing some key policy parameters but also by undertaking institutional reforms and making some strategic infrastructure investments, in such areas as electricity generation and transport, for example. The Bank Group proposes to support these investments through technical and financial assistance. The FY06-09 lending program contains projects to help improve water management (West Delta, Integrated Sanitation and Sewerage Infrastructure, and Urban Water/Wastewater) increase electricity generation (El Tebbin Power and follow up project) and improve transportation (Ports Sector Development, Roads Development and Asset Management, Railways Sector Investment and Restructuring, Urban Transport SWAP). An integrated approach to promote more efficient delivery of urban and rural infrastructure services, local economic development and regional competitiveness will be applied through a couple of Integrated Governorates Development projects. These are expected to enhance linkages between urban markets and rural production, as well as provide private sector investment opportunities in selected governorates. Analytic work in the area of transport sector development, especially on the restructuring of the railways system, road network management and urban transport policy, is also envisaged. Analytical work and policy advice on telecommunications infrastructure, noted above, is also relevant in this regard.

86. Finally, the Bank proposes to facilitate private sector participation in public infrastructure projects through technical assistance (a workshop was organized in December 2004 and further initiatives are planned for later) as well as through lending (e.g. via West Delta and El-Tebbin Power projects). The focus of the Bank’s assistance will be on elimination of certain restrictions that are presently imposed on the private sector’s participation in infrastructure projects; setting a clear and unambiguous regulatory framework and quality standards for such participation; establishing a system to select investors through transparent and competitive procedures; and highlighting the need for rationalization of costs, prices and subsidies in various sectors. IFC is also able to support infrastructure privatizations and public private partnerships, as well as to provide financing for private sector infrastructure investments.

87. Improved quality and relevance at all levels of education system (CAS outcome 2.3). Egypt has developed (with the assistance of the Bank and other development partners) a long term (20 year) vision for the education sector. This vision has informed a number of policy and program innovations in recent years. The country has achieved much success in providing access to education to the majority of its citizens, although gaps still exist in remote regions and for disadvantaged populations. From the point of view of supporting the education sector in the future, the priority issues have to do with quality and curriculum choice. The importance of improving quality can hardly be overestimated given the need to improve Egyptian school children’s performance in most subjects, but particularly in math and science as well as the high rates of unemployment among high school graduates. Curriculum choice is also important, especially in view of the science and technology needs of a knowledge economy and the demand for such skills in Egypt.

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88. In order to reach these objectives, and consistent with the approach of the Ministry of Education (MOE), the Bank will focus on policies and programs to (a) improve quality and curricular relevance (through teacher training, testing and a rational approach to technology introduction in classrooms); (b) ensure appropriate curricular linkages across educational levels (e.g., linkages between secondary technical track education, vocational/skills training, and higher technical institutes); (c) explore connections with other sub-sectors such as health and nutrition (e.g., school health and feeding programs), social protection, infrastructure and transportation sectors (e.g., road linkages to schools) as well as with the private sector (e.g., skills of graduates entering the labor market and skills development among in-service employees), these approaches being particularly relevant for reaching out to disadvantaged populations with quality education services; and (d) develop and implement national standards and strengthen monitoring, accreditation and quality assurance processes at all educational levels (including for the private educational establishments). These areas of support will be prominent in the Bank’s future program, reflected in such activities as an Education Sector Review in FY06 and an Education Enhancement II Project in FY07. In addition, these activities will continue to pay special attention to gender concerns and the cost-effectiveness of education spending. Bank support will also focus on helping identify areas of inefficiency (through the ongoing PER exercise) and helping the Ministry of Education in implementing workable recommendations in a phased manner. The PER exercise has already looked at some aspects of education spending (e.g., capital investments and textbooks). In addition, Bank support will include capacity building in the Ministry of Education.

89. Improved water resource management and air quality (CAS outcome 2.4). The Bank’s overall approach aims to mainstream environmental considerations in both the lending portfolio and the government’s policies and programs. The lending program will focus on two sub-sectors: (1) Water Quality/Integrated Irrigation Improvement. The Bank is developing a portfolio of projects aimed particularly at improving water/wastewater quality. This includes the West Delta Irrigation Project (FY06) to support the implementation of an innovative partnership with the private sector for the management of water resources in the West Delta region, incorporating environmental objectives and components into the design of both institutional reforms and investment operations. There will also be emphasis on sanitation services and water demand management through such projects as Integrated Sanitation and Sewerage Infrastructure (FY08) and Urban Water/Wastewater (FY09). In both the lending program and related analytic work, the Bank will focus on the issues of governance of water agencies, private sector participation, coordination among stakeholders, rational pricing of water services and incentives for water reallocation and pollution control. (2) Air Quality and Waste Management. Learning from the successful implementation of a precursor we are preparing a follow-up project, the Pollution Abatement Project II, whose objective is to reduce pollution generated by point-source/industrial entities in the region of Alexandria and Cairo, in order to limit impacts on public health as well as on ecological systems. The project will introduce for the first time in Egypt a combination of IBRD lending, GEF and revenues from the sale of carbon emissions reductions. The Bank will also be co-financing with GEF, the Solar Thermal Hybrid Project (in FY06) whose objective is to contribute to improving the economic attractiveness of solar thermal technology globally. Efforts will continue to be made towards harmonizing the environmental review and resettlement procedures followed by the Bank and by Egypt. Towards this end, one or two Bank financed projects will be designed to serve as pilots. Finally, analytic support will be focused on three areas where the Bank has comparative advantage and global experience: (i) the use of economic criteria and valuation of externalities; (ii) the linkage between environment and poverty reduction, energy and environment, women and environment, and banking and environment; and (iii) the strengthening of the decision-making process in water quality, solid waste management, and rural water and sanitation sectors.

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90. Strengthened accountability of public sector agencies (CAS outcome 2.5). International experience shows that the impact and effectiveness of public sector agencies can be improved through the introduction of such accountability mechanisms as: performance evaluations for senior management, performance based budgets, unified accounting rules for the treatment of SOE profits, strengthened legislatures (e.g., budget and finance committees or public accounts committees with enhanced powers of scrutiny over the budget) and greater information disclosure about service delivery targets and achievements. Government is presently formulating plans for public sector administrative reforms that encompass some of these objectives. The Bank Group, which has previously provided technical assistance in the area of performance budgeting, stands ready to provide support as well for other initiatives aimed at strengthening public sector accountability. A particular focus should be on building the capacity to plan and prioritize investments at the local administration level and to ensure that operating and maintenance costs are adequately budgeted. Analytical work and dissemination of best practices on sustainable and replicable models for selected e-government services would contribute to this outcome as well.

91. Accountability can also be strengthened through further improvements in financial management. Egypt has a French-style public financial management system featuring a powerful Ministry of Finance and a strong legal framework for the development, implementation, and monitoring of the budget. Recent Bank analyses (Country Financial Accountability Assessment, 2003 and Institutional Financial Management Capacity Assessment, 2005) suggest that the efficiency and effectiveness of the administration of public funds can be further enhanced through such measures as the implementation of GFMIS and modern internal audit functions, and strengthening of the capacity of finance staff in the MOF and high-spending line ministries. The Bank will continue to work with appropriate Government agencies towards this end.

92. Improved coverage, quality and sustainability of social insurance (CAS outcome 2.6). Social policy is an important priority for Government and one in which the Bank has much experience and information to share. A program of support is envisaged in three areas: social insurance, labor market regulations, and skills development. Social insurance reforms in such areas as health insurance, old age pensions, and unemployment assistance are important to ensure fiscal stability, support financial sector development, improve the functioning of labor markets, and ultimately enhance both growth and equity. At Government’s request, the Bank has started a study on the pension system in Egypt (to be completed in FY06) with the aim of identifying key reform areas and transition arrangements. Regarding health, we propose to include in-depth analytical work on health finance and health insurance reform in the context of wider programmatic ESW on Health and Population Sector Strategy. Regarding labor markets, the Bank is proposing analytic work (in FY07) to develop a better understanding of employment structure, regulations and labor market programs in Egypt. This could help in developing better programs to facilitate enterprise restructuring and labor reallocation in the context of greater competition. The Bank is also active in the area of vocational training, in collaboration with the EC, through the Skills Development Project. This ongoing project aims to change the paradigm of vocational training in Egypt by placing more emphasis on the role of the private sector in articulating training needs, providing training and improving its quality. Future support could take the form of evaluations of training programs and the practices adopted by the public and private sectors for assessing training needs. In addition, analytical work could be conducted to review constraints to in-service training and the private provision of training.

Promoting Equity

93. Improved coverage and effectiveness of safety nets for the poor (CAS outcome 3.1). The Bank has been involved for some time now in analyzing the coverage and effectiveness of safety nets for the poor in Egypt. Most recently, this issue was covered in a Poverty Strategy Report (September, 2004) and a high-level ministerial workshop on social safety nets (February, 2005).

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Given the strong interest of Government and civil society in this area, the Bank will continue to provide analytical and financial assistance as necessary. The Poverty and Social Impact Analysis item in the work program provides a vehicle for continued analytic support.

94. Reduced disparities between Lower and Upper Egypt (CAS outcome 3.2). Helping Upper Egypt requires a focus on its special developmental challenges. Among these is the need to better identify local priorities and use more flexible mechanisms to deliver public services. This can be done in part through greater involvement of local administrations, community organizations and NGOs in the selection and delivery of public services. The Bank proposes to address such challenges in selected analytical work (as part of the Public Expenditure Review exercise) as well as in lending (Education Enhancement II, Social Fund IV and Integrated Governorates projects). The last-mentioned projects will focus on both urban and rural development and will aim at (i) de-concentration of public services delivery, with more responsibility transferred to local administrations; (ii) improved access to social services and economic opportunities, and (iii) involvement of civil society in planning and implementation. This would be achieved through support for (i) capacity building of local officials and local council members in planning, implementation, monitoring and evaluation functions, using participatory approaches; and (ii) investments in infrastructure and improved services to support governorate/district level plans and help Upper Egyptians take advantage of economic opportunities. Nurturing economic opportunities is a necessary complement to the provision of social services and basic infrastructure (health, education, rural roads, water and sanitation). For such projects, the Bank would seek partnerships with other donors.

95. Improved access and quality of healthcare for poor (CAS outcome 3.3). Addressing the persistent inequities among regions and income groups in access to basic health and population services is a priority for Government. This issue is particularly relevant with respect to Upper Egypt where fertility rates remain very high and maternal and child health indicators remain extremely poor. Addressing issues of unequal access requires not only improvements in the quality and availability of health services but behavioral changes as well at the household and community levels. The Bank has been actively pursuing such changes in past projects. The ongoing Population Project (due to close in April 2005) offers an interesting model of complementary components supported by the Ministry of Health and Population, which focused on improving the quality and availability of health services, and the Social Fund for Development which focused on participatory and community-based interventions targeted at behavioral changes. We propose to build on this experience in the Family Health Project as well as through further analytical work (Health and Population Sector Strategy).

96. Decreased gender disparities (CAS outcome 3.4). At present, the Bank is facilitating social development, especially relating to women, through bringing a group perspective to bear in analytical work and selected investment projects. Examples of the latter include support for the formation of user groups in irrigation projects, involvement of women’s groups in social fund activities, and capacity building for community organizations across a broad range of activities (in Sohag and other disadvantaged regions). Such support will be continued in the future. In analytic work, studies will be conducted to follow up on the country gender assessment completed recently. In particular, barriers and constraints to female entrepreneurship will be investigated in the context of the Investment Climate Assessment currently under way. Work will also be continued with the National Council for Women (NCW) through an already-disbursing grant to help build the capacity to conduct strategic planning, performance measurement, and develop data and information systems to facilitate gender mainstreaming in policies, programs and projects.

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E. Assistance Program Scenarios

97. A base case program of $500 million a year on average is proposed in order to support the key development objectives of the CAS over FY06-09. From a structural and macroeconomic policy perspective we judge that Egypt is now in the base case and our objective should be to provide financial and analytical support to maintain the present macroeconomic policy framework and reform status. In particular, it should be noted that Egypt has already met several conditions that were under discussion in FY01-04 for a higher lending program. These include exchange rate adjustments and reforms in the foreign exchange management system, restructuring of trade tariffs and customs administration processes, and the presentation to parliament of a new law aimed at reforming tax rates and tax administration. Hence we propose a larger assistance program than in the previous CAS. Furthermore, the base case program is heavily oriented towards support for infrastructure projects, a feature that meets three tests of potentially high development effectiveness, namely, existence of demand from the country, substantial relevance to future growth and development, and alignment with the Bank Group’s comparative advantage. Broadly speaking, the base case program corresponds to conditions described in the baseline medium-term scenario described in Section II.B of this document.

98. A high case lending scenario with an average commitment of $700 million per annum is also envisaged. Such a scenario is predicated on implementation of reforms in the financial sector (see paragraph 20 for details). In particular, restructuring all public sector banks will require substantial public funding. The Government has invited the Bank to participate in determining the exact scope of the required funding through assessments of the financial status of the public sector banks and their performing and non-performing assets. At the same time, the Government has requested that the Bank be ready to support the reform program through both technical assistance and loans. Since financial sector reform is central to improving the climate for private sector development, we propose a high case program to accommodate two quick-disbursing loans. While the financing needed for these operations is not yet known, we propose, on exposure management grounds, that overall lending not exceed $2.8 billion over the next four years in the high case. Consideration of the high case program will be determined by two triggers: (a) clear signs of implementation of substantive financial sector reforms, including significant restructuring (and recapitalization) of the public sector banks, and movement towards the privatization of the Bank of Alexandria; and (b) the adoption of a financing plan under which at least 10 percent of the total funding needs of the financial sector restructuring program is to be met from non-debt-creating sources. Such sources could include, but not necessarily be limited to, grants from donors and proceeds from the privatization of state-owned enterprises, divestiture of public shares in joint public-private banks, and the sale of the Bank of Alexandria. Adherence to such a plan will limit the increase in public debt arising from implementation of the financial sector reform program, which in turn will facilitate macroeconomic management until the benefits of the reform begin to accrue, notably until growth accelerates and public debt ratios stabilize and finally decrease.

99. A low case scenario would result from a dilution in the program of structural reforms and deterioration in the macroeconomic policy framework. On the structural side, a significant dilution of the present program of trade, tax, investment climate and financial sector reforms would create concerns about the sustainability of medium-term growth of 5 percent or above. On the macroeconomic side, a weakening of the good monetary and exchange rate policies followed in recent years or a deterioration in the consolidated fiscal deficit for reasons unrelated to the proposed trade, tax and financial sector reforms, would raise similar concerns. If such conditions arise, the Bank would move to a low case lending program which, depending on the severity of the deterioration, could decrease to an average of $250 million per annum.

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Table 2: Indicative Assistance Program of the Bank (FY06-09)

FY06 FY07 FY08 FY09 Analytical Work Poverty and Social Impact Analysis of Selected Subsidies Public Expenditure Review Transport Sector Policy Education Sector Review Country Environmental Analysis (TA) Investment Climate Assessment Follow-Up ESW on Access to Land and Finance Water Resources: Implications for Income and Health of the Poor

Poverty and Social Impact Analysis of SOE Divestment Public Expenditure Review Social Insurance Reform Options Agricultural Productivity and Marketing Urban Sector Strategy Country Environmental Analysis Follow Up Health and Population Sector Strategy

Poverty and Social Impact Analysis of Structural Reforms Public Expenditure Review Labor Market Assessment Development Policy Review Investment Climate Assessment Follow-Up

To be determined in consultation with Government in FY07/08

Lending El-Tebbin Power ($250m) Mortgage Market Development ($50m) Pollution Abatement II ($20m) West Delta Irrigation ($150m) Ports Development ($50-100m)

Financial Sector Restructuring Loan I ($ TBD)* Urban/Alexandria Growth Pole ($100m) Social Fund IV ($75m) Education Enhancement II ($60m) Integrated Governorates ($100m) Solar Thermal ($2m)

Roads Dev. & Asset Mgmt ($100m) 2nd Integrated Governorates ($100m) Railways Sector Inv & Restructuring ($100m) Integrated Sanitation and Sewerage Infrastructure ($120m) Financial Sector Restructuring Loan II ($TBD)* Family Health ($75m)

Power II ($200m) National Pilot Urban Water & Wastewater ($75m) Urban Transport SWAP ($100m)

* refers to high case operation

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IV. MANAGING RISKS

A. Country Creditworthiness and Exposure to the Bank Group 100. Egypt currently meets all guidelines for Bank Group debt exposure by comfortable margins and implementation of the CAS lending scenarios does not create a risk of exceeding the exposure limits. One guideline limits Bank exposure to any single country to $13.5 billion. The Bank’s current exposure is just over $1 billion. The base case lending scenario would add $2.0 billion to this exposure over four years while a high case scenario would add $2.8 billion. Under both scenarios, we would stay far below the single country exposure guideline. A second guideline pertains to the share of export earnings absorbed by debt service to the Bank. The current guidelines are 6 percent for countries in the low-risk category, 5 percent for those in medium risk, and 4 percent for those in severe-risk category. Our simulations suggest that Egypt’s debt service to the Bank will not exceed 1 percent of its exports even under the high case lending scenario. Finally, a third guideline suggests that the Bank Group’s share of public and publicly guaranteed debt service should not exceed 20 percent and preferred creditor debt service should not exceed 35 percent. Our simulations show that even under the high case lending scenario, the Bank Group’s share in Egypt’s public debt will not exceed 8 percent, and preferred creditor debt service will not exceed 25 percent.

101. External judgments of Egypt’s creditworthiness have varied in recent years. In June 2002, Egypt was able to sell its first sovereign international bond, raising $1.5 billion which was three times the original target. From 2001 through most of 2004, its ratings declined in response to slow growth, inconsistent reform efforts and rising fiscal deficits. Following the announcement of reform measures by the new Government in July 2004 and the improvement in the economy during the year, Egypt’s credit rating has been rising. For example, the overall country risk rating assigned by the Economist Intelligence Unit to Egypt improved from 50 in September 2004 to 48 in November 2004 and has since been constant. Ratings assigned by Standard and Poor’s and by Fitch have also improved in recent months and are now at BB+ with a stable outlook.

102. At 88 percent, Egypt’s public debt to output ratio is high relative to what is considered desirable for macroeconomic stability. However, fiscal sustainability analysis suggests that this level is manageable under a higher growth trajectory than experienced in recent years. For example, analysis suggests that the debt/GDP ratio will decline moderately over FY06-09 if the economy grows at the baseline rate of 5 percent on average over this period. Analysis also suggests that implementation of the base case CAS lending program will not worsen Egypt’s debt sustainability. However, the high case lending scenario would lead to an increase in the debt/GDP ratio and thus be more difficult to manage (see Box 2). In this case, it would be advisable to limit the increase in debt by relying as much as possible on non-debt sources of finance. At the same time, it is worth noting that Egypt’s external debt is moderate (less than 30 percent of GDP as of FY 2004), owed largely to official sources and heavily tilted towards medium and long term liabilities. These characteristics help keep external debt servicing costs low.

B. Implementation Risks 103. Risks may emerge from both external and domestic sources. Attention has been drawn previously to the high correlation between OECD growth rates and Egypt’s economic performance. This link is likely to be enhanced as Egypt pursues greater integration with global markets through implementation of trade agreements with the EU, the US and regional partners. The downside of greater integration is a greater susceptibility to external shocks. If world economic growth falls sharply relative to current expectations, this may lead to a larger impact on Egypt’s growth than has historically been the case. Regional instability in the Middle East and North Africa and increased concerns about internal and external security could also affect Egypt’s economy and society in the coming years, particularly if they affect tourism and foreign investment flows.

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Box 2: Egypt’s Public Debt The consolidated net public debt for Egypt, as derived from data published by the Central Bank of

Egypt, was 88 percent of GDP at the end of FY04, comprising an external debt of 29 percent of GDP and a domestic debt of 59 percent. The term “consolidated” means that the measure is arrived at by netting out all intra-governmental transactions. In particular, transfers from the Social Insurance Funds in the amount of just over 40 percent of GDP are netted out.

Four aspects of the public debt provide cause for concern. First, the current level is high, well above the 60 percent that is conventionally used as a threshold of concern. Second, the debt has been rising since FY00, after having declined steadily through the 1990s, suggesting a fiscal policy dynamic at work that needs to be arrested and then reversed. Third, this debt level has been reached despite substantial cuts in public investment and government capital expenditures. This suggests that the room for maneuver is increasingly limited and a more aggressive strategy of current expenditure control and treasury management is now required. Fourth, financing needs have typically been larger (by about 2 percent of GDP in recent years) than budget deficits on account of sizable “arrears” and “adjustments for errors.”

At the same time, however, some other aspects suggest that the debt situation might be more manageable then what the above ratios and trends suggest. First, the measure of debt reported here does not take into account approximately 70 billion Egyptian pounds held by the Government in “blocked” accounts at the Central Bank of Egypt. These accounts were set up to hold funds for eventual repayment of external obligations that were rescheduled in 1991. For FY2004, an adjustment of 70 billion Egyptian pounds would have reduced the net debt to 73 percent of GDP. Not enough information was available to forecast how the receipts and outflows from this account would affect the public debt level in future years. Furthermore, the institutional characteristics of Egypt’s public debt suggest that it might be less sensitive to classic market-based reactions. For example, the fact that around 70 percent of the domestic debt is held by domestic financial institutions, rather than external agents, reduces refinancing and rollover risks, although it could compromise the efficiency of the domestic financial system. Such risks are also reduced by the fact that the external debt is long term in nature, highly concessional, and held by official sources, rather than by commercial banks or bondholders.

Fiscal sustainability analysis suggests that the debt ratio would stabilize and slightly decline (to 85 percent in FY2009) under the assumption that economic growth will average 5 percent per annum and that additional external debt in the amount of $2 billion would be obtained at official development assistance terms. However, the acquisition of significantly higher debt, in the amount of $9 billion (of which $6 billion equivalent is assumed to be in domestic currency) does worsen the debt trajectory, leading to a peak debt ratio as high as 92 percent by 2009. Under the circumstances, a desirable strategy for Egypt would be one that generates growth without raising the public debt significantly and thus one that relies largely on private investment to serve as the engine of growth. To the extent that some growth-supporting reforms, such as financial sector restructuring, might be financed by additional debt, it would be desirable to obtain a large share of this on concessional terms while relying as much as possible on non-debt sources of funding.

104. Risks may also arise from domestic sources. The current optimism with regard to achieving higher growth over the medium run depends to a large extent on the credibility of the present reform program. If domestic social and political developments lead to a delay or dilution of the announced reform program, this is likely to have an adverse impact on private investment and growth. Some tensions are inherent in the reform process itself. For example, economic reforms may lead to social discontent if the employment and price effects on vulnerable groups are not adequately addressed through fiscal and social policy measures. Furthermore, Egypt is also simultaneously embarking on a political reform process that will increase the level of political competition as well as the public’s access to information and expression of voice. While this process will undoubtedly be beneficial in the long run, it could affect the pace of reforms in the short run.

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105. There is also a risk emanating from possible deficiencies in the institutional capacity needed to implement the reform program and manage the social and political tensions that may come into play. Some reassurance can be drawn from the fact that Egypt successfully implemented an ambitious reform program in the early 1990s, featuring a broad range of stabilization measures and structural reforms and including a substantial fiscal adjustment of almost 15 percent of GDP. Comfort can also be derived from the fact that project implementation has been improving in recent years. Nevertheless, the implementation challenges ahead are substantial and will require special attention to issues of public sector skills, incentives and governance.

106. Both external and domestic risks can be mitigated through the implementation of the multi-faceted reform program described in the CAS. The Bank Group can play a useful role by providing strategic and high-impact financial support, continuing to demonstrate the expected benefits of selected reforms through quality analytical work, and helping to build coalitions of support within Government, civil society and the international community. However, what is likely to be of decisive importance in the success of this CAS is the degree of ownership of the reform agenda exhibited by the Government of Egypt. At present, this is demonstrably high.

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Annex: 1 CAS Results Framework (FY06-09)

Strategic Objective 1: Facilitating private sector development

Long-term Development Agenda for Egypt Outcomes influenced by the CAS Program Bank Group Assistance

Egypt’s long-term goals

Major issues which hinder Egypt’s ability to achieve long-term goals

Outcomes that the Bank Group expects to influence over CAS period

Intermediate outcomes to track CAS implementation

Interventions for each strategic objective

More competitive and efficient financial sector

High level of non-performing loans

Dominance of public ownership in the banking system

Underdeveloped bond, insurance, and mortgage markets

Thin trading in equity market and weak corporate governance

Inadequate access to finance outside major urban centers

Insufficient infrastructure for electronic payments

1.1 Financial sector more efficient and responsive to needs of private sector

Public ownership share in the banking sector declines from 65 percent in 2004 to 40 percent by 2009

Share of private business sector in domestic credit rises from 54 percent in 2004 to 64 percent in 2009

Privatization of at least one of the four major public commercial banks

Diversified mortgage market

Streamlined property registration process

Higher capacity to comply with AML/CFT requirements

Divestiture of public shares in joint public-private banks

Consolidation of banking sector by merger or closure of weak banks

Strengthened supervision of financial sector

Reduction of proportion of non-performing loans

Preparation for sale of at least one public sector commercial bank

Preparation for sale of one public insurance company

Increase in number of registered properties; lower registration fees

Enhancement of postal ATM network and electronic payments system

Operation of Institute of Directors

Restructuring of public sector insurance companies

Operation of program for regional certificate on AML/CFT

Proposed activities:

Financial Sector Restructuring Loan

Mortgage Market Development Loan

Postal financial services

WBI Financial Sector Enhancement Program

On-going activities:

Grant for establishing Institute of Directors

Grants for strengthening Egypt's credit reporting system; modernization of payment system; and strengthening of data analysis and supervision of market risk, connected lending and large exposures

Investments and TA by IFC, including institution building

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Increased trade with regional and global partners

Average annual exports growth rate rises to 13 percent

Tourist arrivals reach 10 million per annum by 2009

Underdeveloped and inefficient seaports and airports

Legal restrictions to foreign investment in certain sectors (real estate, banking, foreign trade etc.)

Cumbersome customs procedures

1.2 Lower transaction costs pertaining to international trade

Customs: Average number of days to clear imported goods reduced to 2 in 2009

Ports: average cargo dwell time reduced from 18 days to 12 in 2009

Progress in implementation of free trade agreements

Simplification of customs procedures

Active consideration of measures to reduce legal restrictions to foreign investment

Increased investment in development of sea- and airports

Proposed activities:

Development Policy Review

Ports Sector Development Project

Ongoing activities:

Airport Development Project

Economic monitoring notes

Increased private business activity

Private investment rate rises to 10 percent of GDP by 2009.

50 percent increase in annual volume of new companies established between 2004 and 2009

Unemployment falls to 8 percent by 2009

Number of women-operated enterprises rises

Cumbersome regulations for new business start-ups

High cost and uncertainty involved in dealings with public agencies (e.g., tax authorities, inspections)

Inefficient industrial land market and registration

Poor bankruptcy regulatory and institutional framework

Unreliable and slow law enforcement institutions

Underdeveloped ICT and e-commerce infrastructure

Inadequate telecoms/ICT access outside major cities

Unnecessary restrictions on private sector participation in certain economic activities

Lack of proper accounting standards for private sector

1.3 Lower transactions costs for operating businesses

Time to register company reduced to 5 days and time to insolvency cut to 2 years (in at least one governorate)

Number of inspections reduced to 8 by 2009

Private participation in management of industrial zones piloted in 2 zones

Corporate and income tax rates reduced per new law

SOEs privatized as per current Government plan

International accounting standards introduced

Percentage of cargo handled by private companies in ports exceeds 50 percent in 2009

Streamlining company registration and bankruptcy procedures begun

Risk-based inspections adopted by at least two inspections authorities

Bankruptcy law revised

Corps of specialized bankruptcy judges created; reform launched for liquidators and trustees

Reform of land registration and management strategy launched

Increased outreach of telecommunication services

Implementation of pre-sale measures to privatize SOEs

Implementation of the Landlord Model in the port sector

Development of a pilot PPP in irrigation infrastructure

Obstacles to women’s entrepreneurship better understood

Proposed activities:

Programmatic ESW on free zones, industrial areas and access to finance and land

ICA Rapid Results Approach

Policy notes/TA on telecommunications issues

Ports Sector Development Project

Alexandria Growth Pole Project

Road Asset Management Project

West Delta Irrigation Project

On-going activities:

PEP-MENA (IFC)

Investment Climate Assessment

IFC equity and loan investments

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Strategic Objective 2. Enhancing the provision of public services

Long-term Development Agenda for Egypt Outcomes influenced by the CAS Program Bank Group Assistance

Egypt’s long-term goals Major issues which hinder Egypt’s ability to achieve long-term goals

Outcomes that the Bank Group expects to influence over CAS period

Intermediate outcomes to track CAS implementation

Interventions for each strategic objective

Macroeconomic stability

Single digit inflation throughout CAS period

Public debt to GDP ratio on declining path

High budget deficits

Large and poorly targeted subsidies

Lack of experience with inflation targeting

Low average maturity of the domestic debt

Inefficient treasury management functions

2.1 Fiscal and monetary policy consistent with macroeconomic stability

Increase in primary surplus between 2005 and 2009

Reduction in ratio of subsidies to GDP between 2005 and 2009

Average maturity of the domestic debt increased

Operation of monetary policy based on inflation targeting

Maintenance of floating exchange rate

Reduction in subsidies provided for energy consumption (e.g. for fuel and electricity)

Increase in number of taxpayers

Longer maturity T-bills offered

Proposed activities:

Public Expenditure Review

Development Policy Review

Ongoing activities:

Economic monitoring notes

Public Expenditure Review

Expansion and rationalization of infrastructure services

Obstacles to private sector participation in infrastructure projects

Under-investment in infrastructure, especially in Upper Egypt

2.2 Increased supply and improved efficiency of infrastructure services

Generation capacity in the power sector increased to 25,400 GW by end-2009

Telecommunications services efficiency improves

Efficiency of urban transport services improves

Implementation of full cost recovery irrigation schemes

Increased public investment in power, irrigation, sea and airports, and maintenance of roads and railways

Reform of the regulatory framework for taxis and buses in Cairo

Improved financial and operational performance of Telecom Egypt

Larger share of investment resources allocated to Upper

Proposed activities:

Railways Restructuring Project

Road Asset Management Project

Urban Transport SWAP

West Delta Irrigation Project

El Tebbin Power Project

Urban Sector Strategy

Privatization assistance for telecoms (IFC)

WBI Alexandria Local Development Workshop

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Egypt and rural areas

Development of quality standards and transparent selection procedures for private sector participation in public infrastructure projects

Improved power sector framework that allows for multiple financing sources in a sustainable manner

WBI Public-Private Partnership Finance Program

Ongoing activities:

Airport Development Project

Transport Sector Policy Note

Integrated Irrigation Improvement and Management Project

Higher quality of education, increased employability of graduates, and lifelong learning of in-service employees

Focus of the Government on high cost construction program and lack of focus on quality issues

Curriculum revision issues face political obstacles

MOE faces difficulty in attracting qualified managers due to bureaucratic hurdles

Low incentives for skills training among private enterprises

Gender inequality in access to education

2.3 Improved quality and relevance at all levels of education system

Improved quality and relevance at basic and secondary educational levels

Gender issues addressed at the secondary level

Girls secondary enrollment rate increased by 2009 (from 2005 baseline figures)

Access to quality pre-university education (including preschool education) increased for disadvantaged populations

Curriculum revised/ updated and teacher training implemented at the basic (including preschool) and secondary levels

Inclusive education policies implemented (to reach out to disadvantaged groups)

Systems for monitoring and evaluation of educational policies strengthened

Key PER recommendations implemented

Proposed activities:

Education Enhancement Project II

Education Sector Strategy

WBI Strategic Choices for Education Reform

Ongoing activities:

Public Expenditure Review

Education Enhancement Project

Secondary Education Enhancement Project

Higher Education Enhancement Project

Skills Development Project

Early Childhood Education Enhancement Project

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Improved air and water quality and reduced water loss

Inadequate environmental standards for air and water pollution

Low coverage of water networks

High subsidies on water lead to wasteful use

Lack of investments in rural sanitation

Lack of effective measures to control air pollution

2.4 Improved water resource management and air quality

Coverage of urban sanitation/ treatment networks and facilities increased

Portion of the rural population connected to sanitation facilities increased

Improvement or air quality (PM10 and SO2) in specific areas of Alexandria and Cairo

Legislation of revised environmental standards

Strengthening of monitoring and enforcement of air and water quality

Improvement of the water use fee collection system

Expansion of water-metering systems

Implementation of projects aimed at preventing wastewater seeping into groundwater

Implementation of projects for pollution control

Proposed activities:

West Delta Irrigation Project

Integrated Sanitation and Sewerage Project

Pollution Abatement Project

WBI Nile Basin Initiative Program

On-going activities:

Integrated Irrigation Improvement and Management Project

National Drainage Project

Pumps Rehabilitation Project

Integrated Water Resource Management Action Plan

Improved perceptions of public sector performance

Lack of government accountability mechanisms

Excessive centralization of public service delivery

2.5 Strengthened accountability of public sector agencies

Increased efficiency and service orientation of tax department

Decentralization of public services delivery, with a greater role for private sector, local authorities, and civil society

Introduction of regular performance evaluations for senior management

Development of sound and unified accounting rules for the treatment of SOE profits

Setting up of monitoring and evaluation system for integrated water management

Replication of Qena-style local government initiatives

Implementation of local area development program

Proposed activities:

Railway Restruct. Project

Urban Transport SWAP

Social Fund IV

WBI Local Governance Management Program

Ongoing activities:

Irrigation Improvement and Management Project

Integrated Water Resource Management (AAA and TA)

Social Fund III

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Adequate, financially sustainable, equitable, and efficient social insurance

Current schemes are financially unsustainable; financing mechanisms hinder employment creation and forgo opportunities to develop the financial sector

Benefit formulas and eligibility conditions distort incentives

Schemes are prone to adverse distributional transfers

Voluntary pensions (occupational plans) are badly regulated exposing plan members to undue financial risk

2.6 Improved coverage, quality and financial sustainability of social insurance system

Implicit debt of the current pension system made explicit and financing mechanisms in place by 2006

Integrated pension system in place that is financially self-sustainable, links contributions to benefits, and guarantees equal treatment to all members by 2009

Adequate regulatory and supervisory framework (for occupational/voluntary plans) in place by 2007

Scheme of social pensions replaces current system for casual-workers by 2009

Improved unemployment insurance system by 2009

Assessment of the pension system and analysis of options for reform

Draft Law for pension reform ready

Draft Law for regulation of voluntary private pensions ready

Assessment of unemployment insurance system and recommendations to improve financial sustainability and incentives for employers and employees

Proposed activities:

TA assistance in the area of pension reform

TA assistance in the area of unemployment insurance and severance pay reform

Ongoing activities:

Social Insurance Reform Options Study

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Strategic Objective 3. Promoting equity

Long-term Development Agenda for Egypt Outcomes influenced by the CAS Program Bank Group Assistance

Egypt’s long-term goals Major issues which hinder Egypt’s ability to achieve long-term goals

Outcomes that the Bank Group expects to influence over CAS period

Intermediate outcomes to track CAS implementation

Interventions for each strategic objective

Developing targeted safety nets

Poor targeting of the current consumer subsidies

Lack of technical expertise with implementation of targeted safety nets

Lack of expertise in developing safety net programs through socially inclusive approach

3.1 Improved coverage and effectiveness of social safety net for the poor

Some universal subsidies replaced by targeted safety nets by 2009

Analytical work on targeting mechanisms performed

Agencies responsible for safety net programs undergo relevant training in developing socially inclusive programs and in implementing targeting mechanisms

Proposed activities:

Poverty and Social Impact Analysis

WBI Poverty Assessment Workshop

Ongoing activities:

Poverty and Social Impact Analysis (subsidies)

Poverty Reduction Strategy

Decreasing interregional disparities

Lack of public investments in Upper Egypt

Lack of resources for income generating programs in Upper Egypt

Lack of capacity among local administrative authorities and community groups in Upper Egypt

3.2 Reduced disparities in living standards between Upper and Lower Egypt

Income per capita in Upper Egypt rises as a proportion of income per capita in Lower Egypt between 2004 and 2009

Rising share of Upper Egypt in annual public investment program

Share of public resources allocated to health and education in Upper Egypt increases

Local capacity to plan and prioritize investments increases in Upper Egypt

Proposed activities:

Poverty and Social Impact Analysis

Social Fund IV

Ongoing activities:

Upper Egypt Rural Development Strategy report

Integrated Governorates

Social Fund III

Improving access to healthcare

3.3 Improved coverage and quality of healthcare for the poor

Coverage of basic health

Increased utilization rates in family health services in target governorates

Increased public investments in

Proposed activities:

Health and Population Sector Strategy

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benefits package (primary care & public health programs) increased to 45 percent in target governorates (Menofia and Alexandria)

Utilization rate increased of family health services (antenatal care visits, contraceptive prevalence rates, delivery with professional assistance, and child immunization rates)

Reduced regional and income disparities in access to basic health services as measured by health insurance coverage and health services utilization rates

family health services in priority under-served regions

Development of institutional arrangements to support the expansion of health insurance coverage in primary care

Family Health Project

WBI Health Sector Performance Program

WBI Social Protection Program

Ongoing activities

Health Sector Reform Project

Decreasing gender disparities

Disparities still exist between men and women, especially related to economic empowerment, participation in the labor force, access to credit, as reflected in the incidence of poverty among female headed-households.

3.4 Strengthening the capacity of National Council for Women for strategic gender planning, monitoring and evaluation, and promoting the collection and use of gender-disaggregated data

Gender issues highlighted in the Bank’s projects and the Government’s Five Year Plan.

Gender disparities reduced in selected sectors such as healthcare and education

Gender strategy launched based on the recommendations of the Egypt CGA.

More gender-disaggregated data made available

Ongoing activities

IDF Grant for the Capacity Building of NCW

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Annex 2: CAS Completion Report Date of CAS: June 2001 Period Covered by CAS: FY02-04 Report Prepared by: Habib Fetini (Bank Staff) and Clive Gray (Consultant) Date: April 27, 2004

Purpose and Methodology

This is the CAS Completion Report (CCR) of the Egypt Country Assistance Strategy (CAS) for FY 2002-2004. The main objective of this report is twofold: to assess the effectiveness of the country strategy in bringing about the expected results, and to highlight the key lessons that have been learned during this period. The report also aims at stimulating reflection about assistance strategies and outcomes, and contributing to the deliberations already started within the World Bank and with the Government on the new country strategy for FY 06-09. The primary audience of this report is the World Bank country team and national counterparts.

The CCR relies on written documents, oral briefings by World Bank country team members, discussions with GOE counterparts in Cairo, and information gathered from other Bank staff. Key reference documents include the Country Assistance Strategy FY02-04; the Egypt Projects Results Page and Portfolio Status, November 2003; project concept/identification notes/documents, and appraisal reports; QAG and OED reports; and AAA products.

Overview i. According to the CAS for Egypt approved by the Board in June 2001, the “over-arching objective of the Bank Group’s country strategy in Egypt is to reduce poverty and unemployment.” Noting that unemployment was high in Egypt and that Government was aiming for a growth rate of about 7.0-7.5 percent, the CAS drew attention to the need for certain structural measures, including reduction of tariffs, simplification of customs procedures, tax reform, reduction/better targeting of subsidies, more active privatization, reform of the commercial code and its application, reforms of the financial system, and a more open foreign borrowing policy. In the event, a combination of external developments (such as low OECD growth) and domestic policies (such as tardiness in dealing with an overvalued exchange rate in 2001-02 and hesitant steps in other potential reform areas) led to much slower growth of the economy than expected. Nevertheless, there continued to be active engagement with the Bank through reviews of poverty, gender, the financial sector, education, health and through negotiations over a Policy-Based Loan (PBL). As a result the prospects for reforms are much better for the next CAS period. ii. The 2001 CAS outlined three scenarios for Bank assistance to Egypt, described as high-, base- and low-case. Some triggers for each of the scenarios were met—policy dialogue intensified, a joint Poverty Assessment was carried out, and the quality of the Bank’s portfolio improved significantly (all high-case), but the fiscal deficit worsened from 4.4 percent in 2001 to 6.4 percent in FY03 (low-case). Only three of eight new CAS-projected Bank loans were approved by June 2004, totaling $68 million against a planned $450 million. However, the late addition of a major infrastructure loan not foreseen in the CAS--$335 million for Cairo and Sharm El Sheikh airports—brought total approvals, at $368 million, to 82 percent of the CAS total.

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iii. The Bank continued to implement 19 loan/credit projects approved before June 30, 2001. These were concentrated in three sectors, namely agriculture, water & rural development (eight projects), education (three), and health & population (five). Three other projects were underway in tourism (two projects) and pollution abatement. Four new projects were approved, one in agriculture, two in education and training, and one in infrastructure (the airports project mentioned above). Meanwhile, the IFC committed twelve new projects in a range of sectors, notably the financial sector, transport infrastructure, SMEs, manufacturing, gas fields, and chemicals. IFC also co-financed a new technical assistance facility to support SME development. MIGA executed two investment guarantees.

CAS implementation: Lessons for four main clusters of Bank activity iv. Key findings from the implementation of the 2001 CAS relate to structural reforms in general as well as to development strategy in three sectors, namely agriculture and water, education, and health.

• Structural reforms. Government’s approach to structural reforms during the previous CAS was hesitant. This was due in part to understandable worries about the short run implications for employment and public revenues from proposed reforms. Future analytic work must focus not only on the overall benefits of the reforms in the long run but also on their short-run costs for different sectors and groups. It should also be noted that, when a decision was made by the Cabinet appointed in July 2004 to accelerate reforms, the fact that a solid analytic basis was available in prior work done by the Bank Group (and other development partners), especially in the financial sector and trade policy areas, made it easier to determine what to emphasize in the reforms. This highlights the need to remain committed to a substantial analytic and advisory program even if there is a decline in the pace of actual reforms.

• Agriculture and water. Apart from the need to reorient lending in this sector to channel more benefits to the poor of Upper Egypt, future Bank/GOE collaboration must address creatively the low water productivity and lack of cost recovery in Egypt’s irrigated agriculture. Other issues to be faced are decentralization of water management to water users’ associations, and how to curb the harm to downstream farm families caused by upstream pollution of the Nile. Both the Bank and GOE have become increasingly aware of the confluence of issues of irrigation and drainage, and rural water and sanitation. The Integrated Irrigation Improvement and Management Project, scheduled for approval in FY05, is designed to meet this concern.

• Education. Egypt’s human resource base is still far from being competitive in the international knowledge-based economy. The new CAS must consider how the Bank can provide a critical mass of support to achieve that objective within the next generation. It must focus on developing better national standards to guide curricula and measure improvements in relevant learning. The standards should reflect international experience and be linked to teacher and administrator incentives in order to improve accountability and quality of teaching and learning.

• Health and social services. Approaches to health insurance tested in earlier Bank projects have not proved viable. A key issue for the new CAS is to design alternative approaches that cope adequately with risk management. Preconditions for continued Bank financing should include political support for a given reform by way of necessary legislation.

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I. Implementation of the 2001 CAS

1. The 2001 CAS, covering the period FY02-04, envisaged the Bank’s assistance program in Egypt as continuing a long-standing focus on four activity clusters deemed central to alleviation of poverty. These include promotion of sustainable macroeconomic growth, pari passu with concomitant structural reform, and development of three key sectors, namely, agriculture and water resources, education, and health and other social services.

2. The bulk of this Completion Report (Sections II-VIII) views implementation of the 2001 CAS in a dynamic framework, highlighting the principal clusters of Bank intervention along with the factors that affected the Bank’s strategy during the three years FY02-04.

3. Section II discusses the shared Bank-GOE objective to alleviate poverty, and shows how the joint poverty assessment that was carried out brought this goal to the forefront. Section III summarizes the initial strategy and evolution of each of the four activity clusters. Section IV cites the benchmarks and triggers set forth in the CAS in regard to high-, base- and low-case scenarios of Bank activity during the CAS period, and compares these with the actual evolution of the Bank’s portfolio. Sections V through VIII describe the four activity clusters in turn, departing from the initial strategy pursued in accordance with the CAS; tracing its evolution in the light of external events and new information; and indicating key findings for the next (FY06-09) CAS. Section IX describes other Bank Group activities, notably the investments of IFC, analytical and advisory assistance (AAA), and capacity building by the World Bank Institute. Section X summarizes the CAS 2001’s statement of project selection criteria, targets for program implementation, and intended procedural improvements, and analyzes the degree of fulfillment of those objectives during the CAS period.

II. A Shared Objective: Alleviation of Poverty

4. The CAS describes the GOE’s “over-arching objective,” as that of achieving a private sector-led growth rate of 7.0-7.5 percent that would create gainful employment opportunities and reduce the incidence of poverty. It goes on to note that, notwithstanding this objective, as of 2001, absence of Bank/GOE dialogue about the problem of poverty in Egypt “prevents the Bank from developing a truly effective poverty alleviation strategy.” Moreover the Government had not yet granted outside researchers access to the 1995-96 and 1999-2000 Household Income, Expenditure and Consumption Surveys.

5. Poverty assessment. This changed with the onset in FY02 of a period of collaboration between the Bank and the Egyptian Ministry of Planning in FY02 that envisaged work on both poverty assessment and strategy formulation. The first output of this joint effort was the June 2002 report, Poverty Reduction in Egypt – Diagnosis and Strategy.

6. The study constructed a novel food poverty line, taking into account regional differences in prices as well as household age and size. The report established that the share of Egypt’s population below the poverty line had fallen from 19.4 percent in the first period to 16.7 percent in the second, although concern was expressed that slower economic growth after 2000 might have reversed the trend. The study also found the distribution of poverty shifting from the previous urban-rural divide to a geographical/regional pattern, poverty being both deeper and more severe in Upper Egypt than elsewhere. Although inequality increased country-wide, in Lower Egypt, where growth was highest, expenditures of the poorer population groups grew faster than those of higher-income groups, indicating that growth had been pro-poor. The study

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revealed education to be the strongest correlate of poverty, over 45 percent of the poor being illiterate.

7. Transfers, primarily from government, were shown to be a larger share of the income of the nonpoor (15 percent) than of the poor (10 percent), arising from the fact that most poor do not work in the regulated sector and so do not benefit from social insurance. While not an efficient mechanism (since it is universal in design), the bread subsidy was shown to keep a large number of people out of poverty.

8. The publication of the poverty assessment in 2002, coupled with its wide public distribution in Egypt, has already influenced Bank-GOE dialogue. A second collaborative output, focusing on designing a strategy for poverty reduction, is scheduled for completion in FY05 to be followed by further analytic work on the next HIECS that is to be conducted in 2005. Designing a more efficient social safety net (covering the cash transfer program as well as selected subsidies) is now a high priority for Government and the Bank’s technical assistance is being sought in this regard.

9. Gender assessment. Closely related to the poverty assessment, in FY02-03 the Bank and the GOE’s National Council for Women collaborated on a gender assessment, leading to a report of that title dated June 2003. The study found gender inequality to be correlated with income, and established a strong link between women’s education and improved gender indicators. Gender inequality in school enrollment was highest at secondary level in Rural Upper Egypt, where the ratio of girls to boys in 1996/97 was only 0.51. The report called for future polices to continue to emphasize reduction of gender disparities in education. It also recommended the following measures: removal of discriminatory provisions under certain laws, particularly those governing family relations; steps to equalize employment opportunity, compensation and social security; steps to promote a culture valuing women as full and equal partners in development; and the collection and dissemination of more economic and social data disaggregated by gender.

III. Evolution of Strategy in the Four Clusters of Bank Activity: A Summary

Sustainable economic growth

10. The macroeconomic context in Egypt deteriorated in several respects during the CAS period. First, the growth rate fell steadily to an estimated 2.5 percent in 2003. Second, the consolidated fiscal deficit rose from around 1 percent of GDP in FY00 to 2.9 percent in FY04. This context, strongly influenced by adverse external events, both international and regional, induced two financing requests from the GOE that were not anticipated in the 2001 CAS, one for a $500 million Policy-Based Loan (to be split 50-50 with the African Development Bank), and the other for a $335 million loan for the third terminal of Cairo Airport and for Sharm El-Sheikh Airport, arising in a context where previously anticipated private financing for such projects was not available on terms considered reasonable.

Agriculture and water resources

11. Bank activity in this sector has been dominated for three decades by parallel loans to the three main components of irrigation, namely distribution, pumping and drainage of Nile water. During the CAS period, growing attention focused on two concerns, (i) the fact that Egyptian agriculture features the lowest level of water productivity in the Middle East/North African region, about US20¢ per cubic meter, and (ii) the health hazard posed by upstream pollution on downstream farm families. As a result, the Bank’s strategy changed to help the authorities reform

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the institutions that manage water distribution and modify the incentives faced by the various actors, in a word to create an integrated management system. A new lending operation, named Integrated Irrigation Improvement and Management, was designed during the CAS period and scheduled for approval in FY05. It combines irrigation, drainage and pumping station improvements under one project.

12. In parallel, and to address growing concerns regarding water quality and sanitation issues, a study has been initiated to define the scope of a complementary lending operation in rural water and sanitation, as envisaged in the 2001 CAS. This project will build on the community structures and social capital created under the on-going water resource projects.

Education

13. During the CAS period, advances in school numbers and enrollment made it clear that, overall, access was no longer a major issue in the education system. While access in remote areas and for disadvantaged and disabled children remained a concern, Bank support for Egyptian education began to focus more on the quality dimension, i.e. how best to generate graduates with technological and problem-solving skills demanded by both the domestic labor market and the information-oriented global economy. Needs in this regard were articulated in a joint Bank-GOE Education Sector Survey, completed in October 2002. Both education loans approved during the CAS period—the Higher Education Enhancement Project (HEEP) and Skills Development Project—emphasized quality. Creation of a quality assurance program for universities was a central component of the HEEP.

Health and social services

14. At the outset of the CAS period, the Bank’s major intervention in these sectors was proceeding on the assumption that a way could be found to create near-universal insurance coverage for primary health care services in three pilot governorates. In late 2002 the ruling party’s health policy committee identified “extending health insurance coverage” as one of the Government’s two key objectives in the sector. However, it soon became clear that implementation of this goal depended in large part on reform of the national Health Insurance Organization, which was not forthcoming. By end-2003, only 7 percent of the IDA health sector credit had been disbursed. A Bank-led health sector reform and financing review identified key reasons for the slow progress. Pending development of a new health insurance model, the project’s focus has shifted to improvement of health services, including rationalization of infrastructure.

IV. CAS Benchmarks & Scenarios, and Evolution of the Bank Portfolio

15. The CAS defines a set of four benchmarks to guide both lending and non-lending involvement in Egypt during FY02-04, as well as four triggers for base-, high- and low-case scenarios for the lending program. The benchmarks are:10

• Success of the Bank Group in being able to complete substantive analytical work in the areas of poverty alleviation and the financial sector

• Sustained policy dialogue between the Government and the Bank

10 World Bank, Memorandum of the President on a Country Assistance Strategy for the Arab Republic of Egypt, Report No. 22163-EGT, cited herein as the 2001 CAS, June 5, 2001, pp. 21-22.

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• Fewer dropped projects and lower average cost of those dropped. Average cost to be aligned with Bank average during FY02-04

• Delays in effectiveness reduced from an average of about a year to about eight months

16. Benchmarks 1, 2 and 4 coincide with triggers listed in Table 1 following. Benchmark 3 is not categorized as a trigger, and is analyzed in Section IX as a procedural target, while the outcomes of the other three benchmarks are reviewed in this section.

Scenarios for the Bank’s lending program in FY02-04

17. The CAS defines three scenarios for new Bank lending in Egypt during the period: a base case (considered to be most likely) and high and low cases. These are summarized as follows:

• Base case – continuation of the current pace of growth (5.0-5.5 percent p.a.) and policy implementation; absence of “significant shocks or reversals of policy reforms, but also no major structural reform breakthroughs”

• High case – either a “major deepening of the structural reforms or a severe deterioration in the external environment”

• Low case – “implementation of policy reforms (deepening controls, halting structural reforms)” and the Bank portfolio deteriorate considerably

18. Table 1 details four main triggers for the three scenarios: the macroeconomic framework; structural reforms; the quality of overall policy dialogue between the Bank and the GOE; and management of the Bank’s portfolio.

19. During 1996-2000, GDP grew, on average, by over 5 percent per year. Since then, external shocks including the September 11, 2001 events in the United States and the U.S.-Iraq war, contributed to a deceleration of GDP growth to 3.4 percent, 3.0 percent, and 2.5 percent in FYs ’01, ’02 and ’03, respectively. Domestic policy measures also played a role. Notwithstanding 12 percent depreciation of the Egyptian pound against the dollar during 2000, the CAS regarded its continuing overvaluation as one element in the economy’s vulnerability. After averaging 9 percent of GDP during 1990-93, merchandise exports had dropped to 6.4 percent by 2000.11

20. During 2001-02 the GOE allowed the official exchange rate to depreciate by another 25 percent. At end-January 2003 it announced a floating of the pound, allowing the central bank (CBE) rate to fall another 25 percent by year’s end, from EP 4.62/$1 to around 6.20. During 2001-03 merchandise exports recovered modestly to average 7.3 percent of GDP—still far below levels characteristic of newly industrializing economies.

21. In order to stem the pound’s fall, during 2003 the GOE intervened in the float, inter alia freezing government imports and requiring exporters to sell 75 percent of their proceeds to domestic banks. Foreign investors’ remittance of profits and dividends was subject to delays. The parallel exchange rate remained in existence and fluctuated widely, spiking in early October at EP 7.40, or 20 percent above the central bank rate, before dropping to EP 6.85 by end-February 2004.

22. The CAS noted a worsening of the budget sector fiscal deficit, which rose from 0.9 percent of GDP in 1997 to average 3.9 percent in 1999-2000. This was attributed partly to

11 Computed from Bank’s SIMA database.

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clearing of arrears as a stimulus to the private sector, but also to an increase in public investment in “mega” projects. Skepticism was expressed about GOE efforts to attract more private Middle Eastern investment in these projects. In the event, the deficit rose to –5.5 percent, -5.8 percent and –6.4 percent in FYs ’01, ’02 and ’03 respectively. However it was expected to drop to -5.5 percent in FY04, mainly as a result of expenditure controls and the positive impact of exchange rate depreciation on revenues.

Table 1: Triggers and Main Assumptions for the Lending Program

Base-case assumptions High-case triggers Low-case triggers

∗ Gradual improvement in current monetary and exchange rate policies. Significant move towards fiscal sustainability. Fiscal deficit declines gradually from a level of 4.4 percent in 2001.

∗ Elimination of tariff surcharge.

∗ Progress toward reforms in the financial sector. FSAP completed. ∗ Improvement in the quality of policy dialogue. Full access to poverty data. ∗ Steady improvement in the . Bank's portfolio. Problem projects in the 10 percent-35 percent range. Delays in effectiveness gradually reduced to about eight months.

∗ Significant progress in achieving fiscal sustainability. Fiscal deficit of 3.6 percent achieved in 2001, and reduction in following years. ∗ Average unweighted tariff reduced to 22 percent. ∗ Acceleration of financial sector reform. FSAP completed. At least one of the 4 large public commercial banks privatized. ∗ Significant improvement in quality of policy dialogue. Poverty Assessment completed as a joint product with the Government. ∗ Significant improvement in the Bank's portfolio. Problem projects below 10 percent. Delays in effectiveness reduced to about six months.

∗ Controls deepened, fiscal deficit unsustainably high.

∗ No progress in structural reforms, especially in trade liberalization. ∗ No progress in financial sector reform. ∗ No improvement in policy policy dialogue, and problems of access to data persist. ∗ Significant deterioration in the Bank's portfolio. Problem projects over 35 percent. Effective- ness delays in excess of a year.

23. Regarding the balance of payments, the CAS noted pressures arising from the drop in tourist receipts following the Luxor attack, as well as net outflows from the domestic banking system reflecting a loss of confidence. During 1999-2000, net international reserves declined by 28 percent. By mid-2003 the current account was once again in surplus, but this was largely due to an 18 percent drop in imports over the past three years, with predictable consequences for growth. FY04 has seen a major improvement in the current account, partially offset by outflows on capital account due to uncertainty about the exchange rate regime.

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24. The CAS cites an estimated current level of $1.5 billion in foreign direct investment (FDI), noting the GOE’s intention to double it by 2010. Revised data show that FDI actually reached $2.1 billion in FY00, but dropped to $600 million in FY03. These pressures, together with skepticism about the GOE’s willingness to persevere with economic reform, were believed to underlie decisions in 2002 by two credit rating agencies (Fitch and Standard & Poor) to downgrade Egypt’s ability to service its long-term debt. S&P’s rating shifted Egyptian debt from “investment” to “speculative,” thus raising the country’s borrowing costs.

Trend and impact of GOE policies during the CAS period

25. The CAS refers to an unfinished agenda of structural reforms:

26. Reform of tariffs and other trade barriers. The central policy theme of the 2001 CAS is that Egypt must reverse the inward orientation of its economy, and promote non-oil manufacturing exports as the main contributor to higher productivity, international competitiveness, and thus economic growth. Success in this endeavor, according to the CAS, requires more flexible exchange rate management, as well as reduction of the level and dispersion of import tariffs, which create an anti-export bias in trade policy. Other factors underlying this bias are identified as non-responsiveness of the public administration; antiquated customs procedures, including outdated and inconsistent product standards and quality control; and inadequate export finance.

27. The nominal floating of the currency in January 2003, and the subsequent depreciation of the central bank rate, represented a step towards more flexible exchange rate management, although this was partially offset by the measures of intervention cited above. As regards tariff reform, given the fiscal situation, and the fact that import tariffs account for about 20 percent of tax revenue12, the GOE was reluctant to take steps that would reduce taxes in the absence of offsetting revenue-enhancing measures. It was also concerned about the employment impact of lower protection for import-substituting industries.

28. In early 2003 an IMF team studied the revenue impact of alternative tariff reforms and advised that reducing the number of tariff bands from the present 28 to five would have only a modest revenue impact. At mid-year the tariff question was a subject of dialogue between the Bank and the GOE during early negotiations for a Policy-Based Loan (see below).

29. At the end of the CAS period, tariffs on apparel were being made WTO-compliant, and tariffs on certain basic and intermediate goods were being reduced. Some steps were also underway to reduce the dispersion of tariffs and reduce tariffs on IT. In early 2003 the GOE established a schedule for a series of customs reforms, some of which were completed later in the year (launching of a model tax and customs center in Cairo, establishment of a new, modern port at Ein Sokhna).

30. During the CAS period the GOE took other measures designed to promote exports, including establishment of a Ministry of Foreign Trade and enactment of laws on Special Economic (export-processing) Zones and Export Promotion. The latter includes establishment of an Export Promotion Fund, improved machinery for executing the duty drawback and tax rebate systems, and provisions to combat extra-legal levies on foreign traders.

12 Karim Nashashibi, IMF Middle Eastern Dept., Fiscal Revenues in South Mediterranean Arab Countries: Vulnerabilities and Growth Potential, Working Paper No. 02/67.

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31. Tax reform. The CAS cites a joint GOE/Bank task force report on tax policy and administration, recommending management information systems to monitor performance in all major functions of revenue collection, starting with duty drawback and sales tax rebates for exports. With respect to the tax code, the report suggested abolishing most tax incentives in order to reduce distortions, limit discretion and facilitate tax administration. A major bill designed to limit arbitrary tax assessment and lower the tax burden on businesses was scheduled for submission to Parliament in early 2004.

32. Subsidies. The CAS describes the present system of food subsidies, amounting to roughly 1.7 percent of GDP and available to poor and non-poor alike, as an inefficient mode of social protection, and recommends more explicit targeting to the poor. However the GOE questions the administrative feasibility of such a reform, and has taken no steps in this direction. Electricity tariffs, set by Cabinet decree, have not changed since 1994, meaning a growing implicit subsidy over the past nearly ten years. In opportunity cost terms (world market prices), petroleum products likewise embody a substantial implicit subsidy. The total for electric power and petroleum together is estimated at 1.5 percent of GDP. Reform is reported to be under discussion, but had not been implemented as of the date of this report.

33. Privatization. Privatization slowed during FY01, compared with FYs ’95 through 2000, when some 130 enterprises with assets worth about US$3.8 billion were privatized. Notwithstanding this effort, in 2000 the public sector still accounted for around 30 percent of economic activity. Subsequent data13 show that FY01 saw only 13 companies privatized, compared with the preceding 4-year average of 29, with proceeds equaling only 41 percent of that average. According to the CAS, the GOE had indicated plans to divest most remaining enterprises during the next 2-3 years (i.e. by FY04), privatizing the gas distribution network, and selling public sector shares in joint venture insurance companies as well as 20 percent of Egypt Telecom. In the event, only five companies were privatized in FY02, yielding merely 8 percent of FY01’s already reduced proceeds.

34. Reform of the commercial code and its application. The CAS calls for improvements in Egypt’s legal system to facilitate investment and accelerate settlement of commercial disputes. During the CAS period the GOE took several legislative initiatives, including adoption of laws on intellectual property rights and labor and drafting of a competition policy law. Nonetheless, at the end of the period, observers were noting the persistence of time delays in resolving commercial cases: just over a third of cases filed in commercial courts are resolved, taking an average of six years.

35. Financial system reforms. The CAS noted the public sector’s continued dominance of the financial sector through retention of the four main commercial banks and major insurance companies, questions about the soundness of loan portfolios, and the GOE’s continued resort to administrative controls in areas where modern economies rely more on market discipline. The controls and lack of competition are blamed for the high cost and nonavailability of medium- and long-term finance, especially to small and medium enterprises.

36. IMF data on bank portfolio soundness as of March 2002 show non-performing loans at nearly 17 percent of total loans, with only two-thirds covered by provisions.14 The CAS characterizes the World Bank’s current access to financial sector data as “limited,” but notes that

13 World Bank Cairo office, “Egypt Brief – Economic Monitoring Note,” March 31, 2003, p. 18. 14 Ibid., p. 8.

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the GOE is considering participation in the Financial Sector Assessment Program (FSAP) with a view to helping it better assess the sector’s vulnerabilities and development needs.

37. An FSAP exercise was indeed launched and a report issued at the end of 2002. Several facets of the action plan it recommended were implemented during FY03-04. A new Banking Law enhances CBE independence. Prudential regulation was strengthened through regulations concerning insider lending. The CBE and banks worked to develop an automated credit risk information system (CRIS). In the area of monetary policy, the CBE established a separate monetary policy unit and introduced new open market operations, including deposit windows. A Real Estate Finance Law, enacted at the start of the CAS period, was expected eventually to promote housing affordability by lengthening amortization periods and reducing effective interest rates. Later in the CAS period the Capital Market Law was modified to support emergence of a mortgage market. An Anti-Money Laundering Law was adopted, with independent enforcement machinery. No major changes were made in the banking and insurance sectors with respect to ownership; however, new management was introduced at the four major public sector banks in 2002/03.

38. Foreign borrowing policy. The CAS expresses concern that overly cautious borrowing policy, designed to keep foreign debt within prudent limits, could hold capital inflow below levels necessary to finance an investment rate consistent with Egypt’s 7 percent growth target. The view is expressed that the current policy of requiring a minimum 40 percent grant element in individual loans is overly restrictive, and should rather be applied at an aggregate level. In the event, it appears that the GOE has applied the policy rather selectively during the CAS period. At the start of the period (July 2001) it floated a $1.5 billion Eurobond, and in June 2003 it formally applied to the World Bank for a $350 million Airports Development loan (see below). At the end of FY03, foreign debt in dollar terms was about 8 percent above its level at the start of the period, largely due to the dollar’s depreciation. Notwithstanding, at one-third of GDP, foreign debt remains at a modest level, as does the debt service ratio of roughly 10 percent.

39. As indicated previously, GDP growth during the CAS period diverged sharply from the GOE’s 7 percent target, although this cannot be blamed solely on failure to attract greater capital inflow for investment. Towards the end of the CAS period, in FY04, signs of an economic recovery began to appear. Business confidence appeared to be firming up, and both non-oil exports and import-competing domestic production were responding, with a predictable lag, to the pound’s depreciation. Tourism arrivals reached record levels, and the nascent natural gas industry was making solid progress. GDP growth was projected in the 3½-4 percent range, up from FY03’s 2.5 percent.

40. The outcomes of the various triggers can be summarized as follows:

41. Macroeconomic policies. Consistent with the base case scenario, monetary and exchange rate policies improved. Controls in these areas were not removed, but cannot be said to have deepened according to the low-case scenario. On the other hand, there was no significant move towards fiscal sustainability; far from declining after 2001, the deficit reached -6.4 percent in FY03, before declining to roughly -5.5 percent in FY04.

42. Trade policy. Consistent with the base- and high-case scenarios, tariff surcharges were eliminated and the average unweighted tariff was reduced below 20 percent. The float of the exchange rate was a pro-trade measure not foreseen in the CAS, although partially offset by the interventions described above.

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43. Financial sector reform. Here the base-case scenario seems to fit. The FSAP was completed and some reforms (see above) were undertaken. No commercial bank was privatized as envisaged in the high-case scenario, although at the end of the CAS period discussions were underway between the GOE and the Bank, IMF and USAID on initiating the privatization process.

44. Policy dialogue. Here the high-case scenario seems to fit. The Poverty and Financial Sector Assessments were completed (see below), and serious policy dialogue occurred in the course of negotiations over the Policy-Based Loan as well as in contacts between GOE ministerial and Bank vice-presidential levels.

45. Bank portfolio management. One year into the CAS period, five out of 18 projects or 28 percent were in the problem category. Strenuous efforts following a Country Portfolio Performance Review (CPPR) in May 2002 improved performance to the point where, as the CAS period drew to a close, only one out of 13 then active projects, or 8 percent, still fell in that category. The three new projects becoming effective by the time of writing, Higher Education Enhancement, Skills Development, and 2nd Matruh Resource Management, attained effectiveness in three, six and ten months, respectively, averaging just over six months. Thus, portfolio management met the two high-case triggers cited in Table 1.

46. In summary, the situation as it evolved contained elements corresponding to some of the triggers of all three scenarios.

New Bank loans during the CAS period

47. Sectoral focus. The CAS signals the Bank’s intent to focus on three types of interventions during FYs 02-04:

• Interventions that support higher and sustained growth. The latter involves supporting macroeconomic stability, phased restructuring of the bank and corporate sectors, and improved infrastructure for greater competitiveness. Bank participation in this category was to be limited because of heavy USAID/EU involvement.

• Targeted interventions for poverty reduction. Defined as activities in basic education and health; social protection/safety net; and rural poverty.

• Interventions with indirect poverty reduction impact. Defined as activities that generate benefits for the poor by promoting broad-based growth, developing poor areas, initiating dialogue on governance and community development, and building effective institutions.

48. Projected volume of activity. As shown in Table 2, the CAS base-case lending program foresaw eight new projects, totaling $500 million. For the high case, total lending over three years was foreseen at around US$1.5 billion, half of it to take the form of quick-disbursing loans. This was described as presupposing sustained dialogue between the GOE and the Bank on the key structural issues. For the low case, it was foreseen that total new lending would be limited to around US$100 million for one or two social sector projects.

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Table 2: Base-Case Bank Lending Program, FY02-04,

FY02 FY03 FY04

Higher Education Enhancement ($50m)

Natural Resource Management ($50m)

Health Sector Reform II ($100m)

Skills Development ($50m) Early Childhood Development ($50m)

Irrigation/Drainage Improvement ($100m)

Information Infrastructure: Telecom, Posts, e-Commerce ($10m)

Agricultural Exports ($40m)

Rural Water/Sanitation ($50m) – planned for FY04/05

49. In the event, four new loans for a total of $403 million have already been or are scheduled to be approved during the CAS period. Table 3 lists those four plus two loans scheduled for approval in FY05. Comparison of Tables 2 and 3 shows that one of the four CAS-period loans, Airports Development, was not foreseen explicitly in the CAS. The current projection of 13 active projects at the end of FY04 is one less than the CAS base-case scenario. Four projects will have closed during FY02-04, and two more are scheduled to close in FY04, but extensions are anticipated. The bottom line is that five out of the eight projects foreseen for FY02-04 in the base-case scenario are expected to be approved by end-FY05, albeit two for substantially lesser amounts. The Agricultural Exports project is being redesigned, and Health Sector II is still possible further down the road, depending on the outcome of a redesigned Health Sector I.

Table 3: New Loans Approved or Expected to be Approved During FY02-05 FY02 FY03 FY04 FY05

Higher Education Enhancement ($50m)

Matruh Resource Management (approved but subsequently cancelled)

Skills Development ($5.5m)

Early Childhood Development ($20m)

Airports Development ($335m)

Integrated Irrigation Improvement & Management ($120m)

Application of sectoral focus criteria during CAS period 50. The lending program realized during the CAS period will not meet a rigid interpretation of the sectoral foci outlined in the CAS, but there are sound reasons for this:

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• The Bank's lending to Egypt is modest compared to the volume of overseas development assistance (ODA) to Egypt from the U.S. and EU.15 Moreover, its market-based terms cannot compete with grant funding from those two sources and other development partners. However, experience during the CAS period shows that the GOE appreciates the Bank’s role more as a critical partner mobilizing knowledge and experience to pioneer efforts in challenging areas, than as a source of funds. For example, at the GOE’s request, the Bank is initiating and leading efforts in Egypt to enhance Early Childhood Development, and to restore private sector participation in provision of infrastructure services by introducing private management of airport services.

• The CAS sectoral focus of support for “sustained growth” is so broad as to accommodate a great variety of interventions. Project analysis in the Bank has shown a close linkage between expansion of Cairo and Sharm El Sheikh airports and development of tourism.

• The CAS’ Private Sector Strategy annex states, “The Bank Group has and can continue to play a role in the infrastructure area, and increasingly in the private provision of infrastructure. Areas for Bank and IFC activity include…ports and airports.” GOE and Bank perceptions agree that, given the current political backdrop, private foreign capital is not available in significant amounts for investments such as the Airports Development Project. The Bank’s acceptance of the airport project conforms to the above supplemental selection criteria. There is no question of the GOE’s unequivocal commitment. While the Bank has not done many recent airport projects, there is likewise no question of its comparative advantage in managing international tendering and implementation of infrastructure projects on this scale.

• As noted above, two of the CAS-listed projects not approved during FY02-04 (Irrigation) have merely been postponed to FY05. Many factors induce changes in the phasing of planned projects.

• Special factors apply to two of the Table 2 projects that no longer appear in the lending program. USAID offered cheaper funds for the Information Infrastructure project, and the Agricultural Exports project turned out not to meet the criterion of serious government commitment, although the GOE is supporting design of a project with similar objectives (West Delta Development), planned for FY05.

51. Admittedly, the number of new loan projects during FY02-04 that could be termed “targeted interventions for poverty reduction” is limited to one, namely Matruh Resources Management II, which also satisfies three criteria under the sectoral heading “interventions with indirect poverty reduction impact,” namely: developing poor areas, initiating dialogue on governance and community development, and building effective institutions. Conversely all four new FY02-04 projects target “broad-based growth,” which makes the CAS’ “indirect poverty reduction” heading a rather vague demarcation of sectoral priorities.

15 According to OECD/DAC, ODA disbursements to Egypt in 2000-01 averaged $643 million p.a. for the U.S., and $392 million for EU members together. World Bank data show average annual IBRD/IDA disbursements in FY00-01 of $62 million.

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V. Cluster 1: Promotion of Economic Growth through Structural Reform

Evolution of Bank/GOE policy dialogue 52. In discussing what did and did not work under the previous CAS,16 the 2001 document cites two sectors where the Bank’s role in policy dialogue was “greatly appreciated,” namely human resource development and rural development. Conversely, it refers to a “constrained relationship” associated with policy dialogue that is variously described as “weak,” “circumscribed,” and “marginal” in four critical areas, namely: nature and incidence of poverty in Egypt; assessment of the financial sector, desirable in order to help the GOE better understand, and respond to, weaknesses of the system and its vulnerability to economic shocks; export push and private sector development.

53. As noted above, the CAS cites development of “sustained policy dialogue” between the GOE and the Bank as both a benchmark for overall Bank involvement in Egypt during FY02-04 and a trigger for the lending program. As indicated below and in Section II, implementation for the first time of joint studies on poverty (see Section II) and the financial sector laid the groundwork for sustained policy dialogue in those areas.

54. Financial sector assessment. The financial sector study, carried out during April-June 2002, focused on banking, where four state-owned commercial banks hold 51 percent of system assets, and the Government has shares in most of the 50+ smaller banks. According to the study, state dominance of the sector has restrained competition and retarded financial sector deepening. The state banks’ operations lack cost-effectiveness and their portfolios reveal weaknesses. The study’s conclusion: to attract private buyers, substantial public funds would have to be injected into them.

55. Major recommendations include: audits of the state banks to assess loan recoverability; resumed privatization of joint ventures; early steps towards privatizing the state-owned banks; allowing market-determined interest rates in primary auctions; restructuring of government borrowing plans; gradual lowering of reserve requirements and remuneration of reserves; strengthening the Capital Market Authority to improve corporate governance and protect investors; privatization of the insurance industry; review of the structure and financing of social security; establishment of a credit registry; legislative-judicial reform to facilitate collection of collateral and protect creditor rights; and revenue-neutral tax reform for the financial sector.

56. Dialogue in context of proposed Policy-Based Loan. In January 2002 the GOE, calling attention to the impact of the September 11, 2001, events on the Egyptian economy, formally applied for a $500 million PBL. Over the next two years this led to high-level dialogue touching on all major facets of development policy, including the above four topics.

57. A draft Letter of Development Policy underlying the discussions, tabled in FY03, described as the foremost aim of Egypt’s reform strategy to create an environment for sustainable economic growth, overall stability and social development. This would enhance private, particularly foreign, investment, thereby raising productivity, competitiveness and employment. Five areas are listed as fundamental to achievement of this goal: the macroeconomic framework, the business climate, the trade regime, the financial sector and social safety nets. The document describes reform measures already introduced by the GOE and discusses their implementation

16 2001 CAS, Box B, p. 20.

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and enhancement. Key issues arising in these areas and featuring in the Bank/GOE dialogue can be summarized as follows:

• Macroeconomic framework. Management of the floating exchange rate; setting of money supply and inflation targets; revenue enhancement and expenditure control measures to reduce the budget deficit, including the impact of external tariff reform; enhanced transparency through public release of budget data.

• Business climate. Rationalizing business taxation, inter alia by reducing marginal tad rates, phasing out exemptions; lowering business costs through reform of labor law; promoting the real estate market by facilitating mortgage financing; reform of company registration, commercial adjudication and insolvency; improving the business environment for SMEs.

• Trade policy. Promotion of exports, inter alia through a new financial facility and establishment of special economic zones; customs modernization based on a new customs law; implementation of a new tariff structure, reducing the number of tariff bands, regularizing exemptions and lowering the average tariff rate; reform of the import inspection regime.

• Financial sector modernization. Enhancing the soundness and competitiveness of the banking sector, including sale of government shares in joint ventures, risk assessment of the four state-owned banks and their eventual privatization; regularizing taxation of financial intermediaries and transactions; new legislation on accounting and auditing of capital market entities.

• Social safety nets. Improved targeting of the poor in order to concentrate subsidies that now benefit poor and the nonpoor alike.

58. Tariff reform. An avenue of reform that is encountering resistance among the Bank’s GOE discussion partners is modification of the tariff structure. Two main concerns underlie this position: (i) the fiscal consequences of uncompensated loss of tariff revenue; and (ii) the unemployment consequences of reduced protection for Egyptian industry. Resolution of the first concern depends less on technical information than on whether Cabinet and Parliament can be persuaded to adopt compensating revenue/expenditure control measures with non-neutral impact, i.e. that will unavoidably make some elements in society worse off.

59. As regards the issue of unemployment, however, it is inevitable that the GOE would be concerned about a reform that promises to intensify foreign competition, particularly for Egypt’s textile and garment industries. There is reason to expect the Government to welcome a joint study of the net employment impact of lower tariffs in certain industries and options for relocating affected workers. A showing that job losses in some branches could be compensated by gains in others would strengthen the Bank’s hand in pushing for tariff changes that would on balance increase the Egyptian economy’s openness and integration with world markets.

Evaluation of the Bank’s performance

60. During the CAS period, the Bank provided a swift response to the GOE’s applications for two large growth-oriented loans, those for airports and policy reform, involving a total commitment of over $800 million (of which the African Development Bank tentatively agreed to share half the cost of the $500 million PBL). In its negotiating posture vis-à-vis the PBL, the Bank recognized policy reforms recently undertaken or currently in course, and engaged the GOE in constructive discussion about further measures to stimulate investment, increase the Egyptian

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economy’s competitiveness and enhance incentives for local producers. Ultimately, an improved balance of payments and GOE reticence vis-à-vis some of the proposed measures led the PBL to be dropped.

61. In regard to economic and sector work (ESW), with GOE participation the Bank executed a major study of the financial sector (FSAP), underpinning discussions on that component of the PBL reform package. Solid analytic work, in the form of a report done in 2000 on export development options, was also available to underpin the trade reform proposals.

Key findings for the next CAS (FY2006-09)

62. The forthcoming CAS period will witness implementation of the airport loan and the culmination of discussions related to structural reforms in the financial, trade, tax and regulatory policy areas. The former will contribute directly to GDP via growth of Egypt’s tourism and transport sectors, as well as indirectly by lowering transaction costs for other sectors.

63. Drawing lessons from the Bank’s interaction with the GOE on structural reform issues during FY02-04 is a more complicated matter. In the PBL negotiations hitherto the Bank proposed a series of reforms designed to speed the growth of exports, employment and GDP over the long run. However, the government is clearly worried about the risk of economic and political shocks those reforms could cause in the short run. Clearly there is a need for the two sides to engage in a deeper dialogue about how Egypt can escape the relative stagnation in which the economy found itself at the end of the CAS period. How can the country best take advantage of the disappearance of trade barriers between it and the European Union, scheduled to culminate in free trade by 2012? What steps can it take to retrain and relocate workers who will be displaced as the economy opens further? And, further, what lessons does financial liberalization in other countries offer Egypt about the resulting stimulus to the economy? How can the nonpoor segment of the population be weaned from energy and food subsidies that burden the public finances and impede programs to help the poor? What will be the macro impact of rising agricultural productivity as management of tertiary irrigation canals is decentralized? In the longer run, what will be the impact of a more decentralized system of higher education, reoriented towards producing skills for the knowledge-based economy? Answering these questions collaboratively with the Bank’s Egyptian partners calls for greatly expended investment in economic and sector work during the next CAS period.

VI. Cluster 2: Development of Agriculture and Water Resources

Previous Bank involvement in/focus on agriculture & water

64. During FY02-04 this cluster had two main components, comprising: irrigation, where the Bank has been Egypt’s principal external partner for three decades, operating via parallel loans to the sector’s three main branches—water delivery, pumping and drainage; and community-based rural development and natural resource management in three regions.

65. The CAS cites the preliminary (July 2000) report of a sector review on agricultural exports, whose final report appeared in December 2001. The review led to design of a $40 million loan project to promote horticulture exports, especially in the context of Egypt’s agreement with the EU. The project was dropped for lack of sufficient GOE commitment, but a similar project, West Delta Development, is being prepared for FY05, with much stronger support from the authorities.

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Implementation of pre-CAS loans

66. Bank evaluators of CAS-period implementation of the three ongoing irrigation sector loans have rated it as satisfactory. These are Irrigation Improvement ($80 million, 2/3 IDA, 1/3 IBRD; approved in FY95), National Drainage II ($50 million, 100 percent IBRD, FY00), and Pumping Station Rehabilitation III ($120 million, 100 percent IBRD, FY99). At end-2003, 44 percent of the loan amounts had been disbursed.

67. The water delivery component (Irrigation Improvement) has focused for some time on institutional aspects of the sector, based on recognition of the advantages of bringing water users’ associations into the allocation and pricing of water at the tertiary canal level.

68. Two of the community-based rural development projects encompassed East Delta, where the Bank lent to raise productivity, including nonfarm income, of 20,000 poor families recently settled on reclaimed (formerly saline) land; and Sohag, Upper Egypt, where a Bank loan is financing credit and enabling local authorities to prepare, implement and manage infrastructure projects and services. The third region is Matruh, in the western coastal drylands, where a loan completed at the start of the CAS period supported natural resource management and community participation among Bedouins and a follow-on project was approved in March 2003.

69. A seventh project in the agricultural sector was designed to channel the bulk of its $175m. value into rural credit through the Principal Bank for Development and Agricultural Credit (PBDAC), a state-owned institution that is the main financial intermediary in rural Egypt. Problems arising in implementing this combined loan/credit led to a joint Bank-GOE decision to close the project in early 2004.

Evaluation of Bank performance

70. During the CAS period the Bank came to realize that its long-time support for traditional ways of doing business in Egypt’s irrigation sector was perpetuating inefficiency and leaving downstream irrigators exposed to health hazards. The question may be asked whether this realization could have come sooner, leading to better design of the lending operations underway during the CAS. The opposing argument is that, ancient modus operandi being as entrenched as they are, one must allow time to nudge the bureaucracy towards modern departures. The new integrated lending operation bids fair to be a substantial improvement over its predecessors.

Key findings for the next CAS

71. Section III above mentioned growing concern with low water productivity of Egypt’s irrigated agriculture, and harm to downstream farm families caused by upstream pollution of the Nile. Low productivity means that irrigated agriculture is receiving large implicit subsidies. Traditionally, Egyptian governments have considered it their responsibility to provide water. However, it has become clear that management of distribution by a cumbersome bureaucracy leads to waste. Farmers are coming to realize that control by themselves, through water users’ associations (WUAs), can bring substantial efficiencies. Moreover, Nile Delta farmers are turning increasingly to horticulture, and prefer pressurized networks, managed individually, over traditional canals.

72. Meanwhile the Ministry of Water Resources and Irrigation is recognizing the need for cost recovery. The first handover of tertiary canals to WUAs is scheduled for late FY04. Water

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boards are being established to manage the secondary canals. A key issue for the new CAS is how well these bodies will function, and how willing the bureaucracy will be to cede its control.

73. On the mechanical side, the GOE has sought to preserve the monopoly of pump supply long enjoyed by a state-owned factory in Helwan. However, this enterprise has not been able to meet demand, helping to make P.S. Rehab. III the slowest disbursing of the three irrigation loans (only 29 percent in 42 months since effectiveness). Pressure is rising to allow the private sector into the industry.

74. As regards pollution control, at present, upstream towns have little incentive to treat their effluents even when treatment facilities are available. The growing health hazards inflicted on Delta households by these effluents can only be controlled by motivating riparian communities to treat them.

75. Growing awareness, on the part of both the GOE and the Bank, of the confluence of issues of irrigation and drainage on the one hand, and rural water and sanitation on the other, underlies the ongoing ESW effort in the latter field, designed to lead to a complementary lending operation in the new CAS period.

76. Experience in rural finance over the past decade, culminating in recent cancellation of the PBDAC credit/loan, indicates that strong GOE commitment to policy change is a prerequisite for future Bank involvement in publicly owned agricultural banks. In the meantime, lending to small businesses may be included in rural development operations.

77. The new West Delta project will provide value added and opportunities for implementing the Bank agenda in promoting private ownership and stakeholder participation, particularly in managing water resources.

VII. Cluster 3: Development of Education

Previous Bank involvement in education 78. Through interaction with Egypt’s two education ministries since the early 1990s, involving technical support of the Government’s 20-year Education Sector Strategic Framework (1999-2019) and culminating in the education sector review completed in 2002, the Bank has become a major partner in developing a comprehensive strategy for education reform at all levels. A Basic Education Enhancement project, approved in 1993, financed school construction in rural as well as urban areas and developed an education management information system. Starting in 1997 an Education Enhancement Program (EEP) targeted further improvement in access to basic education as well as quality and efficiency.

Implementation of pre-CAS loans

79. The CAS period saw continued implementation of three projects from the 1990s. Both the Basic Education Improvement and Education Enhancement Projects continued reducing gender and regional disparities in access through community participation and subsidies to poor families. The EEP supported massive training (over 500,000 teachers and administrators) on topics such as effective teaching techniques and computer literacy. It also picked up on a key recommendation of the Education Sector Survey (see below) concerning reform of the examination system, traditionally based on one-time, all-for-nothing tests of students’ memorization. Over 100,000 teachers and inspectors were trained in comprehensive, cumulative

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evaluation. The impact of the various training programs on teacher classroom behavior and student outcomes remains to be assessed. In collaboration with other donors, the EEP also supported a School Improvement Program aimed at instituting capacity in some 2,500 schools to take local initiative in implementing reforms.

80. A Secondary Education Enhancement Program, becoming effective in mid-2000, converted outdated vocational schools to general secondary schools, trained mathematics and science teachers in computer technology, and surveyed businesses and educationists to develop guidelines for curricular reform.

New loans

81. Both education loans approved during the CAS period emphasized quality—for example, creation of a quality assurance program for universities was a central component of the Higher Education Enhancement Project. This project, its implementation beginning only 14 months before the end of the period, has already encouraged some university departments to undertake self-evaluation, laying a foundation for a national quality assurance system.

82. Structural reform involving consolidation of middle technical institutes into technical colleges is underway. The Skills Development Project, which became effective in early 2004, is expected to strengthen the capacity of training institutes to provide training in selected sectors.

Education sector review

83. This study, not mentioned in the 2001 CAS, was conducted by the Bank MNA (Middle East and North Africa) region’s Human Development Group in cooperation with Egypt’s Ministry of Education. Reporting in October 2002, it noted real progress in narrowing regional and reducing gender disparities, reducing class size, eliminating multiple shifts, increasing class instructional time, and introducing technology in the classroom. While the share of education in Government expenditure has increased from 12 percent in 1991 to about 20 percent, and nearly all children have access to basic education, the poor continue to face severe obstacles in educating their children.

84. The report identified five key challenges facing Egypt’s education reform efforts, namely to:

• prepare Egypt’s youth for the modern, knowledge-based economy through quality improvements at all levels of schooling, from primary through university;

• strengthen management of educational institutions by decentralizing decisions and promoting accountability;

• increase efficiency by reducing over-staffing and giving higher education managers increased autonomy and accountability;

• improve equity by preparing children of the poor to begin school and reducing private costs of education to them;

• reduce regulatory barriers to redeploying resources in the education system.

85. The report provided impetus for a national debate that culminated in a resolution of the ruling party to create a National Quality Assurance and Accreditation Agency (NQAAA), independent of the education ministries that would monitor all levels of the educational system and establish national standards for teachers, administrators, students, the community and the school environment.

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Report on Early Childhood Education

86. In September 2002 the Bank’s Human Development Sector, in cooperation with Egypt’s Ministry of Education, produced a report entitled Egypt: Strategic Options for Early Childhood Education, laying the groundwork for a $40 million loan foreseen for FY05. The study proposes an approach to early childhood education (ECE) that targets the poor. It discusses options for increasing numbers and quality of public and private kindergartens (KGs), while stimulating demand for KG education via incentives and heightened parental awareness. Proposals are advanced for strengthening ECE coordination and management, improving access to public KGs, transforming nurseries currently managed by another ministry into KGs, training KG teachers, and enhancing monitoring and evaluation. With the ECE loan, the Bank’s reach will extend to the entire educational pyramid, making a significant contribution at each level of the Egyptian education system.

Evaluation of Bank performance

87. During the CAS period the Bank correctly recognized that it could enhance its contribution to development of Egypt’s education sector by shifting the earlier focus on increased access to schooling, towards improvement of student learning. The first of two new loans, Higher Education Enhancement, targets legislative reform, institutional restructuring, establishment of independent quality assurance mechanisms, and monitoring systems. The second project, Skills Development, is a pilot activity that will focus on translating employers’ manpower needs into appropriate training.

88. In addition, through its review of Early Childhood Education and development of a project in that area, the Bank will help Egypt redress the imbalance represented by deficiencies in the preparation of disadvantaged children to enter the formal education system.

Key findings for the next CAS

89. The Bank’s long involvement in Egypt’s education sector and the two surveys carried out during the CAS period suggest that the sector is still a long way from generating human resources of the quality needed to make Egypt competitive in the international knowledge-based economy. The next CAS needs to consider how the Bank can provide a critical mass of support for reforms that will achieve that objective within the next generation, while making a significant contribution to reducing poverty.

90. Detailed survey findings reveal a need for numerous reform measures. To improve quality, the existing examination system needs to be replaced with continuous, comprehensive evaluation. Other recommendations of the Education Sector Survey include creating a Learning-Innovations Fund managed by the school council; developing teacher capacity in new curriculum, teaching practices, and technology use; continued introduction of new technology in the classroom; and establishment of a competitive fund to foster change in higher education. On the management side, the study finds a need to involve local communities and school staff in the education process; inform schools about teaching practices and student learning outcomes; decentralize decision-making authority to school managers; and train managers to use EMIS.

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91. Increasing efficiency requires that funding of higher education be rationalized, and quality assurance mechanisms introduced; enrollments in public higher education institutions likewise need to be rationalized, and private provision and open universities encouraged; and excess teachers and administrators have to be redeployed and retrained. A provisional five-year target has been set for the NQAAA to extend its monitoring to the entire system.

92. On the side of equity, Early Childhood Education programs must be expanded in disadvantaged areas; subsidies need to be targeted on the poor to reduce the private costs of schooling; parent education programs are needed to improve child development in the home; and the primary school-leaving examination should be replaced by continuous assessment.

VIII. Cluster 4: Development of Health and Social Services

Previous Bank involvement in/focus on health and social services

93. At the outset of the CAS period, the Bank was involved in five projects in this sector, Schistosomiasis Control, Health Sector, Population, Social Fund III and Social Protection Initiative. Schistosomiasis Control closed early in the period. As the Bank’s flagship activity in the sector, Health Sector’s primary aim was to help the GOE establish a model of social insurance to finance primary health care. Through the Population project the Bank sought to help the GOE raise public awareness of the costs of uncontrolled population growth.

Implementation of pre-CAS loans

94. Schistosomiasis Control. The Implementation Completion Report (ICR) on this 1992 IDA credit, which closed in September 2002, gave it an overall satisfactory rating.17 The project helped the National Schistosomiasis Control Program (NSCP) achieve national coverage, including newly reclaimed areas, and become integrated with existing health service delivery systems. The NSCP now covers Egypt’s entire rural population of 35 million people, and prevalence of the disease has decreased to less than 5 percent of the population from around 36 percent in 1983. However, the report rated as unsatisfactory achievement of a project objective involving support of operational research and strengthening management of the responsible health ministry department.

95. Health Sector. This 1998 IDA credit targeted universal insurance coverage for primary health care services in three pilot governorates. In late 2002 the ruling party’s health policy committee identified “extending health insurance coverage” as one of the Government’s two key objectives in the sector. For reasons described below under the health sector review, the pilot insurance model did not succeed. By end-2003, only 7 percent of the credit had been disbursed. The focus of the project has now shifted to improvement of health services, including rationalization of infrastructure. In collaboration with the GOE, a Bank review team was scheduled to develop a revised operating plan in early 2004. The Government has requested a two-year extension of the June 2004 closing date.

96. Population. Implementation of this 1996 project, designed to increase demand for family planning services, has also been slow. Just over one-third of the IDA credit had been disbursed by the scheduled end-2003 closing date. However, the government’s concern over rapid population increase, currently 1.9 percent,18 has grown. “Managing population growth” was the second key objective identified by the ruling party committee. In close cooperation with several public 17 Egypt: National Schistosomiasis Control Project, Vol. 1, Report No. 25552, March 2, 2003. 18 Egypt, Arab Rep. at a Glance, Dec. 7, 2003. Rate given for 1996-2002.

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agencies and NGOs, the project is highlighting public awareness and targeting vulnerable and hard-to-reach population groups. In view of the renewed GOE focus on population issues and recent progress in implementation, the project was extended at end-2003.

97. Social Fund III. This 1999 IDA credit, third in a series starting in the early 1990s, focuses on creating jobs and providing community infrastructure and services through labor-intensive works. It is being implemented in partnership with local authorities, communities and the private sector. A gender component supports female involvement in the private sector. By end-2003, a year before closing, just over one-fifth of the $50 million credit had been disbursed. The ICR for the previous credit (Social Fund II) described the Fund’s sustainability as being at risk.

98. Social Protection Initiative. This 1999 $5 million IDA-funded pilot project targets poor children with disabilities or at risk of street life. It was designed to develop new strategies for integrated delivery of services through multidisciplinary and inter-agency cooperation. As of end-2003, also one year before scheduled closing, disbursements amounted to just over 10 percent.

New loans

99. No new loans were approved in this sector during the CAS period. As shown in Table 2, the CAS anticipated commitment of a $100 million Health Sector Reform II loan during FY04. However, as indicated above, implementation of Health Sector I has been delayed, and preparation of a new loan will have to await establishment of a viable model for health care financing.

Health sector reform and financing review

100. The Bank’s MNA Human Development Group prepared this review in 2002-03. It focused on lessons of the Health Sector Project, designed to help Egypt’s 1997 Health Sector Reform Program (HSRP) integrate the sector’s fragmented financing into a single National Health Insurance Fund.

101. A pilot effort, the project sought to integrate delivery and financing of primary health care (PHC) in three governorates with high infant, child and maternal mortality rates. It introduced a Family Health (FH) approach, providing integrated services under the same roof for the entire family. The project succeeded in providing satisfactory PHC services, and introduced two major innovations in service delivery: both physicians and patients valued the concept of continuity of care and the unified medical record. Performance-based incentive systems were also adopted for the first time in Egypt, increasing provider accountability to quality standards and reform goals.

102. On the financing side, Family Health Funds (FHFs) were established at governorate level to contract with providers for a package of essential services. They were originally conceived to collect and hold insurance premia, but legislation restricting that function to a national Health Insurance Organization was not modified.

103. As a result, instead of shifting the decrease in private spending to the public system as envisioned, the project decreased households’ contribution to health care spending and increased the government contribution. Unsustainable deficits resulted.

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104. The report notes that (1) Egypt’s public and private health spending has more or less doubled in real terms since 1995, outpacing economic growth and straining the government budget, while (2) increased spending in a system with low technical and allocative efficiency has resulted in poor value for the money. The study urges the GOE to address the FHFs’ institutional set-up and governance and create an organizational framework integrating them into a provider network. More broadly, it calls for a search for ways of bringing financial stability to the health sector as a whole.

Evaluation of Bank performance

105. The question arises whether, based on experience of many other countries receiving Bank assistance to develop a viable model for universal health insurance, the Health Sector project’s designers could not better have foreseen the failure of the Family Health Funds, documented in the foregoing review. In any case, the review shows conclusively that the FHF model was doomed to failure. It is less successful in proposing viable alternatives. Given questions about the sustainability of the HIO, it is not clear that the proposal to merge the FHFs into the HIO’s purchasing division would yield superior results. It is to be hoped that the joint team charged with preparing a revised operating plan for the project in late FY04 will be able to suggest more promising alternatives to be tested with support from the credit balance.

Key findings for the next CAS

106. Since the model for PHC insurance tested in Health Sector I did not succeed, the overarching issue for the next CAS is to propose at least one new model for testing, and to establish preconditions for expenditure of Bank funds on it. One issue the model must face is that of risk management. Whatever institution manages risks associated with health care must meet appropriate prudential requirements, which never came into question for the pilot FHFs. Among preconditions for Bank financing should be evidence of sufficient political support for a given reform by way of necessary legislative changes. The FHFs could not operate as independent entities because a Presidential decree was not forthcoming.

107. Other issues arise in regard to the Population, Social Fund and Social Protection Initiative components of the health and social sector portfolio. All three projects have been moving slowly. What actions by the responsible institutions are required to accelerate execution?

IX. IFC Activity during the CAS Period

108. At end-April 2001 (close to the start of the CAS period), IFC managed a portfolio of 19 projects with a total commitment, comprising loans, equity/quasi-equity, and guarantees, of US$328 million. Participants in IFC's B-loan program had committed an additional US$305 million, split evenly between two power projects. 109. Between July 2001 and March 2004 (three months before the end of the CAS period), nine new projects were committed. Another three projects, with a total IFC contribution of $80 million, were approved by the Board in March 2004, and were expected to be committed by the end of FY04. At end-February 2004, the committed portfolio stood at US$270 million, with US$323 million in loans from participants. Investments are in a range of sectors including the financial sector, infrastructure, SMEs, manufacturing, chemicals, and tourism.

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110. In addition, IFC co-financed a five-year, US$20 million North Africa Enterprise Development (NAED) facility, which opened an office in Cairo in October 2002. NAED signed advisory service agreements with two local private banks in June-July 2003.

IFC's competitive position and strategy

111. IFC is subject to stiff competition (some of which is concessional) from local banks and other sources, such as the European Investment Bank, the Islamic Development Bank, and the African Development Bank. At the same time, solid demand remains for IFC’s services. IFC is selective in its approach to financing in Egypt. For example, IFC is interested in exploring opportunities in the petrochemical sector. IFC also continues to play an important role in the financial sector by setting up new institutions, providing credit enhancement, and technical assistance. 112. The previous CAS described IFC as seeking additional investments in support of the following priorities:

• Developing private-financed infrastructure; • Providing support to the services sector, including tourism;

• Supporting internationally competitive and export-oriented ventures;

• Supporting the privatization effort through both advisory services and providing financing to privatized ventures;

• Providing support to SMEs;

• Developing financial markets; and

• Participating in building gas pipelines to export Egypt's large reserves.

IFC’s activities since the previous CAS have supported those goals:

• In SMEs, IFC support through NAED (now PEP-MENA), included work with the Egyptian banking sector on access to finance.

• In the financial sector, IFC’s initiatives included technical assistance and institution building with specific focus on housing finance and risk-sharing guarantee facilities. In January 2004, IFC committed an investment in the Egyptian Housing Finance Company, the country's first private sector housing bank.

• In infrastructure, IFC obtained Board approval in March 2004 (and has since committed) an investment in the multi-user container, bulk and general cargo terminals at El Sokhna Port on the Red Sea.

• IFC also received Board approval in March 2004 for the development of gas fields in Egypt, in conjunction with two US and British companies, Merlon and Melrose.

• IFC’s support to the services sector included an investment in Metro, in the supermarket sector.

• IFC invested in a number of companies with export markets, including SEKEM, an organic producer of pharmaceuticals, Amerya, an auto parts manufacturer, and Lecico, a maker of ceramic tiles.

• Although IFC did not work on privatization during the CAS period, it hopes to be able to support the efforts of the Government going forward.

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X. MIGA Activity during the CAS Period

113. MIGA provided its first guarantees in Egypt during the final year of the CAS period. At the close of FY04, it had facilitated $1.8 million in foreign investment, and was close to signing agreements for $35 million of coverage with respect to two waste management projects and an LNG project. Several other preliminary applications were in the pipeline. On the technical assistance front, MIGA has been working for some time with Egypt’s General Authority for Investment and Free Zones (GAFI) and its Industrial Modernization Center (IMC) to establish an autonomous Egyptian investment promotion program, which the European Commission has offered to fund. The nature of MIGA’s future TA depends in part on whether the GOE agrees to make the new agency independent of government, a decision which is yet to be made. If it is favorable, MIGA will cooperate with the U.S. Foreign Investment Advisory Service (FIAS) to build capacity for the agency.

114. Investment opportunities in Egypt are included in MIGA’s on-line promotion services. MIGA has also provided $79 million of coverage for Egyptian investors in Pakistan and Ghana.

XI. Analytical & Advisory Assistance, Capacity Building, and Other Nonlending Services

Analytical & Advisory Assistance (AAA)

115. The CAS foresaw a growing role of AAA and capacity building work in the Bank’s program. The share of the Bank’s administrative budget allocated to such work was forecast to increase. The AAA program was to feature two main components:

• Core diagnostic work on poverty, public expenditure review, a financial sector assessment, and gender analysis and mainstreaming, all four topics raised in the Social and Structural Review completed just before the CAS period; and

• Studies and activities giving an intellectual underpinning for Bank operations and technical advice in human development, rural development and water management.

116. As noted earlier, the CAS put primary emphasis on analysis of poverty and the financial sector, categorizing completion of substantive work in these two areas as a “benchmark for Bank involvement” in Egypt.19 The document notes that the effectiveness of the Bank's AAA would be reviewed towards the end of CAS period. To this end a Quality Assurance Group (QAG) team visited Cairo in February 2004. Table 4 reproduces the team’s summary of 23 AAA tasks, costing a total of $3.3 million.20

19 2001 CAS, p. 21. 20 It should be noted that the QAG team considered the Governorate Health Plan, item #7 in the table and financed entirely by trust funds, to be misclassified as ESW. Exclusion of that study reduces total AAA costs to $2.4 million.

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Table 4: AAA Tasks in Egypt – FY01-03

Type of FY AAA Tasks Costs

1 FY01 ESW CDF for Education and Training 2922 FY01 ESW CEM 2093 FY01 NLTA Debt Market Development 734 FY01 ESW Export Promotion Taskforce Report 205 FY01 ESW Safety Net Taskforce Report 106 FY01 ESW Agriculture Export Strategy 27 FY02 ESW Governorate Health Plan 9508 FY02 ESW Early Childhood Development 6099 FY02 ESW Poverty Assessment 167

10 FY02 ESW Education Sector Review 12411 FY02 NLTA Country Environmental Analysis (EG)- GPG 4412 FY02 NLTA GDLN Distance Learning Center 4313 FY02 ESW Environment Note 714 FY03 ESW FSAP 25915 FY03 NLTA Housing Finance/Second Mortg 22616 FY03 ESW Gender Assessment 13417 FY03 ESW Review of Water Sector Work in Egy 6318 FY03 ESW Pension Reform 2819 FY03 NLTA ICT Development Support TA 1620 FY03 ESW Education Sector Policy Dialogue 1221 FY03 NLTA FSAP FOLLOW-UP 1122 FY03 ESW Early Childhood Education Policy 823 FY03 ESW ROSC Accounting & Auditing N/A

117. The QAG team conducted individual assessments of eight new AAA tasks out of 23 completed during FY01-03, and revalidated three tasks assessed previously as part of regular QAG ESW work. Box 1 summarizes the team’s assessment of the AAA program.

Core diagnoses

118. The studies on poverty, gender and the financial sector were summarized in Sections II and IV above. Arabic translations of the poverty and gender reports were distributed publicly, with wide press coverage. At the GOE’s request, the financial sector report is being treated as confidential for the time being.

119. In many member countries the Bank carries out fiduciary diagnostic work in the form of Country Financial Accountability Assessments (CFAAs) and Country Procurement Assessment Reports (CPARs). A CFAA and a CPAR for Egypt were prepared and submitted to the authorities in FY04.

120. June 2002 saw publication of a Bank-prepared report on the Economic Costs of Environmental Degradation. This document was well received by both the authorities and civil society, and is often quoted in the press. At the end of the CAS period, only the public expenditure review (PER) remained to be undertaken, constituting a subject of discussion between the Bank and GOE

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Box 2: Quality Assurance Group (QAG) Assessment of Bank’s AAA Work in Egypt, FY01-03

The QAG panel visiting Cairo in February 2004 gave an overall assessment of Satisfactory to the Egypt AAA program. Out of six standard dimensions for QAG assessments, the panel cited five as Satisfactory—Strategic Relevance, Internal Quality, Dialogue & Dissemination, Coherence & Integration, and Bank Inputs & Processes—while Likely Impact was assessed as only Marginally satisfactory.

This latter assessment is described as arising more from an appreciation of the country context than from the approach or scale of Bank efforts. The panel cites the GOE’s “gradualist and somewhat reluctant approach to reform, with the pace of reform accelerating when socioeconomic conditions worsen and slackening as soon as the situation becomes better.” Another factor is the Bank’s limited leverage, arising from Egypt’s “geopolitical importance and the abundance of resources available at concessional terms from other donors.”

The panel finds the likely impact of AAA work greater in sectoral areas, “particularly where there is an existing domestic constituency or champions for reform, and more difficult in the core macroeconomic, structural areas.” Sectors where a significant impact is expected include:

• Education, where high-quality analytical work has helped a committed minister improve access to education, establish national standards and enact other reforms; and

• Poverty reduction, where the FY03 joint assessment has led another committed minister to seek the Bank’s help in developing an action plan.

(The FY03 study on water sector work in Egypt was not included in the QAG panel’s sample of AAA work; otherwise irrigated agriculture might have been mentioned as another sector where a positive impact is likely.)

The panel regards a positive impact from trade sector AAA as less likely in the near term, specifically in regard to:

• Export promotion, where the foreign trade ministry has refrained from distributing the Bank’s report; and

• Agricultural exports, where from the outset the Bank did not succeed in interesting the agriculture ministry in the study.

The financial sector is viewed as a special case, since the management of the Central Bank changed after the FSAP was conducted and reticence vis-à-vis reforms proposed in the report has been replaced by openness, as evidenced inter alia by the CBE’s recent establishment of a Banking Sector Restructuring Committee. The panel sees eventual implementation of the FSAP’s recommendations as generating demand both for Bank TA and a lending program.

Apart from education, poverty reduction and the financial sector, the report foresees a limited impact of future AAA on Bank lending, rather it expects AAA work to “increasingly address knowledge-sharing and capacity building needs.” To increase the impact of AAA on GOE development strategy, the report calls for an “integrative, analytical document such as a Development Policy Review (DPR)” to help “draw together in a coherent way the various policy issues facing the country and allow a more convincing demonstration of the actions with the highest pay off.”

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121. Agricultural exports. This sector review, whose preliminary (July 2000) report is cited in the CAS, produced its final report in December 2001. The resulting $40 million loan project was conceived to support promotion of horticulture exports, especially in the context of Egypt’s agreement with the EU. As indicated above, the project as such was dropped, but another project with similar objectives (West Delta Development) is in preparation.

Studies relating to future Bank operations

122. Of the fields listed in the CAS for studies related to future Bank loan projects, work on rural development and water management was undertaken during the CAS period and the corresponding reports are expected before the new CAS period.

World Bank Institute activity

123. In line with the CAS’ emphasis on knowledge transfer and capacity building in priority areas, and following consultations by WBI with stakeholders including officials, donors, NGOs and think tanks, during FY02-04 WBI focused its activities in Egypt on poverty alleviation, environmental management, macroeconomic management, globalization and the investment climate. The program included structured learning activities, policy services to the authorities, and dialogue and dissemination vis-à-vis development practitioners and civil society, building on the Bank’s economic and sector work (ESW) and AAA. To enhance program impact, a WBI economist was assigned to the Bank’s Cairo office.

124. Specific interventions, in coordination with MNA operations, included:

• dialogue on the joint poverty assessment, involving Cabinet, journalists, NGO representatives, academics and donors;

• development debates via videoconferences involving Egyptian poverty experts, MNA specialists and senior MNA managers;

• structured learning activities on poverty assessment and monitoring; and

• orientation of Egyptian counterparts to prepare an impact assessment of Egypt’s Social Fund.

125. Promoting dissemination of MNA’s report on the Cost of Environmental Degradation, WBI helped organize a national workshop in Cairo and is supporting follow-up studies and capacity building on the cost of water degradation. Working with Egyptian NGOs, WBI also supported capacity building and dissemination efforts in environmental monitoring.

126. In the fields of macroeconomic management, globalization, and investment climate, WBI provided:

• Policy services to the authorities, as well as a Macroeconomic Management and Monetary Policy course, in support of the GOE’s January 2003 decision to float the currency. WBI also delivered the first distance-learning macroeconomic management course to the wider MNA region in collaboration with Egypt’s GDLN center;

• capacity building programs on regulation of infrastructure services and infrastructure finance;

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• in collaboration with the Bank’s OPCS, capacity building in monitoring and evaluation skills for a pilot performance-budgeting program in several ministries; and

• capacity building in trade facilitation.

127. Apart from the national program, Egyptian officials and development practitioners participated in WBI regional knowledge and capacity building activities in trade, rural development, health, education and social protection.

128. New developments in implementing WBI activity in Egypt included:

• New working relationships with Egyptian training and learning institutions (Cairo University, Al-Ahram Center, GDLN, etc). For these relationships to have a sustainable impact, these institutions’ administrative capacity needs to be strengthened.

• WBI mobilized Egyptian experts and officials to transfer knowledge and practical experience to officials in other MNA and African countries.

• To support its activities, WBI was able to raise funds from local donor offices.

129. Table 5 summarizes WBI’s program of courses held in Egypt during FY02-04.

Table 5: WBI Courses in Egypt, FY02-04 Title

Length

No. of Egyptian

partici-pants Frontiers in Infrastructure Finance * 41 Frontiers in Infrastructure Finance 9 days 35 Transparency in Infrastructure Concessions ??? 18 Introduction to Poverty Monitoring and Evaluation 4 days 18

130. A base survey for an impact assessment of WBI activities was conducted in FY03 in cooperation with Cairo University’s Center for Developing Country Studies. The survey, based on interviews with course participants and three focus group sessions, found the perceived effectiveness to be 4.83 on a scale of 1-7, relatively high compared to other countries conducting the same exercise. Activities were rated as effective in raising awareness/understanding of development issues, refining existing knowledge, and encouraging networking, and least effective in providing strategies/approaches to address the needs of Egypt and participants’ organizations. Rating their activity highest were participants who prepared an action plan on the basis of their course experience. Completion of the assessment in FY05 will help better focus WBI activities in Egypt.

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XII. Procedural Criteria and Targets in the 2001 CAS

131. This section examines the degree of fulfillment of project selection criteria and targets for program implementation, set forth in the CAS, that do not relate directly to choice of sectors of activity.

Criteria and targets

132. Dropped and postponed loans. CAS benchmark No. 3 (Section IV above) calls for fewer dropped projects and lower average cost of those dropped, to be aligned with the Bank average during FY02-04.

133. Supplemental selection criteria. After specifying three areas (Section IV above) for Bank focus in FY02-04—support of higher education and growth, targeted interventions for poverty reduction, and interventions with indirect poverty reduction impact—the CAS cites a need for selectivity within those areas, leading to focus on interventions where:

• The GOE’s commitment to projects is unequivocally strong;

• The Bank has a long and positive experience (subsectors cited are water sector/irrigation and human development);

• The Bank can bring knowledge management and experience of other countries to guide Egypt's policy reforms (singling out mortgage market development, information and communications infrastructure, poverty and gender analysis, and community-based development); and

• The Bank can serve as a catalyst for mobilizing financing packages 2-3 times that of Bank loans for well-designed and high priority projects.

134. Portfolio management targets. The CAS also lists five considerations intended to guide loan portfolio management during FY02-04:

• Closer management of closing dates;

• Greater efforts by the GOE and Bank to reduce effectiveness delays;

• Less resort to project management units (PMUs) to ensure sustainability of project outcomes;

• Closer cooperation with development partners having softer lending terms than the Bank’s, to satisfy the GOE’s 40 percent grant element criterion; and

• Efforts to dissuade the GOE from applying the 40 percent criterion on a project level.

• Execution of the criteria and targets

135. Dropped and postponed loans. Eight of the nine projects in the CAS table of projected loans—see Table 2 above—were foreseen for FY02-04 (the ninth project, Rural Water Sanitation, was allocated to FY05). Three of the eight, Higher Education, Skills Development, and Natural Resource Management (now labeled Matruh Resource Management II), will have been approved during the CAS period. Skills Development was recast and reduced by almost 90 percent, from $50 to $5.5 million, while Matruh RM II was reduced by 75 percent to $12.4 million. Three of the nine projects, Early Childhood Development, Irrigation/Drainage Improvement and Rural

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Water/Sanitation, now combined in Integrated Irrigation Improvement and Management ($150 million), are in the pipeline for FY05.

136. In other words, only two of the nine CAS projects—Information Infrastructure and Agricultural Exports—are no longer in the program. However, it would be incorrect to term them “dropped”—in Bank terminology, a “dropped” project is one on which sizable administrative resources have been spent in taking the project to an advanced stage of preparation. Less than $50,000 was spent on Information Infrastructure, most of it in the form of technical assistance on postal development, and preparation of Agricultural Exports was limited to a small exploratory mission. Health Sector II remains in the pipeline for an undetermined date, as Health Sector I is projected to be extended two years from June 2004. The forecast loan amounts for these three projects totaled $150 million, or an average $50 million per loan.

137. This observation makes it possible to evaluate the outcome of CAS Benchmark No. 3. According to the 2001 document, the 1997 CAS foresaw eleven IBRD/IDA operations totaling $450-600 million. In the event, ten loans received Board approval, for a total of $580 million. However, a number of these were not the same projects foreseen in the 1997 CAS, several of which qualify as having been dropped. Thus, no projects qualify as having been “dropped” during FY02-04, and the 2001 CAS benchmark was met.

Supplemental selection criteria

138. Degree of GOE commitment. If this is measured by relative interest shown at high political levels, Airports Development comes out on top. However, in each of the other three FY02-04 projects, the Bank is working with GOE counterparts for whom the Bank role is facilitating activities in whose efficacy the local actors believe strongly. Indeed, it was in part pursuit of this criterion that led the Bank to recast the Skills Development project from a $50 million effort based in a ministry whose devotion to the task was uncertain, to a $5.5 million pilot project in a different ministry that is investing sizable resources of its own in the activity. Mention should also be made of the Higher Education Enhancement Project’s attaining effectiveness in just over three months, the second shortest period on record for Bank loan or credit projects in Egypt.

139. The Bank’s comparative advantage. Of the two subsectors listed under supplemental criterion (ii), irrigation is the subject of a major project scheduled for FY05, while human development applies to the FY02-04 education and training projects. Criterion (iii), knowledge management/best practices as applied to policy reform, applies to the policy dialogue discussed in Section IV above, as well as to advice on mortgage market development provided in the FSAP, the joint poverty and gender assessments, and community-based development as highlighted in Matruh Resource Management II.

140. The Bank’s catalytic role in mobilizing financing packages. Three projects may be cited here:

• Skills Development—parallel to the Bank’s $5.5 million intervention, which will focus on the demand side (enhancing firms’ demand for trained workers), the European Commission has prepared a EUR 33 million companion project focusing on improving the quality of training;

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• Early Childhood Development—complementing the Bank’s projected $40 million loan, scheduled for approval in FY05, Canadian CIDA has agreed to provide $10 million in grant funds;

• Integrated Irrigation Improvement—Germany’s GTZ and possibly at least one other donor will participate in this project.

Portfolio management targets

141. Overall, considerable progress was achieved during the CAS period towards sharpening the focus of Bank and GOE resources on current and emerging priorities. The two parties took bold decisions to clean up the portfolio; relinquish unutilized resources, even on IDA terms; and close slow-moving projects. Performance in regard to the individual CAS targets can be summarized as follows:

142. Management of closing dates. Five of the 19 projects active at the start of FY02 were extended during the CAS period, namely Education Improvement (by one year); Basic Education Enhancement, Irrigation Improvement and Social Fund III (two years); and Pollution Abatement (18 months). In addition, two more projects—Health Sector Reform and Population—are scheduled for extension during FY04. However the GOE agreed not to extend the Basic Education project beyond end-’03 despite a significant undrawn credit balance, and has also agreed to adhere to the end-’04 closing date for the Social Protection Initiative project regardless of any then undrawn balance.

143. Timing of loan effectiveness. As indicated earlier, effectiveness of the first three loans approved during the CAS period averaged just over six months. Effectiveness of the Airports Development loan is expected even sooner. In the past, waiting for Parliamentary approval of loans during the December-May session has lengthened the time required for effectiveness of projects whose approval was not timed accordingly. The appointment in late 2001 of a Minister of State for Foreign Affairs responsible for aid matters has accelerated the processing of foreign loans in all stages.

144. Resort to project management units (PMUs). Such units are envisaged for all four FY02-04 loan projects. The unit’s title varies among projects, but this is only a matter of semantics. Higher Education Enhancement has already established its PMU, Skills Development is to have one PMU each for its Bank and EU components. Second Matruh will use a project coordination unit (PCU). In the Airports Development project, two project implementation units (PIUs) are envisaged.

145. PMU recruitment experience has shown that the needed skills are not readily available in the market, especially procurement and monitoring & evaluation skills. Thus far, concern over financial accountability and efficient implementation of loan operations has outweighed the longer-run sustainability objective, which is to integrate post-project activity with normal ministry functions. The new CAS must address capacity building in the areas of procurement and upgrading of local institutions.

146. The GOE’s 40 percent grant element criterion. In the Early Childhood Development Project, CIDA’s agreement to provide 20 percent of the external financing on grant terms raised the overall grant element to 40 percent. (In addition, CIDA funding of the project’s preparation costs significantly increased its quality.) Co-financing of Matruh II by $17.8 million in grants from IFAD and GEF raised that project’s grant element well above 40 percent

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Appendix - EGYPT COUNTRY PROGRAM MATRIX, FY02-04

The following pages reproduce in its entirety the country program matrix from the 2001 CAS. To each cell under the columns “PROGRAM INDICATORS/ BENCHMARKS” and “BANK GROUP INSTRUMENTS,” an update cell has been added, showing evolution of the indicators/instruments during the CAS period. In most cases the preceding text of this report expands on the matrix update cells.

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EGYPT COUNTRY PROGRAM MATRIX, FY02-04

Diagnosis Strategy/Action Program Indicators/Benchmarks

Bank Group Instruments Other Donor Activities

I. Interventions Supporting Higher and Sustained Growth

Fiscal deficit cut below 2 percent of GDP. Current and investment budgets consolidated. Investment projects prioritized on economic grounds. Major tax reform completed (extension of GST, tax admin, corporate tax system).

AAA: Public Expenditure Review; Social & Structural Review II; Economic Monitoring; Project Appraisal & Evaluation (WBI/IDF).

Macroeconomic Stability & Growth

Recent increase in the fiscal deficit current budget process makes it difficult for government to implement its policies and assess outcome of expenditures.

Maintain fiscal discipline. Establish a medium-term framework for public expenditure planning. Prioritize and scale back implementation of mega projects. Shift gradually toward results-oriented budget.

Deficit averaged –5.9 percent in FYs 01-03, projected at –5.5 to –6.0 percent in FY04. Budgets have not been consolidated. Bill to reduce arbitrary tax assessment & lower tax burden on business is scheduled for submission to ’04 session of Parliament.

PER and SSR II not conducted. Economic monitoring intensified in context of negotiations for Policy-Based Loan. WBI activities did not include project appraisal & evaluation.

IMF; USAID

Export Promotion

Distorted incentives framework; inefficient and high cost infrastructure services; institutional and bureaucratic constraints led to disappointing export performance.

Flexible management of exchange rate. Tariff reform (reduction in level and dispersion of tariffs). Adherence to requirements of COMESA, PAFTA and EU. Removal of non-tariff barriers (customs reform, quality controls). Enhancing private provision of infrastructure.

Non-oil exports increase by at least 10 percent p.a. Reduce maximum tariffs from 40 percent to 30 percent. Bring all tariffs that were between 20 percent-30 percent to 20 percent; bring them between 15 percent-20 percent to 10 percent. Eliminate the customs surcharge.

New operation: Agricultural Exports Project. Investment in export-oriented companies.

IFC loans & equity: Investment in IPPs in power. Potential investments in diverse sectors such as water and waste water, ports, airports.

Non-lending: Agricultural Trade and WTO (WBI).

IMF; USAID; EU; Arab Fund; Kuwait Fund

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During 01-03 non-oil exports rose by 4 percent p.a. Concerned about revenue loss, GOE did not revise tariffs. There was progress in curbing non-tariff barriers.

Agricultural Exports Project was dropped. IFC invested in the port sector. WBI activities did not include trade/WTO.

Improved perception of business environment (surveys). Increased private domestic investment and FDI.

Non-lending:TA to strengthen business environment. Corporate governance TA.

IFC loans, equity & TA: Focused lending to facilitate access to finance (credit lines, risk capital, guarantees, leasing, etc.). Extended North Africa Enterprise Development Facility. Selected direct investments in companies with clear development impact.

Private Sector Development

Unfavorable business environment with a particularly unsupportive SME environment.

Streamlining of tax and customs administration. Strengthen commercial and legal system. Reform labor legislation. Bankruptcy and intellectual property rights legislation.

Revised labor law facilitated more flexible labor management, but. transactions costs faced by private business were not otherwise significantly reduced. Privatization slowed, increasing private sector skepticism.

IFC’s five new projects satisfied stated criteria. North Africa Enterprise Development Facility (NAEDF) opened in Cairo.

USAID; EU; UK; UNDP; Germany; Italy; CIDA

Diagnosis

Strategy/Action

Program Indicators/Benchmarks

Bank Group Instruments Other Donor Activities

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Privatize at lease one state-owned bank. Stronger bank supervision capacity in place. Mortgage market development initiated.

IFC loans, & equity: TA on, and investment in, innovative financial instruments to build mortgage finance institutions, underwrite and trade of bonds. Medium & long-term loans to banks and non-bank financial intermediaries. Become a shareholder of secondary mortgage market institution.

Non-lending: Mortgage development and capital market development. Financial Sector Assessment Program (FSAP).

Financial Sector Dominance of publicly-owned institutions has limited scope and depth of financial markets. Range of products available insufficient to meet needs of private sector, especially SMEs. Slight increase in non-performing loans. No mortgage market to facilitate housing finance. Need to modernize and better regulate capital markets and insurance sector.

Strengthen bank supervision. Gradually privatize the public financial institutions. Develop non-bank financial institutions. Deepen and broaden capital markets.

No bank has been privatized. Management of one state-owned bank changed, GOE indicated intent to continue introducing market-oriented bank management. Regulations regarding connected & related party lending introduced. Capital market law amended to promote mortgage market.

New IFC commitments featured manufacturing, agriculture, trade and financial sector. NAEDF signed advisory service agreements with two Egyptian private banks. FSAP study was carried out.

IMF; USAID; EU; UK

Substantial progress in completing industrial sector and non-industrial privatizations.

Information Infrastructure Project (Telecoms & Post). TA to improve performance of public entities. Advisory services and selected transactions (IFC).

Privatization

After impressive progress during 1995-99, marked slowdown in privatization. Share of public sector still 30 percent in economic activity.

Government plans to divest most of remaining enterprises during next 2-3 years.

Privatizations in ‘01-’02 averaged only 9 p.a., compared with 29 during each of preceding 4 years. Average proceeds were only 25 percent of previous rate.

Project was dropped. Envisaged TA and IFC activity did not occur.

USAID; EU; Germany; CIDA

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Fully functional TRA. Major improvement in postal services. Significant growth in E-Commerce activities.

Information Infrastructure Project.

ICT Sector

Weak capacity of the telecom regulatory authority (TRA). Inadequate postal services. Incomplete legal framework for E-Commerce.

Build TRA capacity. Reform and modernize postal sector. Develop necessary legal framework for E-Commerce.

MCIT ministry assuming leadership in sector strategy. Slow liberalization of services (no 3rd mobile license) except for data services segment, where Egypt leads MNA region in ICT infrastructure and liberalization strategy has led to 7 data providers, 60+ ISPs.

SOE weak, not ready for privatization. Corporatization work started in Egypt Telecoms. Postal Sector undergoing major reform, TA from Bank (GICT) often requested informally through Cairo office.

Project was dropped as - except for postal sector - GOE chose not to borrow for SIL or TA.

Info Development study ($80,000 grant) on SME e-readiness, especially in tourism & ICT sectors, completed Dec 03.

USAID

II. Targeted Interventions for Poverty Reduction

Education

Despite near universal basic education, inequity remains in certain area. Low student performance at all levels, especially in problem-solving and technology skills.

Increase demand for education in disadvantaged areas through parental participation and provision of early childhood education. Improve the quality of student learning for all. Reform curricula and provide enhanced learning environment at all levels.

Annually increase enrollment for girls by 2 percent and for boys by 1.2 percent until universal 8 years of basic education reached. Improvement in student achievement score, particularly in problem solving and technology skills.

Ongoing operations: Basic Education; Education Enhancement; Secondary Education.

New operations:

Early Childhood Development.

Non-lending: Early Childhood Development.

USAID; UNICEF; CIDA; EU; ESDF; Japan; Kuwait; Netherlands

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From 1999 to 2003, the net enrollment ratio (NER) in primary education rose from 91 percent to 95 percent for girls, and from 95 percent to 98 percent for boys. In preparatory education, the NER rose from 73 percent to 79 percent for girls, and from 75 percent to 79 percent for boys.

Early Childhood Development report completed. $40 million loan programmed for FYT05.

Increased female literacy; increased female participation in formal economy.

AAA: Gender Assessment. Despite improved access for girls’ education over past two decades, more needs to be done to bridge the gender gap.

Provide additional basic education for girls, especially in rural areas. Train female teachers, improve teaching methods. Provide mothers education and encourage involvement in school activities. Facilitate procedures for obtaining birth certificates for children not registered at birth.

Rising female enrollment in all levels of education. Nation-wide, female/male ratios in first three levels range from 0.82 to 0.88.

Gender Assessment carried out. Gender component of Social Fund III supports increased female participation.

Netherlands; Italy; UNICEF; USAID

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Health

Free public health services available in principle, but poor quality of services, especially in poor rural and urban areas render them ineffective.

Health delivery systems at all levels inefficient in operations and maldistribution of physical and human resources, leading to duplication, wastage and inequity.

Public health services supply driven and fragmented through proliferation of many vertical & disease specific interventions.

Social health insurance coverage limited to formal sectors, students and infants, leaving most women and families in informal sector without effective insurance protection.

Support expansion of family medicine practice to establish quality standards and accreditation mechanisms, and provide an integrated primary care service responsive to needs of whole family, with greater emphasis on prevention and community participation.

Rationalize investments in health infrastructure and human resources through health service standards, preparation of government Health Masterplans and GIS mapping to identify needs, gaps and duplication in service delivery.

Strengthen integration of public health programs through improved disease surveillance system and greater governorate and district capacity to monitor and identify areas of need.

Phased expansion of social insurance coverage for basic primary health care services by governorates, and institutional capacity building of insurance functions at governorate levels. Undertake actuarial analysis to quantify financing implications of expanding social health insurance.

Preparation and implementation of governorate Master Plans in new target sites (Upper Egypt). Increase number of accredited family medicine practitioners to meet needs identified in Master Plans.

Implementation of an integrated national information system to support the communicable disease surveillance system.

Expansion of community development programs in “hot spot” villages in Egypt with very high fertility rates and high Schistosomiasis infection rates.

Expansion of Family Health Fund in selected governorates to finance primary care social insurance program, and enrollment of uninsured population in targeted governorates.

Ongoing: Population Project and Social Fund Project (health component).

New: Health Sector II Project.

Ongoing: Schistosomiasis Control Project, and Population Project.

Ongoing: Health Sector I Project.

New: Health Sector II Project.

AAA: Health Care Financing Study and Workshop.

USAID; EU; SFD; (Multi-donor Support); Kuwait; Spain; UNICEF; UNDP; Denmark

EU

UNICEF; WHO

EU; USAID

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Disease surveillance system was strengthened with support of Health Sector Reform Project.

Community development activities under Population Project led to increased demand for family planning services.

Schistosomiaisis infection rates were dramatically reduced.

New Family Health model in three pilot governorates expanded service delivery, but financing mechanism (Family Health Fund) proved not sustainable.

Schistosomiasis Control project closed early in CAS period. Implementation Completion Report rating was satisfactory.

Closing date of Population Project was extended. Progress achieved in raising public awareness and targeting vulnerable and hard-to-reach population groups.

Health Sector Reform and Financing Review carried out in FY02-03 concluded that HSR project improved family health service delivery but failed to develop a sustainable financing model.

By end-03, only 7 percent of 1998 Health Sector Reform Project was disbursed. Bank and GOE agreed to restructure the project and revise its objectives in early 2004.

Health Sector Reform II postponed to FY 06.

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Diagnosis

Strategy/Action

Program Indicators/Benchmarks

Bank Group Instruments Other Donor Activities

Government to update poverty figures and establish poverty line. Complete Poverty Assessment.

Complete Public Expenditure Review (PER).

Government addresses safety net issue in poverty strategy.

Incorporate safety net beneficiary assessment in PER.

AAA: Poverty Assessment.

AAA: Public Expenditure Review (PER) and WBI Workshop.

AAA: Bank report on Safety Nets submitted to government.

PER.

Poverty Analysis & Social Safety Nets Limited updated information on the magnitude and nature of poverty makes it difficult to develop pro-poor policies and strategies.

Need for better understanding of distributional impact of public expenditures.

Need to improve social safety net components in terms of coverage, efficiency and effectiveness, based on recommendations of Bank TF report submitted to government.

Government to complete Household Survey and make results available. Government to develop revised Poverty Strategy.

Beneficiary analysis of public expenditures.

Government to take steps to improve food subsidies, cash transfers, Social Fund and/or social insurance.

Poverty Assessment carried out, report issued June ’02, giving household- & region-specific poverty lines approximating $2 PPP/day. Poverty ratio estimated to have dropped from 19.4 percent in’95-’96 to 16.7 percent in ’99-’00. Possible subsequent increase given weaker economy. Fiscal pressures have forestalled new departures vis-à-vis poverty reduction.

Poverty Assessment analyzes safety nets and finds food subsidies inefficient since nonpoor derive greatest benefit.

Joint Gov’t-Bank poverty strategy report expected by mid-’04.

Government has not agreed to conduct PER.

Safety Nets report submitted in ’01. Crucial dialogue initiated by Poverty Assessment. As yet no PER or WBI Workshop.

UNDP; UK; Italy; USAID;

WFP; Netherlands; Denmark

USAID

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Reduced soil salinity and water logging. Increased agricultural production in poor rural areas.

Ongoing: Matruh Natural Resources Management Project includes rain harvesting techniques, water shed management.

New: Natural Resource Management Project II; Rural Water/Sanitation Project.

Rural Development

63 percent of the poor and 74 percent of the ultrapoor in Egypt live in rural areas. Increasing the productivity of agriculture essential for increasing rural incomes.

Improved water availability, reduced soil salinity and water logging, better rural services for the poor.

Second Matruh Resource Management loan was approved 3.03 for $12.4 m. (75 percent below 2001 program, largely compensated by $18 million co-financing from IFAD and GEF). Picking up water management activities from Matruh I, it stresses capacity building and off-farm productive pursuits.

Rural Water/Sanitation has been incorporated in Integrated Irrigation Management project scheduled for FY05.

USAID; KfW

Netherlands; Japan

III. Interventions With Major Indirect Poverty Reduction Impact Higher Education & Skills Development

Graduates of secondary and higher education lack market-relevant skills. Need for strengthening skills in managerial entrepreneurial and technical skills in a viable manner.

Better align curricula and assessment with the skills needs of employers and further learning. Strengthen education management information system and introduce accountability based on student outcomes. Strengthen financial & administrative autonomy of higher education institutions and their

Increased employer satisfaction with graduates as measured by tracer studies. Policy decision-making based on performance indicators and objective criteria. 50 percent of higher education budget will be allocated to higher education institutions as block grant.

Higher Education Project; Skills Development Project.

EU; ILO; USAID; Germany

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Government is asking Parliament to create a National Quality Assurance & Accreditation Agency (NQAAA), independent of education ministries. Some university departments have initiated self-evaluation. Competitive funding for innovations in higher education, and design of block grant funding system, are well underway.

Higher Education Enhancement Project, effective July ’02, is providing technical assistance towards these objectives.

Skills Development Project loan not yet effective at end-03.

Diagnosis

Strategy/Action

Program Indicators/Benchmarks

Bank Group Instruments Other Donor Activities

Agriculture output per unit of water. Conveyance efficiency, reduced soil salinity. Identification of “win-win” activities on the Nile Basin Initiative. Improved management of reuse. Recovery of O&M and capital cost as proportion of actual costs.

Monitoring system of water quality operational.

Ongoing: IIPs, NDP, Pumping Stations, and NDP II Projects.

New: Irrigation/Drainage Improvement Project. Private Sector role in Water Management (IFC).

AAA: Drainage & Wastewater Reuse; NBI; Irrigation Improvement Sector Review.

New: Rural Water & Sanitation Project.

Water, Irrigation, Drainage Improvement Per capita availability of water in Egypt is low (less than 1,000 cu.m. per capita per year). Improving productivity of scarce water resources a key issue. In addition, cooperation with Nile riparian countries is critical to assure long-term cooperative management of the Nile.

Deteriorating water quality. Continuing problem of salinity, pollution and rural sanitation.

Government plans to invest in water pumping stations, irrigation improvement and drainage (I&D) to improve productivity of water use. Active involvement in the Nile Basin Initiative (NBI) for “win-win” activities in the Nile. Institutional and management improvements, including water user participation and cost sharing programs.

Sub-surface drainage problem a national priority. Strategy for reuse of drainage water under implementation.

Gross output now measured at $0.20/cubic meter. Management of tertiary canals expected to improve with Government handover to water users’ associations (WUAs), scheduled for mid-04.

Integrated Irrigation Improvement Project (IIIP) programmed for FY05. IFC investments during CAS period did not include water management. Drainage & Wastewater Reuse and Irrigation Sector Review not carried out. Egypt has subscribed to Nile Basin Initiative.

Rural Water & Sanitation now integrated with IIIP.

KfW; Netherlands; Japan; USAID; UNDP; CIDA; FAO; Kuwait Fund; Abu Dhabi Fund

KfW; Netherlands; CIDA; USAID

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Environment

Costs of environmental degradation considerable but need to be better quantified for policy decision-making.

Linkages between energy and environment poorly understood in electricity, petroleum and transport sectors.

Private sector and especially SMEs would be particularly affected by negative/positive implications of complying with strict environmental standards on exports/imports as a result of Egypt’s Association Agreement with EU.

Poor environmental management at local level.

Support policy dialogue on environment through systematic economic assessments of Egypt’s environment issues.

Enable Egypt to identify and implement local environment management projects which bring global benefits.

Support private sector in reducing risks and exposures to environmental regulations.

Improve access to environmental information and help promote better environmental management.

Estimation of the cost of environmental degradation as percent of GDP.

Sector strategies developed for energy, addressing links to global environment concerns.

Percentage change in imports/ exports due to changes in environmental regulations.

Number of staff trained on environmental management in local administration.

Non-lending: METAP Study on cost of environmental degradation.

Non-lending: TF Study on energy-environment review. GEF work on wind, solar/ thermal energy and biodiversity issues.

Non-lending: METAP Country Assessment of impact of environmental regulations on trade and competitiveness.

Non-lending: DGF for environmental training at the local level.

CIDA; Denmark; Netherlands; Germany; Italy; Japan; UNDP; UK; USAID

Switzerland, Norway

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Projects designed with support from the Global Environment Facility (GEF) and the Clean Development Mechanism (CDM).

Trust Fund studies carried out: Energy-Environment Review, Clean Development Mechanism.

GEF projects under preparation on wind, solar/ thermal energy and biodiversity issues.

GEF-funded analysis of bio-diversity issues as component of Matruh II.

METAP Country Assessment included national EA system.

Norwegian Trust Fund financed environmental training.

Diagnosis Strategy/Action Program Indicators/Benchmarks Bank Group Instruments Other Donor

Activities Governance Absence of transparency and ineffectiveness by government officials increases cost of business. Also tax incentives tend to offset each other with little incremental benefit, but room for petty corruption. Commercial legal system too slow and cumbersome in resolving commercial legal disputes. With Egypt’s increasing exposure to globalization and its need to tap domestic and international capital markets, corporate governance standards will need to improve to give investors the protection

Need for improvements in administration and tax code. Increase number of judges and improve their remuneration. Egypt first country to undertake an assisted self-assessment.

Set up easily monitorable performance standards in all major revenue collection functions, starting with duty drawback and sales tax rebates for exports. Abolish most tax incentives. “Clearance rate” for commercial dispute resolution ( percent of filed cases actually resolved) to increase from about 40 percent at present to 50 percent by 2005. Completion of Corporate Governance Assessment. AAA: Governance Issues Report.

AAA: Task Force Report on Business Environment (completed). AAA: Corporate Governance Assessment. Seminar to disseminate findings.

IMF; USAID; UNDP; Spain USAID; CIDA USAID

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No significant reforms introduced in tax administration practices. Partial tax reform bill scheduled for submission to ’04 session of Parliament.

No measured change in “clearance rate.”

Corporate Governance Assessment not carried out, nor was Governance Issues Report prepared.

Assessment and seminar not carried out.

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Annex 3: Private Sector Development Strategy Introduction

Egypt needs higher economic growth in order to alleviate poverty, unemployment and fiscal challenges. Such growth can only be sustainable if it comes about as a result of rising private investment. The strategic challenge for the Government of Egypt (GOE) is to facilitate an increase in private investment through improving the business climate and through making complementary public investments. The present Government is cognizant of this need and has announced measures as well as intentions to improve the investment climate through reforms in finance, trade, taxation, and regulatory policy. It has also begun to consider ways to increase and improve public infrastructure (in electricity, roads, telecommunications, ports, and education), in part through new public investments and in part through facilitating private investment in relevant areas.

World Bank Group activity in last CAS period

During FY2001-05, IBRD activity in the area of private sector development consisted primarily of a loan in the amount of $350 million to help improve airport facilities in Cairo and Sharm El-Sheikh (the Airport Development Project) and analytical and advisory activities including a Financial Sector Assessment Program (FSAP), an Investment Climate Assessment (ICA) and a workshop on private participation in infrastructure.

IFC has had an active pipeline in Egypt, with equity and loan investments in a number of sectors including manufacturing, financial markets, gas production, and infrastructure. IFC has committed a total of fifteen new investments since the last CAS in the following business lines: phyto-pharmaceuticals & health products, organic textiles & foodstuffs; dairying, fruit juice production and supermarket retailing and construction materials; sanitary ware & ceramic tiles; automotive castings, notably brake calipers; acrylic fiber; housing finance; insurance and leasing. IFC was also involved in the first seaport operated by the private sector with container, bulk and general cargo terminals. Execution of existing commitments has proceeded apace. On the technical assistance front, IFC co-financed a North Africa Enterprise Development Facility (NAED) which has been superseded by IFC’s Private Enterprise Partnership for the Middle East and North Africa (PEP-MENA). The focus of this technical assistance in Egypt has been on access to finance, access to business services and support for improvements to the business enabling environment.

Egypt has placed significant emphasis on attracting foreign investment in order to create new employment opportunities, increase exports and encourage technology transfer. Recently, the General Authority for Investment and Free Zones (GAFI) was revamped and given a direct reporting relationship with the newly created Ministry of Investment. GAFI’s new management has requested MIGA to design a technical assistance proposal to provide capacity building services to the institution with a view to improving its ability to bring foreign investment into the country. This work is currently underway. The first element of the technical assistance proposal will be the updating of a previous assessment made by MIGA (in 2003).

MIGA provided its first political risk insurance guarantee in Egypt to a Spanish investor in FY04. The project was in the infrastructure sector for a management contract awarded by the Cairo Governorate for the management of solid waste in Cairo.

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Vision for the future

There are five inter-linked themes in Egypt's vision for the private sector:

• Improving the business environment. Promoting a supportive environment and eliminating unnecessary constraints for private sector development, enabling it to meet international standards of cost and quality.

• Integration in the global and regional economies. Ensuring full participation in global and regional markets while mitigating transitional social costs of the integration.

• Privatization. Reducing the role of state owned enterprises in the manufacture and distribution of private goods and services.

• Strengthening partnership between private and public sectors. Redefining how the public and private sector work together and reorienting the public sector towards more efficient provision of public goods.

• Supporting development of Small and Medium Enterprises. Creating an environment that nurtures Small and Medium Enterprises (SME) through better access to markets, resources and infrastructure.

Overlaying these themes is the need to: (a) reform the financial sector, and (b) improve infrastructure services.

Private Sector Development Priorities

Improving the business environment. The Egypt Investment Climate Assessment has identified a wide range of constraints to business development in Egypt, including significant red-tape and administrative barriers, access to credit and access to land issues.

Private firms often indicate the quality of tax and customs administration as a primary constraint. These systems operate in a way that imposes uncertainty, delays and excess costs on Egyptian businesses, particularly SMEs. Officials continue to exercise considerable discretion in the application of tax and trade-related regulations, raising compliance costs and evasion. There may be scope for streamlining tax incentives for new investments to make them more effective. The commercial legal system is also regarded as too slow, expensive and cumbersome in resolving commercial legal disputes and therefore is not heavily relied on by businesses. This limits the development of impersonal and complex contracting and raises the cost of business transactions.

Access to resources is another major constraint to growth of private firms. The financial system is characterized by a low level of competition, relatively high intermediation costs and a low level of innovation. This set-up has limited the access to credit for new firms and in particular emerging SMEs. Also, while education is plentiful, skills are not. Human resources with appropriate vocational and technical training are central to meeting the demands of the private sector in a more competitive economy.

Insufficient provision and low quality of infrastructure services impose excess costs on Egyptian firms, both exporters and non-exporters, limiting their competitiveness and discouraging investment. Port services are slow and costly. Evidence also suggests that there are constraints in domestic transport (in part due to the limited road density), telecommunications and reliable electric power supply. Finally, access to land or industrial sites also presents a constraint to private sector activity.

Integration into regional and global economies. To benefit from integration into regional and global markets, Egypt needs to: (i) improve its export performance in non-oil sectors; and (ii) promote technological innovation and take other steps towards developing a

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knowledge-based economy. Recently, the government has taken bold steps toward further trade liberalization. The average tariff has dropped from 14.6 percent to 9 percent, the number of tariff brackets decreased from 27 to six, and the list of products subject to tariffs has been shortened from 13,000 to 6,000. However, progress with removing other barriers to integration, such as lack of marketing and distributing companies and absence of export credit and insurance services, particularly for SMEs, has been slower. Export Processing Zones (EPZs) have not lived up to their potential in terms of generating foreign exchange earnings, employment and attracting FDI. Data on the performance of the EPZs is inadequate to monitor performance, objectives are unclear and there are few if any requirements regarding exports for firms registering in the zone.

Government is developing measures to further improve export competitiveness. These include: further simplification of custom procedures; development of airports and seaports; assistance to SMEs in foreign marketing; facilitation of insurance against export risks, especially for SMEs; adoption of harmonized international standards and procedures to place producers on equal footing with international competitors; taking maximum advantage of the free trade and partnership agreements with EU and the Arab countries, and achieving similar agreements with the United States; and improving performance of the EPZ sector by facilitating exporter access to duty free inputs and infrastructure, tax, labor and environmental regulations in the zone.

In an increasingly global economy, where knowledge about how to excel competitively and information about who excels are both more readily available, the effective creation, use and dissemination of knowledge and new technologies is increasingly the key to success. Technological innovation is quickly becoming the key factor in global competitiveness. To improve its knowledge economy infrastructure Egypt will need to:

• strengthen the general legal environment in field of intellectual property rights and develop new “cyber-laws”;

• improve the quality of telecommunications, especially internet infrastructure;

• strengthen the financial services sector by promoting the widespread use of credit cards and automatic payment systems;

Privatization. The share of the public sector in GDP stands at about 30 percent in Egypt, which is relatively high compared to other countries. A public sector dominated economy typically reduces the productivity of the private sector by reducing its access to finance, raising the cost of finance, and increasing the average wage in the economy. To mitigate such pressures for the private sector, Egypt launched an ambitious privatization program in the early 1990s, which resulted in the transfer of about one third of SOE assets to private owners. By the end of the decade implementation of the program slowed down, but the new government is planning to revive it and to abandon a concept of a 'strategic' commodity or sector that must remain in government hands. While some sectors and utilities will probably remain off limits on the grounds that they are vital for national security, the number of such cases will be greatly reduced. Moreover, while such companies would remain part of the state, their management could be outsourced to the private sector.

In approaching the next phase of the privatization program, it would be useful to focus on the following issues:

• effective "commercial" corporatization of state-owned enterprises and economic activities that continue to be held at both the central government and municipal levels;

• addressing investors' risk concerns through the development of financial instruments such as guarantees when appropriate;

• ensuring a level playing field between foreigners and local investors;

• developing a coordinated regulatory and policy regime that is consistent with the needs of

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a privately held infrastructure sector;

• providing substantial financial and other supportive resources to deal with restructuring and commercialization costs.

Strengthening cooperation and partnership between the private and public sectors. The general agenda for private sector growth in Egypt has been clear for many years - discussion of ways to create an improved business environment that leads to better competitiveness, privatization, support for SMEs, and financial sector strengthening have occurred many times. Insufficient progress in implementing this agenda could be explained, in large part, by ways in which the public sector and private sector interact or do not interact. It is generally recognized there is substantial room for improvement in this relationship.

Moving forward on this issue requires the following:

• Strengthening accountability mechanisms for public and private sectors: The impact and effectiveness of government/public sector organizations can be improved through the introduction of such accountability and incentive mechanisms as: performance evaluations for senior management, performance based budgets, and unified accounting rules for the treatment of SOE profits. Corporate governance improvements in the private sector could also be instrumental in building a broader and deeper capital market that would help place corporate finance on a sounder basis.

• Developing public-private partnerships. This can be facilitated through legislation to: eliminate certain unnecessary restrictions that are presently imposed on the private sector’s participation in infrastructure projects; set a clear and unambiguous regulatory framework and quality standards for such participation; and establish a system to select investors through transparent and competitive procedures.

• A concerted effort to strengthen the private sector's voice through the creation of stronger business agencies, and a willingness on the Government side to consult.

Supporting development of small and medium enterprises. SMEs and micro enterprises are a significant force in the Egyptian economy. Enterprises with less than 10 workers are estimated to contribute 80 percent of private sector value added and account for 75 percent of private sector employment. SMEs typically face complex business regulations and have little incentive to join the formal sector. A high level of informality means that those businesses that do choose to operate within the formal sector suffer from unfair competition, as their competitors have significantly lower operational costs. At the same time, the revenue base for the Government is reduced while the informal firms suffer from rent-seeking behavior on the part of revenue and other government officials.

Supporting development of the SMEs could involve the following:

• PEP-MENA has been and will continue to be active in the area of access to finance for SMEs. This effort includes work with the financial sector to improve the capacity of local financial institutions to service this market, and generally improving access to finance through strengthening of the financial sector.

• Micro enterprises would benefit from the encouragement of micro-financial institutions that are managed by the private sector or NGOs.

• Reducing and simplifying the bureaucratic red tape that overwhelms Egyptian businesses but particularly SMEs.

• Strengthening marketing channels, to ensure better information and support is available.

Reforming the banking sector. Public dominance of the banking sector in Egypt, especially the banking and insurance components, imposes a burden on both the private and public sectors.

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The private sector faces relatively high costs (real lending rates are now close to 10 percent) and poor access to credit while government faces contingent liabilities arising from high levels of non-performing loans among publicly owned banks, for example. The Government of Egypt is considering a number of measures to improve the performance and soundness of the banking sector in the long run. Among these are: divestiture of public shares in joint venture (public-private) commercial banks; privatization of one of the four major public commercial banks and restructuring of the other three; consolidation among banks to create more efficient, larger entities; and strengthening prudential regulations and supervisory procedures.

Improving quality of the infrastructure services. More and better infrastructure is needed in Egypt to help the private sector become more competitive. While certain infrastructure services are provided at subsidized prices (e.g. power and water), inefficient or inadequate provision of other services (e.g., transportation) increase costs for the private sector. In most cases, pricing and management reforms are called for while, in some cases, additional public investments are also needed. In addition, institutional arrangements for infrastructure financing need to be addressed in many infrastructure sub-sectors in order to improve their overall efficiency. For example, while the technical performance of the generation, transmission and distribution systems is adequate, consumers receive a reliable service at a low price, and the power sector in Egypt has, over the last few years, experienced notable achievements, these arrangements have not been adequate to establish financial discipline and sound commercial practices in the power sector. The financial position of the sector is weak; there are subsidies in electricity tariffs and large arrears in the payment of electricity bills, mainly by several major customers in the public sector.

Government plans to address the infrastructure problem by undertaking some infrastructure investments on its own account, by focusing on critical pricing and management reforms where possible and by facilitating the involvement of the private sector in other infrastructure services. With respect to the latter, priority concerns include:

• Removal of unjustified restrictions on private sector participation in infrastructure projects and creation of a level playing field between public and private sector players;

• Improvement of the regulatory framework for the private sector participation;

• Review of the BOOT regulations for infrastructure; and

• Establishing tariff structures and targeted subsidy systems compatible with opening of the sector to competition.

World Bank Group Assistance Strategy

Overview

Egypt enjoys strong donor support from a wide variety of institutions including USAID, the EU, UNDP, AfDB, Kuwait Fund, KfW and the Islamic Development Bank. In broad terms the WBG strategy is to work in partnership with other donors to provide the following support:

The IBRD will (i) facilitate knowledge sharing on the implementation aspects of the reform agenda and (ii) provide financial resources to fund some of the implementation and restructuring costs arising from the need to restructure the financial sector. One area where the Bank can help is in facilitating the public/private partnership dialogue. In parallel, specific technical assistance can be provided in areas that will accelerate change, such as privatization and private participation in infrastructure (PPI). To deliver on this agenda the Bank will work closely with the Government and other members of the donor community to develop innovative "low cost" financing packages.

IFC will focus on: (i) supporting PPI initiatives with either guarantee, capital or advisory services as the case may require, (ii) assisting the development of new financial sector institutions

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and instruments for the private sector, (iii) catalyzing new private sector investment in manufacturing, petrochemicals, oil and gas, as well as the social sectors, and (iv) supporting SME initiatives. MIGA will remain available to provide guarantee instruments to facilitate new private sector investment, if required.

Assistance Proposals

This section provides a description of assistance proposals in the five major areas of the PSD agenda in Egypt (improving business environment, integration in the global and regional economies, privatization, strengthening cooperation and partnership between private and public sectors, supporting development of small and medium enterprises), as well as two cross-cutting themes (financial sector reform and infrastructure services). In addition, it highlights areas of potential comparative advantage for the IBRD and IFC.

Improving business environment. The Egypt ICA has identified a wide range of constraints to business development, including access to land and finance and significant red-tape and administrative barriers. Follow-up to the ICA could include a series of policy notes to move the ICA recommendations to the implementation stage. These would focus on: (i) how to start the reform of the industrial land market, (ii) the steps needed to simplify business entry, and (iii) how to reform some administrations in their dealings with businesses (e.g. inspections). As the authorities embark on some of the reforms recommended in the ICA, further work could be done to help establish an impact evaluation framework to measure the effectiveness of the reforms in achieving their goals. These follow-up activities will be closely coordinated with other donors’ support, in particular the IFC’s new technical assistance facility for the region (PEP-MENA). The five pillars of PEP-MENA are technical assistance for the financial sector, support to SMEs, assistance for improvement of the business enabling environment, support to development of public-private partnerships (particularly for infrastructure) and assistance in privatizing or restructuring state-owned enterprises.

Integration in the global and regional economies. The IBRD will assist Egypt in development of its sea- and airports, as well as in streamlining and rationalizing customs procedures. IFC plans to facilitate and encourage cross border investments into Egypt and to support expansion of the internationally competitive Egyptian companies into new markets. MIGA stands ready as well to support foreign investment by Egyptian companies through the provision of guarantees against non-commercial risks. MIGA is one of the few agencies available to provide this support to Egyptian companies, and has already done so in the past (Orascom for a $90 million investment in Pakistan). MIGA also plans to include specific sectors of the Egyptian economy in a MENA Enterprise Benchmarking Program, planned for FY06, which would provide specific data on the competitiveness of specific Egyptian industries. FIAS will continue to support efforts to improve the climate for foreign investors.

Privatization. WBG assistance in this area could involve: (a) technical assistance to improve performance of public enterprises through the development of monitoring and management mechanisms, and corporatization; and (b) pilot turn-around funds to encourage privatization of selected public enterprises. In the longer term, depending on the speed of the privatization program, the IBRD could provide financial resources to facilitate the program. Privatization advisory services can be provided by the IFC in cases where the Government would prefer to give IFC a mandate for a particular transaction. MIGA can also provide assistance in two different areas. First, MIGA’s online services can allow the privatization agency and sectoral ministries to more widely disseminate information on pending privatizations to potential investors and lenders, deepening the potential investor pool. Second, MIGA guarantees can help alter the risk perception of investors and realize the projects by making them more attractive, particularly as MIGA can cover sovereign and sub-sovereign risk.

Strengthening cooperation and partnership between private and public sectors. The

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WBG will use its experience to facilitate the broad public-private sector dialogue in Egypt. In recent years the Bank Group has supported a variety of approaches (consultative forums, regulatory complaint offices, and strengthening professional associations) designed to foster ongoing public-private dialogue on the objectives, scope and details of reforms. Such activities have included the creation of Private Sector Foundations in Senegal, Ghana and elsewhere, Competitiveness Review Commissions (Cote d'Ivoire and Cameroon) and simpler networking activities which have helped to harmonize the activities of diverse PSD groups and focus the agenda for public-private debate. To enhance the government - private sector dialogue the WBG can support a series of workshops and strengthening institutional and organizational capacity along these lines. A specific component of this work could be to develop conflict resolution mechanisms as well as to upgrade the capacity and support systems of local professional associations and chambers of commerce.

Supporting development of small and medium Enterprises. The Bank Group can provide assistance in three dimensions of SME development: (a) facilitating access to resources, especially finance; (b) providing business development assistance; and (c) helping to build linkages between Egyptian and foreign SMEs. The nature of this assistance, in turn, varies for different categories of SMEs. Egyptian SMEs represent very heterogeneous sectors that consist of a large variety of enterprises in terms of the number of employees, amount of assets, technical competencies, know-how and dynamism, and range from informal to formal, self-employment to enterprises hiring 200 or more workers, artisanal products to high technology products, or subsistence enterprises to those that are more competitive and dynamic.

Specific initiatives could include:

• Focused lending opportunities to facilitate access to finance (e.g., IFC investments in non-bank financing instruments, such as leasing and factoring as well as IBRD assistance to develop modem export finance mechanisms, including guarantees etc.).The focus would be on sustainability. In addition, financial intermediaries will be targeted for assistance. Opportunities to issue credit lines for direct SME lending, especially in the leasing industry will be examined.

• As part of the WBG assistance, the business partnership group could help to spur the development of new partnership activities between selected European and Egyptian Chambers of Commerce that would: transfer expertise on best practices of Chamber services for SMEs, encourage linkages amongst European and Egyptian SMEs, and provide SME skills development in joint ventures and e-commerce.

• A particular focus of MIGA’s efforts in Egypt will be to support investments in the agribusiness, manufacturing and services sectors, which tend to be dominated by SMEs. MIGA will also market its Small Investors’ Program, which provides streamlined coverage to SMEs, throughout the MENA region.

Financial sector reform. The IBRD is planning two operations in Egypt over the CAS period. The Financial Sector Restructuring Loan will assist the government in preparing privatization of one major public bank and restructuring of others, divestiture of public shares in joint venture (public-private) commercial banks, and consolidation of banking sector to create more efficient, larger private financial institutions. The Mortgage Finance Project, which will focus on establishment of a market-based liquidity facility for the mortgage market, strengthening the regulatory framework for mortgage lending, and modernization of the property rights registration system. In addition, the IBRD may provide assistance in development of the private pension funds.

IFC would follow a three-pronged approach in the financial sector: creating or strengthening existing institutions, providing medium to long-term funding, and deepening the financial sector by developing the bond markets and introducing new financial instruments. IFC's

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institution building role will build on the successful experience of setting up joint ventures between local financial institutions and international companies that are industry leaders, to promote the transfer of expertise and best practice. IFC expects to be active in setting up institutions to engage in activities that are as yet underdeveloped, including mortgage finance (such as the recent investment in the Egyptian Housing Finance Company), underwriting and trading of bonds, and factoring. Developing mortgage finance will first entail the growth of a primary market, where existing or new institutions provide mortgages. A second stage will be the development of a secondary mortgage market, which will need the introduction of securitization and setting up secondary mortgage institutions.

Extending financing to intermediaries engaged in the SME sector, such as leasing companies, will be the focus of particular attention. Developing the corporate bond market, and fixed income markets more generally, is an important component of general financial sector development. An active, well functioning primary market provides an important corporate finance tool that can reduce interest rate, foreign currency and refunding risk. Egypt has a somewhat active primary corporate bond market (although activity has dropped off sharply recently) with established procedures, but an illiquid secondary market. IFC could assist GOE in setting up a new institution(s) or strengthening existing ones that underwrite and trade debt instruments. This activity would also support development of an active government securities market, which provides benchmark interest rates across the maturity spectrum, among other financial sector benefits.

Improving infrastructure services. Areas for IBRD and IFC activity include ports and airports, power, water and wastewater. The Bank Group could support investments in these areas through technical and financial assistance. The FY06-09 lending program contains projects to help increase electricity generation (the El Tebbin Power Project) and improve transportation of tradable goods (the Ports Sector Development Project). Analytic work is also envisaged in the area of transport sector development, especially with respect to the railways system.

The water and sanitation sector has benefited from substantial donor funding over the past two decades. With donor funding expected to decline, policy advice will focus on attracting private sector participation in the provision of water and sanitation services. Low water tariffs are a major impediment to private sector participation. Reforms of the regulatory framework are expected to decentralize decision-making and grant more autonomy to municipal water and sanitation authorities in setting tariffs. The WBG can advise municipal authorities on PSP options and IFC could provide direct financing to the projects.

It is expected that there will continue to be demand for IFC financing in power generation. IFC's strategy will be to explore the scope for private participation in the distribution sub-sector and in developing alternative sources for generation such as wind power. In this sector, Egyptian authorities are dealing simultaneously with the cornerstone elements of sector reform, namely sector structure, ownership policy and regulation, and pricing issues. Until recently, electricity supply was under monopoly control of the Egyptian Electricity Authority (EEA), but this has changed and the private sector is now authorized to build, own, operate and transfer BOOT power generation plants. IFC has two investments in the power sector and could consider others. In the renewable energy area work to develop self sustaining markets can also be pursued. Through PSAS, IFC can provide advisory services to facilitate private transactions. In the power sector, reforms need to be aimed at attracting private sector participation and financing of the large amount of investment needed in generation, transmission and distribution to cater for load growth.

MIGA has recently issued a guarantee in the provision of solid waste services in Cairo, and expects that foreign investors interested in infrastructure opportunities, e.g. in privatizations and PPPs, will find considerable interest in MIGA guarantees – particularly against the breach of government (including sub-sovereign) obligations. The extent of MIGA support will, however,

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depend on meaningful reform of the state sector and the opening of markets for foreign investment.

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Annex 4: World Bank Institute Strategy To provide sustained support to the CAS implementation in the area of capacity building, WBI has articulated a strategy involving close alignment with the CAS in selective areas and the rolling of in-country multi-year targeted programs, complementary to country-focused operational interventions. The strategy builds on results of a baseline evaluation of WBI activities in FY03 and on a strong partnership between WBI and country operations thanks to the decentralization of a WBI senior staff in the Cairo Office.

During the first years of the CAS, WBI activities, building on ongoing efforts launched in FY05, will focus primarily on two CAS pillars in response to GoE request to support reform implementation in these areas: (i) facilitating private sector development; and (ii) enhancing the provision of selected public goods. With respect to the third pillar, WBI could become more engaged during the CAS period once focus shifts from formulation to implementation. Activities will be specifically targeted at Egyptian high-level officials to improve dialogue/discuss options on key policy reforms and support implementation. The targeting of senior officials with decision making capabilities has proven effective over the past two years in moving reform agendas. A second set of activities targeted to the “middle tier” and stakeholders will be developed to support reform implementation and broaden support. The in-country activities will be complemented by regional and global WBI activities.

The indicative WBI program is shown in the results matrix (See Annex 1). The timing of specific activities will be closely linked to progress on the operations side and may be revisited as necessary to ensure a synchronized approach. By end FY06, a new baseline evaluation covering FY03-06 will be conducted to assess impact of current WBI approach in Egypt. Activities for FY07 and 08 will be reviewed at mid-year drawing on evaluation of the program and revised as necessary to best support the evolution of the CAS.

In support of the objective of facilitating private sector development, WBI will focus on three areas. A Financial Sector and Capacity Enhancement Program will be conducted as a direct support to GoE ongoing financial reform and complementary to the preparation of the Financial Sector Restructuring Loan and the Mortgage Development Project. An Investment Climate Assessment Rapid Results Approach Initiative will be launched to jumpstart the implementation of reforms identified in the Investment Climate Assessment and a Trade Facilitation Program will also be initiated.

To support the second CAS pillar, WBI will focus on Public-Private Partnerships and Infrastructure Finance, Local Governance Management, and a multi-year Education Enhancement Program to improve the quality of education and decentralization. For greater impact, a training of trainers component supporting the capacity of local training institutes will be incorporated. Other priority programs include a Social Protection Program covering issues related to social safety nets, labor market, pension reform and a Water Resource Management Initiative.

WBI will also continue its support through a poverty impact assessment program currently being undertaken with other donors with a view to train the Social Fund to undertake impact assessment.

98

Annex 5: Macroeconomic Simulations

The short-term impact of shocks is simulated below using the quantitative framework proposed by Devarajan and Go21 (2002).

Following this framework, we firstly estimate the short-run growth effects of macroeconomic shocks and policies using a trivariate VAR model (with Egypt GDP growth, OECD GDP growth, and Egypt government consumption as a share of GDP as its variables) and assuming that relative prices and the composition of output are unchanged.

Secondly, we use the “1-2-3 Model,” a static, multi-sector, general-equilibrium model of a small open economy, to capture the effects of macroeconomic policies and shocks on relative prices and the composition of output, assuming that the aggregate output is fixed at the levels implied by the VAR simulations. The 1-2-3 Model divides the economy into two sectors: exports (E) and domestic goods (D). There is one other good in the economy, imports (M). The model assumes that a constant elasticity of transformation function links outputs of E and D, and consumers have a constant elasticity of substitution utility function in D and M.

We simulate two deviations from the baseline macroeconomic scenario for the period 2004-2007 – “External Shock” and “Policy Shock”.

For the “External shock” scenario we assume that the growth rate of the OECD will fall by 2 percentage points in 2005 compared to its implied baseline level, and will remain 1 percentage point below such level in 2006. We assume that this event will represent an aggregate demand shock rather than terms of trade shock for Egypt. We use the investment closure of the model, assuming that the primary response of the economic agents to the shock will be adjustment in the investment rates. We also assume that the government will manage to meet the inflation targets.

For the “Policy shock” scenario we assume that the government consumption’s share in GDP will increase by 10 percent in 2005. VAR simulations show that even short-term effect of increases in government consumption is likely to be adverse: in the simulations, they cause fall in growth rate over a three-year period. Most likely reason for this in Egyptian context is crowding-out effects of higher fiscal deficits, which may offset the Keynesian stimulus to the economy from the increase in government spending (at least if a large portion of the latter was financed domestically). We use the investment closure of the model and assume that this policy will not allow the government to meet its inflation targets.

The results of the simulations are presented in the Tables 1 and 2.

21 For the general description of the approach, see Devarajan, S. and D. S. Go (2002). A Macroeconomic Framework for Poverty Reduction Strategy Papers with an application to Zambia. Africa Region Working Paper No. 38. For the detailed description of the model, see Devarajan, S., S. Robinson, A. Yúnez-Naude, R. Hinojosa-Ojeda, and J. D. Lewis. 1999. “From Stylized to Applied Models: Building Multisector CGE Models for Policy. North American Journal of Economics and Finance 10: 5-38.

99

Table 1: Simulations results for the scenario with external shock

Year Variables

2004 2005 2006 2007

Growth Rates Real GDP 4.3 % 2.9% 3.7% 4.6% Real Consumption 4.5% 7.7% 3.7% 5.0% Real Gross Domestic Investment 3.0% -6.0% 7.9% 4.4% Export Volume 22.7% 5.5% 7.5% 9.8% Import Volume 13.4% 20.3% 11.1% 8.7% GDP deflator 10.0% 5.5% 5.5% 5.0% Ratios to GDP

Gross Domestic Investment 16.5% 14.7% 15.1% 15.2% Fiscal Balance (excl. grants) -6.6% -8.2% -7.4% -7.6% Current Account Balance 5.1% 2.7% 2.0% 2.2%

Table 2: Simulations results for the scenario with policy shock

Year Variables

2004 2005 2006 2007

Growth Rates Real GDP 4.3% 2.8% 4.2% 4.7% Real Consumption 4.5% 7.2% 4.8% 4.5% Real Gross Domestic Investment 3.0% -6.4% 8.7% 4.3% Export Volume 22.7% 5.2% 7.0% 5.7% Import Volume 13.4% 20.8% 12.3% 9.2% GDP deflator 10.0% 13.5% 6.6% 4.9% Ratios to GDP Gross Domestic Investment 16.5% 14.9% 15.3% 15.2% Fiscal Balance (excl. grants) -6.6% -8.8% -7.8% -8.3% Current Account Balance 5.1% 2.5% 1.9% 2.0%

100

Annex: A1 Egypt at a Glance

Egypt, Arab Rep. at a glance 9/20/04

M. East Lower-POVERTY and SOCIAL & North middle-

Egypt Africa income2003Population, mid-year (millions) 68.1 312 2,655GNI per capita (Atlas method, US$) 1,360 2,210 1,480GNI (Atlas method, US$ billions) 92.9 689 3,934

Average annual growth, 1997-03

Population (%) 2.0 1.9 0.9Labor force (%) 2.9 2.9 1.2

Most recent estimate (latest year available, 1997-03)

Poverty (% of population below national poverty line) 17 .. ..Urban population (% of total population) 42 58 50Life expectancy at birth (years) 69 69 69Infant mortality (per 1,000 live births) 33 44 32Child malnutrition (% of children under 5) 4 .. 11Access to an improved water source (% of population) 97 88 81Illiteracy (% of population age 15+) .. 31 10Gross primary enrollment (% of school-age population) 97 96 112 Male 100 100 113 Female 93 92 111

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1983 1993 2002 2003

GDP (US$ billions) 28.1 47.2 87.8 82.4Gross domestic investment/GDP 28.7 16.2 18.3 17.1Exports of goods and services/GDP 25.5 27.7 18.4 21.7Gross domestic savings/GDP 17.8 13.2 13.8 14.5Gross national savings/GDP .. 24.2 18.8 18.6

Current account balance/GDP -5.4 4.9 0.7 2.4Interest payments/GDP 1.4 0.8 0.2 0.2Total debt/GDP 57.2 19.5 34.2 37.4Total debt service/exports 9.3 7.8 3.8 4.7Present value of debt/GDP .. .. 30.4 ..Present value of debt/exports .. .. 135.6 ..

1983-93 1993-03 2002 2003 2003-07(average annual growth)GDP 4.2 4.6 3.2 3.2 ..GDP per capita 1.7 2.6 1.2 1.2 ..Exports of goods and services 7.8 2.3 -7.1 11.5 5.0

STRUCTURE of the ECONOMY1983 1993 2002 2003

(% of GDP)Agriculture 19.6 16.7 16.5 16.1Industry 30.0 33.1 34.8 34.6 Manufacturing 13.2 16.7 19.1 18.9Services 50.4 50.2 48.7 49.2

Private consumption 65.0 76.6 73.7 73.0General government consumption 17.2 10.2 12.5 12.5Imports of goods and services 36.4 30.7 22.8 24.3

1983-93 1993-03 2002 2003(average annual growth)Agriculture 2.6 3.5 3.6 4.9Industry 4.3 4.7 3.6 1.9 Manufacturing 5.3 7.0 4.2 3.4Services 4.3 4.6 2.4 3.3

Private consumption 4.2 4.1 2.7 2.5General government consumption -0.6 2.9 2.6 2.8Gross domestic investment -5.4 6.7 5.0 -4.6Imports of goods and services -1.6 1.3 -6.0 0.7

Note: 2003 data are preliminary estimates.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

-10

0

10

20

30

98 99 00 01 02 03

GDI GDP

Growth of investment and GDP (%)

Egypt, Arab Rep.

Lower-middle-income group

Development diamond*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

-10

-5

0

5

10

15

98 99 00 01 02 03

Exports Imports

Growth of exports and imports (%)

Egypt, Arab Rep.Lower-middle-income group

Economic ratios*

Trade

Domesticsavings

Investment

Indebtedness

101

Egypt, Arab Rep.

PRICES and GOVERNMENT FINANCE1983 1993 2002 2003

Domestic prices(% change)Consumer prices .. 11.1 2.8 3.2Implicit GDP deflator 8.3 9.9 2.2 6.2

Government finance(% of GDP, includes current grants)Current revenue .. 27.8 23.4 23.3Current budget balance .. 1.5 -2.3 -3.1Overall surplus/deficit .. -3.5 -7.5 -8.0

TRADE1983 1993 2002 2003

(US$ millions)Total exports (fob) .. 3,725 6,643 8,205 Cotton .. 2,111 83 3,195 Other agriculture .. 37 185 199 Manufactures .. 1,167 2,877 2,952Total imports (cif) .. 10,728 14,644 14,821 Food .. 1,878 1,035 1,521 Fuel and energy .. 1,267 2,961 2,373 Capital goods .. 2,545 3,211 3,179

Export price index (1995=100) .. 96 .. ..Import price index (1995=100) .. 92 .. ..Terms of trade (1995=100) .. 104 .. ..

BALANCE of PAYMENTS1983 1993 2002 2003

(US$ millions)Exports of goods and services 6,682 11,174 15,801 18,006Imports of goods and services 10,766 14,044 19,535 19,565Resource balance -4,083 -2,870 -3,734 -1,559

Net income -630 -572 95 -107Net current transfers 3,191 5,737 4,252 3,609

Current account balance -1,522 2,295 614 1,943

Financing items (net) 1,583 2,016 -1,070 -1,397Changes in net reserves -61 -4,311 456 -546

Memo:Reserves including gold (US$ millions) .. .. .. ..Conversion rate (DEC, local/US$) 0.9 3.3 4.3 5.0

EXTERNAL DEBT and RESOURCE FLOWS1983 1993 2002 2003

(US$ millions)Total debt outstanding and disbursed 16,090 9,218 30,001 30,863 IBRD 723 1,357 542 539 IDA 649 912 1,280 1,339

Total debt service 961 1,236 745 1,007 IBRD 84 304 100 101 IDA 6 19 43 46

Composition of net resource flows Official grants 383 883 650 0 Official creditors 724 388 -212 -130 Private creditors .. .. .. .. Foreign direct investment 490 493 647 0 Portfolio equity 0 0 -212 0

World Bank program Commitments 482 208 50 0 Disbursements 289 163 72 54 Principal repayments 34 200 106 114 Net flows 255 -37 -34 -59 Interest payments 56 122 38 33 Net transfers 200 -159 -71 -92

MNSED 9/20/04

-4

-2

0

2

4

97 98 99 00 01 02 03

Current account balance to GDP (%)

0

5,000

10,000

15,000

20,000

97 98 99 00 01 02 03

Exports Imports

Export and import levels (US$ mill.)

0

5

10

15

98 99 00 01 02 03

GDP deflator CPI

Inflation (%)

A: 542

D: 25,655

B: 1,280E: 2,524

Composition of 2002 debt (US$ mill.)

A - IBRDB - IDA C - IMF

D - Other multilateralE - BilateralF - PrivateG - Short-term

102

Annex: B2 Selected Indicators of Bank Portfolio Performance and Management

As of 04/12/2005 Indicator 2002 2003 2004 20051/

Portfolio Assessment Number of Projects Under Implementation a 18 16 17 13 Average Implementation Period (years) b 5.1 5.0 5.1 5.4 Percent of Problem Projects by Number a, c 22.2 12.5 17.6 15.4 Percent of Problem Projects by Amount a, c 25.4 16.1 1.6 2.1 Percent of Projects at Risk by Number a, d 27.8 12.5 17.6 15.4 Percent of Projects at Risk by Amount a, d 34.3 16.1 1.6 2.1 Disbursement Ratio (%) e 7.1 9.7 18.2 15.4 Portfolio Management CPPR during the year (yes/no) 2-May No No NoSupervision Resources (total US$) 1,303 1,166 1,219 1,440Average Supervision (US$/project) 72.4 72.9 75 80 Memorandum Item Since FY 80 Last Five FYs Projects Evaluated by OED by Number 81 8 Projects Evaluated by OED by Amt (US$ millions) 3,982.4 510.9 % of OED Projects Rated U or HU by Number 24.4 12.5 % of OED Projects Rated U or HU by Amt 14.5 12.2 1/ 2005 Portfolio Assessment is between July 1, 2004 and March 31, 2005. a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning

of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

103

Annex: B3 Proposed IBRD Lending Program

As of 04/08/2005

Fiscal Year Project ID US$

(Million)

Strategic Rewards (H/M/L)c

Implementation Risks (H/M/L)c

2006 West Delta Irrigation Infrastructure 150.0 H M El Tebbin Power 250.0 H M Mortgage Finance 50.0 H M Ports Sector Development 100.0 H M Subtotal 550.0 2007 Urban/Alexandria Growth Pole 100.0 H M Integrated Governorates Develop. 100.0 H M Social Funds IV 75.0 H M Education Enhancement II 60.0 H L Pollution Abatement II 20.0 H M Solar Thermal (plus GEF) 2.0 H M Financial Sector Restructuring Loan TBD H M Subtotal 357.0 2008 Transport/Road Asset Management 100.0 H M Integrated Governorates II 100.0 H M Railways 100.0 H M Delta Integrated. Sanitation & Sewerage Infrastr. 120.0 H M Financial Sector Restructuring Loan II TBD H M Subtotal 420.0 2009 Power II 200.0 H M Pilot Urban Water/Wastewater Infrastructure 75.0 H M Population and Health 75.0 H M Urban Transport SWAP 100.0 H M Subtotal 450.0 Total 1,777.0

104

Annex: B4 Summary of Non-lending Services As of 03/23/2005

Product Completion

FY Cost

(US$000) Audiencea Objectiveb Recent completions Rural Water and Sanitation 2005 166.3 Bank, Government Knowledge generation Mortgage Market 2005 96.7 Bank, Government Knowledge generation Poverty Strategy 2005 50.0 Bank, Government Knowledge generation Underway Public Expend. & Fiduciary Mgt. (annually) 2005 373.2 Government Knowledge generation Review of IWRM Strategy 2005 148.8 Bank, Government Knowledge generation Poverty & Social Impact Analysis (annually) 2005 150.0 Government Knowledge generation Nile Basin Initiative 2006 485.0 Government, Bank Knowledge generation Country Environmental Analysis (TA) 2006 40.0 Government Knowledge generation Public-Private Partnership 2006 90.0 Government Knowledge generation Investment Climate 2006 210.0 Bank, Government Knowledge generation Transport Sector 2006 25.0 Bank, Government Knowledge generation Rural Development 2006 200.0 Bank, Government Knowledge generation Railways (TA) 2006 50.0 Government Knowledge generation Planned Urban Sector Strategy 2006 50.0 Bank, Government Knowledge generation Public Expend. & Fiduciary Mgt. (annually) 2006 150.0 Government Knowledge generation Poverty & Social Impact Analysis (annually) 2006 100.0 Bank, Government Knowledge generation Nile Basin Initiative 2006 75.0 Bank, Government Knowledge generation Poverty and Natural Resources 2006 20.0 Bank, Government Knowledge generation Education Strategy 2006 150.0 Bank, Government Knowledge generation Child Labor Prevention 2007 35.0 Bank, Government Knowledge generation Health Sector 2007 100.0 Bank, Government Knowledge generation Safety Net 2007 100.0 Bank, Government Knowledge generation Public Expenditure & Fiduciary Mgt. (annually) 2007 150.0 Bank, Government Knowledge generation Development Policy Review 2007 200.0 Bank, Government Knowledge generation Nile Basin Initiative 2007 75.0 Bank, Government Knowledge generation Poverty & Social Impact Analysis (annually) 2007 100.0 Bank, Government Knowledge generation _________________________________ a. Audience = Government, donor, Bank, public dissemination. b. Objective = Knowledge generation, public debate, problem-solving.

105

Annex: B5 Social Indicators

MDG / Indicator 1990 1994 1997 2000 2003 Goal 1: Eradicate extreme poverty and hunger Percentage share of income or consumption held by poorest 20% .. .. .. 8.6 .. Population below $1 a day (%) 4 2.6 .. 3.1 .. Population below minimum level of dietary energy consumption (%) .. .. 3 .. 3 Poverty gap ratio at $1 a day (incidence x depth of poverty) 0.5 0.5 .. 0.5 .. Poverty headcount, national (% of population) .. .. 22.9 16.7 .. Prevalence of underweight in children (under five years of age) 10.4 16.8 10.7 4 8.6 Goal 2: Achieve universal primary education Net primary enrollment ratio (% of relevant age group) 83.7 .. 90.9 89.9 .. Primary completion rate, total (% of relevant age group) .. .. 98 100 91 Proportion of pupils starting grade 1 who reach grade 5 .. .. .. 98.9 .. Youth literacy rate (% ages 15-24) 61.3 64.8 73.2 .. .. Goal 3: Promote gender equality and empower women Proportion of seats held by women in national parliament (%) 4 .. 2 2 2 Ratio of girls to boys in primary and secondary education (%) 81.3 .. 91.6 93.4 .. Ratio of young literate females to males (% ages 15-24) 72 76.2 84.7 .. .. Share of women employed in the nonagricultural sector (%) 20.5 18.9 18.9 19 20.3 Goal 4: Reduce child mortality Immunization, measles (% of children ages 12-23 months) 86 89 92 98 98 Infant mortality rate (per 1,000 live births) 76 56 .. 40 33 Under 5 mortality rate (per 1,000) 104 71 .. 49 39 Goal 5: Improve maternal health Births attended by skilled health staff (% of total) 36.5 46.3 56.4 60.9 69 Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 84 .. Goal 6: Combat HIV/AIDS, malaria, and other diseases Contraceptive prevalence rate (% of women ages 15-49) 47.6 47.9 54.5 56.1 60 Incidence of tuberculosis (per 100,000 people) 41.8 37 33.8 30.8 28.1 Number of children orphaned by HIV/AIDS .. .. .. .. .. Prevalence of HIV, total (% of population aged 15-49) .. .. .. 0.1 0.1 Tuberculosis cases detected under DOTS (%) .. 43.5 10.8 44.6 56.2 Goal 7: Ensure environmental sustainability Access to an improved water source (% of population) 94 .. .. .. 98 Access to improved sanitation (% of population) 54 .. .. .. 68 Access to secure tenure (% of population) .. .. .. .. .. CO2 emissions (metric tons per capita) 1.4 1.5 1.8 2.2 .. Forest area (% of total land area) 0.1 .. .. 0.1 .. GDP per unit of energy use (2000 PPP $ per kg oil equivalent) 4.8 5 4.9 4.9 4.6 Nationally protected areas (% of total land area) .. .. .. .. 9.7 Goal 8: Develop a global partnership for development Aid per capita (current US$) 103.5 47 32.9 20.8 13.2 Debt service (% of exports) .. .. .. .. .. Fixed line and mobile phone subscribers (per 1,000 people) 30.2 42.8 58.3 107.8 211.7 Internet users (per 1,000 people) .. 0.1 1 7.1 39.3 Personal computers (per 1,000 people) .. 3.4 7.5 12.6 21.9 Unemployment, youth female (% of female labor force ages 15-24) .. .. 42.8 36.7 .. Unemployment, youth male (% of male labor force ages 15-24) .. .. 15.8 13.8 .. Unemployment, youth total (% of total labor force ages 15-24) .. .. 23.1 20.4 .. Other Fertility rate, total (births per woman) 4 .. 3.5 .. 3.1 Life expectancy at birth, total (years) 62.8 .. 66.3 .. 69.1 Literacy rate, adult total (% of people ages 15 and above) 47.1 50.3 55.6 .. ..

106

Annex: B6 Key Economic Indicators Actual Estimate Projected

Indicator 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

National accounts (as % of GDP) Gross domestic producta 100 100 100 100 100 100 100 100 100 100 Agriculture 17 17 17 16 17 16 15 14 13 13 Industry 31 33 33 35 35 36 34 34 34 35 Services 52 50 50 49 49 48 52 52 53 53 Total Consumption 87 87 87 86 86 85 84 84 83 82 Gross domestic fixed investment 21 18 18 18 16 16 16 17 17 18 Government investment 11 10 9 9 8 8 8 8 9 9 Private investment 10 9 9 8 8 8 9 9 9 9

Exports (GNFS)b 15 16 18 18 22 28 30 31 31 31 Imports (GNFS) 23 22 22 23 24 30 31 31 31 32 Gross domestic savings 13 13 13 14 14 15 16 16 17 18

Gross national savings c 20 18 19 19 19 20 23 24 24 25 Memorandum items

Gross domestic product 90711 102216 97686 87851 81336 76975 85933 93296 99863 10689

2 (US$ million at current prices) GNI per capita (US$, Atlas method) 1420 1530 1560 1470 1380 1260 1230 1270 1370 1466 Real annual growth rates (%, calculated from 1992 prices) Gross domestic product at market prices 6.1 5.4 3.5 3.2 4.3 5.0 5.0 5.0 5.0 5.0 Gross Domestic Income 5.7 6.7 5.3 4.4 5.1 5.6 6.1 4.6 4.6 4.6 Real annual per capita growth rates (%, calculated from 1992 prices) Gross domestic product at market prices 4.1 3.4 1.6 1.3 1.3 2.3 0.6 3.2 3.4 3.4 Total consumption 2.8 3.9 2.8 0.8 1.7 1.2 0.5 2.0 1.7 2.3 Private consumption 3.1 4.2 2.8 0.9 1.7 1.2 1.1 1.8 1.5 2.1

107

Key Economic Indicators (Continued)

Actual Estimate Projected

Indicator 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Balance of Payments (US$ millions)

Exports (GNFS)b 13538 15981 16925 15801 18005 22948 26140 28560 31061 33391 Merchandise FOB 4445 6388 7078 7121 8205 10453 5369 5791 6332 6786

Imports (GNFS)b 21135 22755 21772 19535 19564 22938 26672 29085 31290 33769 Merchandise FOB 17008 17860 16441 14637 14820 17975 23620 25790 27781 30045 Resource balance -7597 -6774 -4847 -3734 -1559 10 -532 -525 -230 -379 Net current transfers 4869 4679 3742 4253 3610 3934 4850 5007 5106 5408 Current account balance -1724 -1163 -33 614 3729 3417 3457 3769 4045 4025 Net private foreign direct investment 655 1614 482 413 671 217 750 1200 1750 2000

Long-term loans (net) -522 -788 -559 -105 -1596 -1447 2065 -612 -2625 -3464 Official -488 -628 -710 -751 -770 -1067 -1113 -1127 -1092 -1389 Private -34 -160 151 646 -826 -380 3178 515 -1533 -2075 Other capital (net, incl. errors & ommissions) -526 -2689 -761 -1379 -472 -2582 -3000 -3300 -3300 -3300 Change in reservesd 2117 3027 871 456 -546 158 -1586 -921 -339 -84 Memorandum items Resource balance (% of GDP) -8.4 -6.6 -5.0 -4.3 -1.9 0.0 -0.6 -0.6 -0.2 -0.4 Real annual growth rates ( YR92 prices) Merchandise exports (FOB) -9.1 31.2 6.8 6.3 4.8 7.7 -0.7 5.7 7.2 5.0 Primary -26.1 24.6 1.5 -3.6 26.5 4.5 -7.5 3.6 5.9 4.1 Manufactures 25.9 39.2 12.6 16.0 -12.7 11.4 7.2 8.1 8.8 6.0 Merchandise imports (CIF) 4.5 5.5 -6.4 -5.8 -8.4 2.6 10.4 6.2 4.8 5.2 Merchandise import price index 94.8 94.4 92.9 87.8 97.0 114.7 120.8 124.1 127.6 131.1 Merchandise terms of trade index 97.9 107.7 113.5 113.7 113.0 113.1 55.6 55.2 54.8 54.4

Real exchange rate (US$/LCU)f 128.6 125.6 111.9 100.9 87.6 78.1 71.2 69.9 69.6 69.3 Consumer price index (% change) 2.8 2.4 2.4 3.2 4.9 10.0 9.3 7.1 5.5 5.5 GDP deflator (% change) 0.9 7.4 -0.4 2.3 6.9 9.2 3.6 6.5 5.0 5.0

a. GDP at market prices b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

108

Annex: B7 Key Exposure Indicators

Actual Estimate Projected (using base case)

Indicator 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

29187 29333 30001 31383 30077 28785 27620 26260 24758 23167 Total debt outstanding and disbursed (TDO) (US$m)a

Net disbursements (US$m)a -514 804 -750 -1404 -1363 -1056 -1165 -1311 -1377 -1373 Total debt service (TDS) a 1833 1949 2073 2763 2699 2272 2185 2275 2306 2278 Debt and debt service indicators (%)

TDO/XGSb 151.7 136.1 138.0 159.4 139.2 108.9 86.5 74.3 65.0 57.1 TDO/GDP .. 28.7 30.7 35.7 36.3 37.4 32.1 28.1 24.8 21.7 TDS/XGS 9.5 9.0 9.5 14.0 12.5 8.6 6.8 6.4 6.1 5.6 Concessional/TDO 77.5 72.3 67.0 67.5 75.0 71.6 67.6 67.6 68.2 67.8 IBRD exposure indicators IBRD DS / Public DS (%) 9.6 8.1 6.4 5.5 4.5 4.9 5.2 3.4 4.0 3.2 Pref. creditor / Public DS (%)c 29.4 28.1 25.9 25.8 28.7 20.6 18.7 13.2 16.4 12.8 IBRD DS / XGS (%) 0.8 0.6 0.5 0.5 0.5 0.4 0.3 0.3 0.2 0.2 IBRD TDO (US$m)d 761 639 550 542 539 539 472 524 591 632 Share of IBRD portfolio (%) 0.6 0.5 0.5 0.5 0.5 0.4 0.5 0.6 0.7 0.8 IDA TDO (US$m)d 1273 1266 1242 1316 1386 1398 1405 1415 1410 1388

a. Includes public and publicly guaranteed debt, private non guaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International

Settlements. d. Includes present value of guarantees.

109

Annex: B8 Operations Portfolio (IBRD/IDA/Grants) Operations Portfolio (IBRD/IDA and Grants)

As of 04/14/2005 Closed Projects: 97

Last PSR Difference Between

Expected and Actual

Active Projects Supervision Rating Original Amount in US$ Millions Disbursements

a/

Project ID Project Name

Development

Objectives Implementation Progress FY IBRD IDA Grant Cancel. Undisb. Orig. Frm

Rev'd

P040858 SOHAG Rural Development S S 1999 25.0 14.1 11.3 2.8 P049166 East Delta Ag. Services S MU 1998 15.0 9.9 8.4 0.3 P005173 Irrigation Improvement S S 1995 26.7 53.3 0.0008 9.9 16.2 3.8 P050484 Secondary Education Enhancement S S 1999 50.0 34.0 16.8 18.8 P082914 Airports Development S HS 2004 335.0 302.9 2.6 P005169 Education Enhancement S S 1997 75.0 21.2 23.2 23.8

P082952 Early Childhood Education Enhancement # # 2005 20.0 20.0

P045175 Health Sector S S 1998 90.0 67.5 58.0 P056236 Higher Education Enhancement S S 2002 50.0 42.8 26.7 P049702 Skills Development S U 2004 5.5 5.1 1.0 P052705 Social Fund III S S 1999 50.0 2.6 -1.4 -1.2 P045499 National Drainage II S S 2000 50.0 29.8 18.4 P041410 Pumping Stations Rehab III S S 1999 120.0 73.7 73.7 Overall Result 607.2 358.3 0.0008 633.6 IBRD/IDA * Total Disbursed (Active) 341.58 of which has been repaid 14.05 Total Disbursed (Closed) 4,268.06 of which has been repaid 3,268.63

Total Disbursed (Active +

Closed) 4,609.64 of which has been repaid 3,282.68 Total Undisbursed (Active) 633.59 Total Undisbursed (Closed) 5.38

Total Undisbursed (Active +

Closed) 638.97

* Disbursement data are updated at the end of the first week of the month.

110

Annex: B8 (continued) Statement of IFC’s Held and Disbursed Portfolio As of 02/28/2005

Amounts in US Dollar Millions Approval Fiscal Year

Institution Short Name

Loan Cmtd-

IFC

Equity Cmtd-

IFC

QL+QE Cmtd-IFC

All Cmtd-Part

Loan Out-IFC

Equity Out-IFC

QL+QE Out-IFC

All Out-Part

1994/96 ANSDK 1.3 0.0 0.0 0.0 0.6 0.0 0.0 0.0 2004 Alexandria Fiber 8.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2001 Amreya 5.7 0.0 0.0 0.0 5.7 0.0 0.0 0.0

1999/04 CIL 0.0 0.3 0.0 0.0 0.0 0.3 0.0 0.0 1992/97/98/00 Carbon Black-EGT 5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

2002 Ceramica Al-Amir 4.1 0.0 0.0 0.0 4.1 0.0 0.0 0.0 1994 Club Ras Soma 1.3 0.0 0.0 0.0 1.3 0.0 0.0 0.0 1993 Cmrcl Intl Bank 0.0 10.0 0.0 0.0 0.0 10.0 0.0 0.0 2001 EFG Hermes 4.7 0.0 0.0 0.0 4.7 0.0 0.0 0.0 2004 EHF 0.0 1.7 0.0 0.0 0.0 0.4 0.0 0.0 2001 IT Worx 0.0 2.5 0.0 0.0 0.0 2.5 0.0 0.0 2004 Lecico Egypt 15.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

1986/88/92 Meleiha Oil 0.0 13.0 0.0 0.0 0.0 2.7 0.0 0.0 2004 Merlon Egypt 15.0 0.0 5.0 0.0 15.0 0.0 5.0 0.0 2002 Metro 15.0 0.0 0.0 0.0 15.0 0.0 0.0 0.0 1992 Misr Compressor 9.7 0.0 0.0 0.0 9.7 0.0 0.0 0.0 2002 OCIC 22.5 0.0 0.0 19.1 22.5 0.0 0.0 19.1

1996/01 Orix Leasing EGT 1.6 0.0 0.0 0.0 1.6 0.0 0.0 0.0 2001 Port Said 43.2 0.0 0.0 143.3 43.2 0.0 0.0 143.3 2002 SEKEM 5.0 0.0 0.0 0.0 5.0 0.0 0.0 0.0 2004 SPDC 20.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2001 SUEZ GULF 42.6 0.0 0.0 140.4 42.6 0.0 0.0 140.4

1997/01 UNI 2.6 0.0 0.0 0.0 2.6 0.0 0.0 0.0

Total Portfolio: 222.3 27.6 5.0 302.8 173.5 15.9 5.0 302.8

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Annex C: Egypt Country Financing Parameters

Item Parameter Explanation/Remarks Cost Sharing. Limit on the proportion of individual project costs that the Bank may finance.

Up to 100% Cost sharing arrangements for individual projects would be determined based on project context. The Bank’s financing share is expected to be higher in social sector and lower in infrastructure investments. The Bank will continue to seek government counterpart funding in most projects and expects to co-finance many projects with other development partners.

Recurrent Cost Financing. Any limits that would apply to the overall amount of recurrent expenditures that the Bank may finance.

No country level limit.

Recurrent cost financing would be applied on a case-by-case basis grounded on due diligence project reviews and approvals. The Bank will take into account sustainability issues at project and sector levels. Recurrent cost financing is broadly expected to stay at current modest levels.

Local Cost Financing. Are the requirements for Bank financing of local expenditures met, namely: (i) financing requirements for the country’s development program would exceed the public sector’s own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing of foreign expenditures alone would not enable the Bank to assist in the financing of individual projects.

Yes The requirements for local cost financing are met. The Bank may finance local costs as needed to achieve individual project objectives.

Taxes and Duties. Are there any taxes and duties that the Bank would not finance?

None No taxes or duties have been identified as excessive, unreasonable or discriminatory. At the project level, the Bank would consider whether taxes and duties constitute an excessively high share of project costs.