document of the world bank...kevin carey (practice manager, gmtmn), yolanda tayler (practice...

Document of The World Bank

FOR OFFICIAL USE ONLY Report No: PGD64

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT FOR A

PROPOSED DEVELOPMENT POLICY LOAN

IN THE AMOUNT OF US$1,000 MILLION

TO THE

ARAB REPUBLIC OF EGYPT

FOR THE

PRIVATE SECTOR DEVELOPMENT FOR INCLUSIVE GROWTH

DEVELOPMENT POLICY FINANCING

November 13, 2018

Finance, Competitiveness, and Innovation Global Practice Social, Urban, Rural, and Resilience Global Practice Middle East and North Africa Region

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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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The World Bank Private Sector Development for Inclusive Growth DPF (P168630)

ARAB REPUBLIC OF EGYPT

GOVERNMENT FISCAL YEAR July 1 – June 30

CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 5, 2018)

Currency Unit = Egyptian Pound (EGP) US$1.00 = EGP 17.7

ABBREVIATIONS AND ACRONYMS

AML Anti-Money Laundering ASA Accountability State Authority CAPMAS Central Agency of Public Mobilization and Statistics CBE Central Bank of Egypt CDEIEC Central Department for Environmental Inspection and Environmental Compliance CPF Country Partnership Framework DPF Development Policy Financing DSA Debt Sustainability Analysis ECA Egyptian Competition Authority EEAA Egyptian Environmental Affairs Agency EFF Extended Fund Facility EIA Environmental Impact Assessment ESIA Environmental and Social Impact Assessment FDI Foreign Direct Investment FRA Financial Regulatory Authority FSAP Financial Sector Assessment Program GAFI General Authority for Investment and Free Zones GDP Gross Domestic Product GoE Government of Egypt GRM Grievance Redress Mechanism GRS Grievance Redress Service IFC International Finance Corporation IMF International Monetary Fund ISC Investor Service Center IT Information Technology LAU Local Administrative Unit LG Local Government MFI Microfinance Institution MIIC Ministry of Investment and International Cooperation MOF Ministry of Finance MOPMAR Ministry of Planning, Monitoring and Administrative Reform MSMEs Micro, Small, and Medium Enterprises MTDS Medium Term Debt Strategy MTDS Medium Term Debt Management Strategy NAFA Net Acquisition of Financial Assets

NBFI Non-bank Financial Institution NGO Nongovernmental organization PforR Program-for-Results PER Public Expenditure Review PFM Public Financial Management PMAR Planning, Monitoring and Administrative Reform PSIA Poverty and Social Impact Analysis SCD Systematic Country Diagnostic SOE State-Owned Enterprise SMEs Small and Medium Enterprises STRC Second Tranche Release Conditions TA Technical Assistance VAT Value Added Tax

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Regional Vice President: Ferid Belhaj

Country Director: Samia Msadek (Acting)

Senior Practice Director (s): Alfonso Garcia Mora (Acting), Ede Jorge Ijjasz-Vasquez

Practice Manager (s): Jean Pesme, Ellen Hamilton (Acting)

Task Team Leader (s): Ashish Khanna, Mohamed El-Shiaty, Mohamed Nada


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ARAB REPUBLIC OF EGYPT PRIVATE SECTOR DEVELOPMENT FOR INCLUSIVE GROWTH

DEVELOPMENT POLICY FINANCING

TABLE OF CONTENTS

SUMMARY OF PROPOSED FINANCING AND PROGRAM ........................................................................ 3

1. INTRODUCTION AND COUNTRY CONTEXT .................................................................................... 6

2. MACROECONOMIC POLICY FRAMEWORK ................................................................................... 10

2.1. RECENT ECONOMIC DEVELOPMENTS .......................................................................................... 10

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ......................................................... 13

2.3. IMF RELATIONS ............................................................................................................................ 17

3. GOVERNMENT PROGRAM .......................................................................................................... 18

4. PROPOSED OPERATION .............................................................................................................. 21

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 21

4.2. PRIOR ACTIONS, RESULTS, AND ANALYTICAL UNDERPINNINGS ................................................. 23

4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 51

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 51

5. OTHER DESIGN AND APPRAISAL ISSUES...................................................................................... 52

5.1. POVERTY AND SOCIAL IMPACT ......................................................................................... 52

5.2. ENVIRONMENTAL ASPECTS ......................................................................................................... 56

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 58

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 61

6. SUMMARY OF RISKS AND MITIGATION ...................................................................................... 61

ANNEX 1: POLICY AND RESULTS MATRIX ............................................................................................ 65

ANNEX 2: FUND RELATIONS ANNEX .................................................................................................... 68

ANNEX 3: LETTER OF DEVELOPMENT POLICY ...................................................................................... 70

ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS ............................................................. 76

ANNEX 5: DEBT SUSTAINABILITY ANALYSIS ........................................................................................ 81

ANNEX 6: DETAILED POVERTY AND SOCIAL ANALYSIS ........................................................................ 86

This loan was prepared by an IBRD and IFC team led by Ashish Khanna (Program Leader, MNC03), Mohamed Hisham El-Shiaty (Sr. Private Sector Specialist, GFCM1), and Mohamed Nada (Sr. Urban Specialist, GSURR). The operation was prepared under the guidance of Najy Benhassine (Director, GFCDR), Sameh Naguib Wahba (Director, GSURR), Jean Pesme (Practice Manager, GFCMW), and Ayat Soliman (former Practice Manager, GSURR; now Director, GWADR). The team is grateful for the support received from Paloma Anos Casero (Director, GMTD1), Kevin Carey (Practice Manager, GMTMN), Yolanda Tayler (Practice Manager, GGOPM), Renaud Seligmann (Practice Manager, GGOMN), and Olivier Le Ber (Practice Manager, GTR05).

The team members included Maha Hussein (Sr. Private Sector Specialist, GFCM1), Ellen Hamilton (Lead Urban Specialist, GSURR), Wael Zakout (Sr. Technical Advisor, GSURR), Roland White (Lead Urban Specialist, GSURR), Tracey Marie Lane (Program Leader, MNC03), Peter Ellis (Lead Urban Economist, GSURR), Somik Lall (Lead Urban Economist, GSURR), Aminur Rahman (Lead Economist, GFCMW), Laurent Gonnet (Lead Financial Sector Specialist, GFCAW), Maya Abi Karam (Senior Counsel), Ibrahim Chowdhury (Sr. Economist, GMTMN), Andreja Marusic (Sr. Private Sector Specialist, GMTBR), Mohamed Yahia (Sr. Financial Management Specialist, GGOMN), Hosam Abdel Nasser Hassan (Sr. Financial Management Specialist, GGOMN), Nistha Sinha (Sr. Economist, GPV05), Amal Faltas (Sr. Social Development Specialist, GSURR), Ehab Mohamed Shaalan (Sr. Environmental Specialist, GEN05), Lulwa Ali (Sr. Environmental Specialist, OPSES), Ola Nour (Sr. Financial Sector Specialist, GFCM1), Oya Ardic Alper (Sr. Financial Sector Specialist, GFCFI), Ahmed Faragalla, (Sr. Financial Sector Specialist, GFCFI), Mohammed Ali Khaled (Sr. Operations Officer, CF3A3), Sherif Hamdy (Sr. Operations Officer, MNC03), Concepcion Aisa Otin (Sr. Financial Officer, FABBK), Diep Nguyen-Van Houtte (Lead Transport Specialist, GTR05), Said Dahdah (Sr. Transport Specialist, GTR05), Sohaib Athar (Young Professional, GSURR), Eric Ranjeva (Finance Officer, WFACS), Emily Owen (Urban Specialist, GSURR), Sara Alnashar (Economist, GMFDR), Ghada Ismail (Financial Sector Specialist, GFCMW), Laila AbdelKader Ahmed (Financial Sector Specialist, GFCMW), Tania Ghossein (Sr. Private Sector Specialist, GMTBR), Murat Sultanov (Sr. Financial Sector Specialist, GFCFI), Gabriel Lara Ibarra (Economist, GPV05), Steve Wan Yan Lun (Operations Officer, GFCMW), Salma Rasem El Gammal (Consultant, GSURR), Duru Oksuz (Consultant, GSURR), and Cathie Wissa (Consultant, GSURR). Hanzada Aboudoh (Program Assistant, MNCEG), Enas Shaaban (Program Assistant, MNCEG), and Georgette Ibrahim (IT Officer, ITSCR) provided outstanding administrative support.

The team is grateful for the support and guidance from Samia Msadek (Acting Country Director, MNC03) and for the close and productive cooperation with the IMF team. The team is also appreciative of the excellent collaboration with the Government of Egypt throughout various stages of this operation, including with the Ministry of Investment and International Cooperation which led the project, along with support from the Ministry of Finance; Ministry of Trade and Industry; Financial Regulatory Authority; General Authority for Investment and Free Zones; Ministry of Electricity and Renewable Energy; Ministry of Justice; Ministry of Housing, Utilities, and Urban Communities; Ministry of Local Development; and Ministry of Planning, Monitoring and Administrative Reform.


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SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION

Project ID Programmatic

P168630 No

Proposed Development Objective(s)

Enabling financial inclusion, private sector development and strengthening fiscal management for inclusive growth in Egypt.

Organizations

Borrower: ARAB REPUBLIC OF EGYPT

Implementing Agency: MINISTRY OF INVESTMENT AND INTERNATIONAL COOPERATION, GENERAL AUTHORITY FOR INVESTMENT & FREE ZONES

PROJECT FINANCING DATA (US$, Millions) SUMMARY

Total Financing 1,000.00 DETAILS

International Bank for Reconstruction and Development (IBRD) 1,000.00

INSTITUTIONAL DATA

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Overall Risk Rating

High .


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Summary Table and Results of Proposed Operation and Program

Borrower Arab Republic of Egypt

Implementing Agency Ministry of Investment and International Cooperation; General Authority for Investment and Free Zones

Operation type Two-tranche operation (with each tranche being US$500 million less applicable front-end fee)

Program Development Objective

Enabling financial inclusion, private sector development and strengthening fiscal management for inclusive growth in Egypt.

Pillars of Operation and Results Indicators1

Pillar 1: Financial Inclusion and Access to Finance

Number of microfinance beneficiaries using mobile payment or e-payment (baseline: 0; target: 600,000 in June 2020, of which 40 percent are female and 20 percent are outside Greater Cairo and Alexandria) Number of published collateral registrations used by MSME, corporate, individual debtors and syndicated loans (baseline: 0; target: 20,000 publications by June 2020). Number of new coded investors (baseline: 9,300; target: 12,000 by June 2020)

Pillar 2: Private Sector Development Value of the extent of shareholder governance index (baseline: 6.3 out of 10 in Doing Business Report 2018; target: 7 out of 10 in Doing Business Report 2020) Number of days needed to start a business (baseline: 11 days in Doing Business Report 2019; target: 3 days by June 2020) Average number of firm registrations per month at the new Investor Service Centers (baseline: 0; target: 20 by June 2020) Non-government financing as percentage of total financing under Fekretak Sherketak/Egypt Ventures initiative (baseline: 0%; target: 50% by June 2020) Percentage increase in the number of SMEs participating in public tenders and/or being awarded contracts (baseline: No increase, target: 20% increase by June 2020) Percentage of property registration offices in the “new urban communities” implementing more transparent procedures for deed registration (baseline: 0; target: 10% by June 2020) Increase in number of ride-sharing driver licenses issued (baseline: 0; target: target 100,000 by June 2020)

Pillar 3: Strengthened Fiscal Management

Number of companies filing annual income tax returns electronically (baseline: 0; target: 30,000 companies by June 2020) Energy subsidies as a percentage of GDP reduced from 3.8% in FY17/18 to 2.5% by June 2020 An updated expanded medium-term debt management strategy will be

1 End target date of all results indicators is end-June 2020.


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published (baseline: No; target: Yes) Number of governorates and districts preparing their FY2020/21 capital investment plans in accordance with the formula-based system (baseline: No formula-based system; target: All 27 governorates and 188 districts by June 2020).

Overall Risk Rating High .


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IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN TO THE ARAB REPUBLIC OF EGYPT

1. INTRODUCTION AND COUNTRY CONTEXT

1. Egypt’s bold and transformative reform program is showing early signs of success. The Government of Egypt (GoE) has implemented major reforms over the past three years to ensure macroeconomic stability, achieve energy security and enhance competitiveness. Real GDP grew at 5.3 percent in FY18, compared to 4.2 percent in FY17, and is expected to be around 6 percent in FY19-FY20. The introduction of a new Value-Added Tax (VAT) and the gradual phasing-out of energy subsidies are helping fiscal consolidation, while energy sector reforms have led to a reduced reliance on gas imports, eliminating power deficits in the country and providing US$14 billion of savings from energy subsidies used for fiscal consolidation and targeted social protection. Accompanying macroeconomic reforms, the GoE has made significant strides to improve the business environment. This has been achieved through a series of reforms that include a modern and comprehensive investment law and a new industrial licensing law. Due to licensing law reform in 2017 and Industrial Development Authority law in 2018, the number of operating licenses and permits have increased nearly 20-fold from 2017 to 2018, while the number of building licenses have increased almost 8-fold during the same period. In addition, private investments have reached US$17.9 billion for fiscal year (FY) 2017/2018 compared to US$12.0 billion for FY2016/2017. Furthermore, there has been a significant increase in the number of newly established companies from 15,371 companies in FY2016/2017 to 19,836 companies in FY2017/2018. Overall, these far reaching economic reforms undertaken with World Bank Group (WBG) support have stabilized the economy providing the underpinnings for a second generation of reforms and opportunities to take better advantage of advances in the digital economy.

2. While these early gains are impressive, further efforts are needed to accelerate economic inclusion. Some 60 percent of Egypt’s population is either poor or vulnerable, and inequality is on the rise. The national poverty rate is close to 30 percent (2015), and there are striking spatial variations in poverty. Across the 27 governorates of Egypt, poverty rates range from a low of about 7 percent in Port Said and about 18 percent in Cairo to a high of 66 percent in Sohag and Assiout. In fact, Upper Egypt governorates (which includes Sohag and Assiout) have some of the highest incidence of poverty as well as the highest absolute number of poor. Pockets of poverty exist even in governorates with low poverty incidence such as the Cairo governorate, where some districts have poverty rates as high as 44 percent.

3. Private sector-led job creation is the pathway for economic inclusion and a new social contract. Egypt needs to create at least 700,000 jobs every year. Economic exclusion has led to high youth and female unemployment with many without formal jobs. Youth and female unemployment in Egypt has been one of the highest amongst its peers (around 30 percent and 22 percent, respectively, compared to an overall unemployment rate of 10 percent). Between 1998 and 2018, informal private sector employment increased from 31 percent to 76 percent. Stagnation of the private sector is also evident from low level of firm entry density and firm turnover rates. Private sector investment as a share of GDP constituted only 11.4 percent over the period 2000-2016, which is approximately 7 percent lower than in other emerging economies. While Egypt’s private sector share of jobs is 78 percent, 76 percent are informal, low quality, low productivity, and low pay jobs.


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4. Building on recent bold reforms, Egypt has embarked on an ambitious set of second generation reforms to develop a competitive and inclusive private sector. Egypt’s ranking in the latest Global Competitiveness Index (93/137) reflects improvements in the macroeconomic and investment climate and highlights potential areas for improvement. The Government is committed to promoting a private sector-led development model and providing a level playing field. To realize the benefits of Egypt’s already enacted legislative reforms, it will be important to ensure their proper implementation to create a level playing field for the private sector to compete in and thrive.

5. Access to finance is one of the top three investment climate constraints in Egypt. The level of financial intermediation and financial inclusion in Egypt is low. Only 7 percent of firms have access to finance compared to an average of 28 percent in the MENA region, according to the 2016 World Bank enterprise survey. According to the latest FINDEX data, only 14 percent of the population over 15 years old has an account at a financial institution and, in the absence of modern payment systems, Egypt remains a cash-based economy with cash payments constituting 98 percent of payments. Access to finance, particularly for MSMEs and start-ups, needs to be enhanced by developing various channels of funding such as capital markets, venture capital, private equity, and microfinance.

6. A major imperative to effective private sector-led job creation in Egypt is continued growth-friendly fiscal consolidation that reduces crowding out of private sector financing through lower Government borrowing and enhanced fiscal management. Predictability in fiscal management is being complemented in three areas: recognition of a key milestone in the path to energy cost recovery, an impetus to electronic tax filing, and formula-based capital allocations to local governments. In each case, stakeholders are given more assurance about the role of fiscal management in their decisions: a signal that the Government is committed to a debt management strategy, a move to arms-length tax filing, and reduced discretion in local capital spending allocations.

7. More predictable fiscal management facilitates private sector decision-making, while on a parallel track, the ongoing fiscal consolidation underpins market confidence and perceptions of fiscal sustainability. Following an ambitious fiscal consolidation program which has already resulted in an impressive improvement in the primary balance by 3.6 percent of GDP over two years, Egypt needs to lock in these fiscal gains through its medium-term fiscal strategy supported by the IMF Extended Fund Facility (EFF) and technical assistance from the World Bank. The challenge of providing 700,000 jobs annually through the private sector would, however, need a sustained higher growth rate in future while reducing public expenditure (primarily through continued rationalization of energy subsidies), enhancing revenue through reform and use of information technology for tax administration and enhanced transparency and efficiency in government services. Providing public participatory planning through allocation of capital expenditure directly to Governorates would be an effective tool for efficiency and inclusion at Governorate level.

8. The GoE has requested the international community to support its vision of continued fiscal sustainability, improved access to finance and enhanced business environment as essential for boosting economic productivity and private sector development. The GoE has made commendable efforts to develop a comprehensive set of reforms and requires a programmatic approach to support its implementation. In parallel with fiscal consolidation, growth has increased, but the public has had to cope with significant price adjustments, and public sector pay – the source of most formal sector earnings – has been tightened in real terms. The government’s ultimate risk mitigation strategy is private sector-led job creation, and it needs time and financing buffers for the enabling interventions of this operation to bear


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fruit. The proposed operation is part of the overall World Bank Group support to these efforts, both from a financing angle and on the substance of the reform agenda. The government reform program also fits well with WBG priorities of creating jobs for the youth through the Maximizing Finance for Development (MFD) approach, human capital development, and deployment of new technologies.

9. From a financing perspective, the proposed DPF is an important element of the Government’s medium-term financial plan to further enhance macroeconomic stability. The proposed operation is designed to support the authorities in improving macroeconomic prospects, spur private sector led-growth and improve debt management in terms of pricing and maturity of debt. It will provide a strong and timely signal to international markets to support the structural reforms that the Government is undertaking.

10. The proposed US$1 billion DPF operation is part of a programmatic multisectoral engagement to support a second generation of reforms focusing on changing the social contract in Egypt. It aims to support inclusive economic growth through private sector-led job creation, investments in human capital, improved governance, transparency and service delivery while taking advantage of advances in the digital economy. As part of this comprehensive agenda, this DPF seeks to address upstream reforms on legal, regulatory and institutional barriers for unlocking private sector investments across all three pillars of financial inclusion, enabling the private sector and strengthened fiscal management. These second-generation reforms have strong ownership of Egyptians and the World Bank has been supporting them through:

(a) Inclusive growth through enabling private sector-led growth and job creation encompasses a programmatic approach including multiple operations: (i) this DPF operation; (ii) sustainable development of lagging regions through projects and programs in Upper Egypt, the National Rural Sanitation and the planned Sinai engagement; and (iii) proposed operations on promoting entrepreneurship and expanding social housing for the poor.

(b) The human capital program encompasses projects on: (i) health sector that seeks to eliminate Hepatitis C and deliver improved health services; (ii) education with a target to train half a million teachers and provide IT enabled education to one million students; and (iii) planned additional financing on social protection that deepens targeted cash transfer programs, and launches skills-based initiatives, fostering social inclusion.

(c) Improved governance, transparency and service delivery are being addressed through: (i) a cross-sectoral program on leveraging private investments across energy, water, transport and agricultural sectors while addressing cross-sectoral issues on land and corporate governance of state-owned enterprises; and (ii) initiating a digital economy operation focusing on improving digital infrastructure and platforms, e-enablement of government services and improvement in performance improvement systems.

11. This DPF operation is hence a part of a second phase of an ambitious program that requires a multi-year government commitment as well as a multi-year World Bank engagement.

12. This US$1 billion DPF operation supports homegrown reforms pursuing financial inclusion, private sector development, and fiscal management. First, it focuses on financial inclusion and access to finance for the growth of the private sector, particularly unconnected small and medium enterprises (SMEs), thus leading to formal employment. Second, the program enables private sector investments by


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promoting entrepreneurship, easing doing business, enhancing transparency and automation, including procurement procedures, and supporting disruptive technologies for job creation. Third, the program supports fiscal management which is essential for unlocking private sector investments through enhanced transparency and buoyancy in tax revenue through online tax filing, continued reduction in energy subsidies in both fuel products and electricity, publicly disclosed medium-term debt strategy, while also initiating fiscal empowerment of local institutions through clearly defined roles of local government bodies in participatory planning while increasing fiscal transfers.

13. Measures supported by the proposed DPF and the broader program will contribute to leveling the playing field by facilitating the entry of new unconnected players, injecting new blood into the private sector landscape, and by promoting transparency and predictability. These reforms will help increase market contestability and complement the IMF program’s structural benchmark to strengthen the Egyptian Competition Authority. These actions supported by the proposed DPF will be complemented by other current and forthcoming WBG interventions contributing to this critical objective, including a digital economy engagement which will also support e-governance and accountability. Ongoing and planned technical assistance and analytical work will also support the authorities in their preparation of still needed policy reforms2 (market contestability, reform of the financial sector, productivity) and their effective implementation of recently adopted reforms.

14. The proposed DPF also contributes to the implementation of the WBG MENA Strategy, addresses the constraints identified in the Systematic Country Diagnostic and priorities of the Country Partnership Framework of Egypt. The operation focuses on addressing climate mitigation and adaptation related to reform of energy subsidies, microfinance, entrepreneurship, public procurement law, online tax filing, land registration, and building resilience through empowerment of local institutions. Climate change threatens inclusive growth in Egypt where low-income, marginalized populations lack the resources to adapt to climate-induced shocks such as floods, droughts, heatwaves, as Egypt is highly exposed to natural disaster risk.3 New disaster risk reduction mechanisms and low-emission development strategies will help shield vulnerable Egyptians from these disruptive impacts. Consequently, the DPF seeks to facilitate the country’s aspiration as articulated in Egypt’s Nationally Determined Contributions (NDCs; 2017) to the UNFCCC which are at the heart of the Paris Agreement and the achievement of these long-term goals, as well as in its UNFCCC Third National Communication (2016). The reforms supported by the proposed DPF are closely linked to: (i) WBG’s twin goals of ending extreme poverty and boosting shared prosperity in a sustainable manner; (ii) the strategic pillars of WBG MENA Strategy related to renewing the social contract and supporting inclusive growth; (iii) all three pillars of Egypt’s Systematic Country Diagnostic (SCD), namely, private sector-led job creation, spatial integration, and inclusion; and (iv) the private sector-led job creation pillar of Egypt’s Country Partnership Framework (CPF) for 2015-2019.

15. This DPF will comprise of two tranches of US$500 million each. The first tranche will be made upon completion and verification of prior actions, adequacy of the macroeconomic policy framework and satisfactory progress on the program.4 The second tranche will be made upon completion and verification

2 Including upcoming Country Private Sector Diagnostic, Financial Sector Assessment, Investment Climate Assessment 3 Egypt country profile, ThinkHazard, World Bank Group (2018). The country is considered highly vulnerable to coastal flooding, urban flooding, river flooding, extreme heat, wild fires, and water scarcity. 4 “Prior actions” refer to the actions completed by GoE before submission of the operation to the World Bank Board for approval, and constitute first tranche release conditions.

http://unfccc.int/files/national_reports/non-annex_i_natcom/application/zip/tnc_report.zip

http://thinkhazard.org/en/report/40765-egypt


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of specific policy-related second tranche-release conditions as well as the adequacy of the macroeconomic policy framework and satisfactory progress in carrying out the program. This enables stronger monitoring of the reform process and macroeconomic framework.

2. MACROECONOMIC POLICY FRAMEWORK

2.1. RECENT ECONOMIC DEVELOPMENTS

16. Egypt has started to reap the benefits of its ambitious economic reform program. Macroeconomic stability has been restored, economic growth has resumed, and inflation has fallen sharply (Table 1). Real GDP growth has continued to accelerate during FY2017/18 (July to June), rising to 5.3 percent from 4.2 percent in FY2016/17. The acceleration in economic growth was mainly driven on the expenditure side by consumption, with investments and net exports also contributing positively to growth. The sectors that contributed to strengthening economic activity are tourism, natural gas extraction, and construction. Inflation continued to ease, despite upward pressure from recent increases in subsidized energy costs and transport fares. Headline inflation slowed to an annual 16 percent in September 2018 from a record 33 percent in July 2017. Similarly, core inflation fell to single digits in July for the first time in more than two years.

17. The Government’s fiscal consolidation plan remains on track, as illustrated by the continued reduction in the budget deficit. The overall fiscal deficit narrowed by more than 1 percentage point to 9.8 percent of GDP in FY2017/18 from 10.9 percent of GDP the year before. The improvement in fiscal balances was driven by rising tax revenues (in percent of GDP), a further decrease in the wage bill ratio, and a small decline in the energy subsidy. The Government has increased spending on social protection and extended the coverage of key cash transfer programs. The authorities had envisaged a larger pace of fiscal consolidation, but the higher-than-target spending in FY2017/18 was mainly because of an overrun in the fuel subsidy on the back of higher-than-projected global oil prices and higher interest payments. That said, higher taxes paid by the Central Bank of Egypt (CBE) on interest income from government bonds and under execution of other spending helped offset some of the overrun in total expenditure. On the positive side, the primary balance recorded a small surplus of 0.1 percent of GDP after perpetual deficits for more than 15 years.

18. With higher global oil prices and tighter financial conditions, the CBE has kept policy rates on hold in recent months after rate cuts. After a period of rapid tightening, which saw the CBE increase the main policy rates by a cumulative 700 basis points between November 2016 and July 2017, the CBE cut rates by a cumulative 200 basis points in February and March 2018. With rising international oil prices and tightening global financial conditions, the CBE has left the overnight deposit rate, overnight lending rate, and main operation rate unchanged at 16.75 percent, 17.75 percent, and 17.25 percent, respectively, in recent months. The discount rate was also kept at 17.25 percent. The authorities are currently undertaking a comprehensive review of the CBE Law to strengthen the CBE’s institutional and operational autonomy. To further enhance transparency and communication, the CBE has regularly published a quarterly monetary policy report, starting in March 2017.


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19. The positive impact of macroeconomic and policy reforms have led to a marked improvement in the external financing position. The current account deficit narrowed by over 50 percent to 2.4 percent of GDP in FY2017/18 from 6.1 percent of GDP the year before. The improvement in the current account was driven by a strong recovery in the tourism sector, sharp rise in remittances, and increased Suez Canal receipts. The deficit in the trade balance narrowed by 1 percent of GDP helped by an increase in both oil and non-oil exports, while imports remained broadly unchanged.

Table 1. Key Economic Indicators

Last Updated September 2018

FY2012/13

FY2013/14

FY2014/15

FY2015/16

FY2016/17

FY2017/18

FY2018/19

FY2019/20

FY2020/21

Actual Actual Actual Actual Actual Pre-actual Forecast Forecast Forecast

Real Sector and Prices Real GDP growth rate (y/y) 2.2 2.9 4.4 4.3 4.2 5.3 5.6 5.8 6.0 Population (in millions) 84.7 86.7 89.0 91.1 93.3 96.1 n.a. n.a. n.a. Unemployment rate (last Q of FY) 13.3 13.3 12.7 12.5 12.0 11.3 9.4 9.2 8.9 CPI annual inflation rate, (period average) 6.9 10.1 10.9 10.2 23.3 21.6 14.5 12.5 10.7

Public Finance (in percentage of GDP) Total revenues 18.8 21.4 19.0 18.1 19.0 18.2 18.6 18.5 18.1 Tax revenues 13.5 12.2 12.5 13.0 13.3 14.2 14.6 14.6 14.5 Grants 0.3 4.5 1.0 0.1 0.5 0.0 0.0 0.0 0.0 Other nontax revenues 5.1 4.7 5.5 5.0 5.2 4.0 4.0 3.9 3.6 Total expenditures (excluding NAFA) 31.6 32.9 30.0 30.2 29.7 27.9 27.1 25.6 24.2

Current expenditures 29.5 30.5 27.5 27.6 26.6 25.5 24.5 22.7 21.3 Capital expenditures 2.1 2.5 2.5 2.6 3.1 2.4 2.6 2.8 2.9 NAFA 0.1 0.5 0.5 0.5 0.2 0.1 0.1 0.4 0.3 Overall budget balance, including grants −12.9 −12.0 −11.4 −12.5 −10.9 −9.8 −8.6 −7.5 −6.4

Overall balance, excluding grants −13.2 −16.5 −12.5 −12.7 −11.4 −9.8 −8.6 −7.5 −6.4 Primary balance −5.0 −3.9 −3.5 −3.5 −1.8 0.1 1.8 1.8 1.9 Gross budget sector debt (domestic + external) 88.2 89.4 93.1 102.8 108.0 98.7 93.4 90.4 89.3

External Sector (in percentage of GDP) Trade balance −10.7 −11.2 −11.7 −11.5 −15.8 −14.8 −13.5 −12.6 −12.1 Current account Balance −2.2 −0.9 −3.7 −6.0 −6.1 −2.4 −2.5 −2.5 −2.5 Net FDI inflows 1.3 1.4 1.9 2.1 3.4 3.1 3.3 3.3 3.5 Capital and financial account balance (does not include errors and omissions)

3.4 1.7 5.4 6.4 13.2 8.8 3.2 3.3 3.0

Net international reserves (end of period US$, billions) 14.9 16.7 20.1 17.5 31.3 44.3 46.4 48.0 48.8

in months of merchandise imports 3.1 3.3 3.9 3.7 6.6 8.4 8.4 8.3 7.8 External debt 15.0 15.1 14.6 16.8 41.1 37.2 34.0 31.5 28.0 External government debt 10.7 9.7 8.0 8.0 18.1 17.7 16.5 14.1 11.8 Monetary Sector (annual percentage change) Broad money 13.7 17.8 16.2 18.3 31.9 27.3 20.0 16.5 16.5 Credit to the private sector 8.4 7.3 12.8 15.7 32.3 17.1 15.5 13.0 13.0 Credit to the private sector (in real 1.5 −2.9 1.9 5.5 9.0 −4.5 1.0 0.5 2.3


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Last Updated September 2018

FY2012/13

FY2013/14

FY2014/15

FY2015/16

FY2016/17

FY2017/18

FY2018/19

FY2019/20

FY2020/21

Actual Actual Actual Actual Actual Pre-actual Forecast Forecast Forecast

terms) Source: World Bank and Ministry of Finance (MOF). Note: FY17/18 data reflect pre-actuals as shared by the Ministry of Finance with the World Bank team in September 2018. CPI = Consumer Price Index; FDI = Foreign Direct Investment; NAFA = Net Acquisition of Financial Assets.

20. The capital and financial account remains in a comfortable position, notwithstanding some portfolio outflows in the wake of tighter global financial conditions and a rise in emerging market volatility. In FY2017/18 the capital and financial account registered net inflows of US$22 billion, compared to US$31 billion the year before. Lower borrowing and smaller net portfolio inflows resulted in a lesser surplus in the financial and capital account. In light of the emerging market sell-off, portfolio flows recorded net outflows of US$2.9 billion in the final quarter of FY2017/18 (March to June). Higher frequency data show that portfolio outflows continued in early FY2018/19 with non-resident holdings of Egyptian treasury bills declining by US$2.5 billion in July and August. The net FDI was US$7.7 billion last year and the bulk of this continues to be directed to the oil and gas sector (US$4.5 billion), meaning that the development of other growth and employment generating private sector industries has lagged.

Table 2. Key Fiscal Aggregates (Percentage of GDP)

FY2012/

13 FY2013/

14 FY2014/

15 FY2015/

16 FY2016/

17 FY2017/

18 FY2018/

19 FY2019/

20 FY2020/

21 Last updated September 2018 Actual Actual Actual Actual Actual Pre-

Actual Forecast Forecast Forecast

Total Revenues 18.8 21.4 19.0 18.1 19.0 18.2 18.6 18.5 18.1 Tax revenues 13.5 12.2 12.5 13.0 13.3 14.2 14.6 14.6 14.5 Grants 0.3 4.5 1.0 0.1 0.5 0.0 0.0 0.0 0.0 Nontax revenues 5.1 4.7 5.5 5.0 5.2 4.0 4.0 3.9 3.6

Total Expenditures 31.6 32.9 30.0 30.2 29.7 27.9 27.1 25.6 24.2 Wages and salaries 7.7 8.4 8.1 7.9 6.5 5.4 5.2 4.9 4.9 Purchase of goods and services 1.4 1.3 1.3 1.3 1.2 1.1 1.0 1.0 1.1

Interest payments 7.9 8.1 7.9 9.0 9.1 9.9 10.4 9.3 8.3 Subsidies, grants, and social benefits 10.6 10.7 8.1 7.4 8.0 7.5 6.5 6.0 5.6

Energy subsidies 6.9 6.5 4.0 3.0 4.2 3.8 2.5 1.1 0.4 Other expenditures 1.9 1.9 2.1 2.0 1.8 1.6 1.4 1.5 1.4 Investments 2.1 2.5 2.5 2.6 3.1 2.4 2.6 2.8 2.9

Cash Deficit 12.8 11.5 11.0 12.0 10.7 9.7 8.5 7.1 6.1 NAFA 0.1 0.5 0.5 0.5 0.2 0.1 0.1 0.4 0.3 Overall deficit, including grants 12.9 12.0 11.4 12.5 10.9 9.8 8.6 7.5 6.4

Overall deficit, excluding grants 13.2 16.5 12.5 12.7 11.4 9.8 8.6 7.5 6.4

Primary balance −5.0 −3.9 −3.5 −3.5 −1.8 0.1 1.8 1.8 1.9 Sources of financing of projected overall budget deficits (percentage of GDP) External borrowing 3.8 2.0 0.9 0.8 Domestic sources of financing 6.0 6.6 6.6 5.6

Note: FY17/18 data reflect pre-actuals as shared by the Ministry of Finance with the World Bank team in September 2018.


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Source: World Bank and MOF.

21. While international reserves remain at comfortable levels and the exchange rate remains broadly stable, erosion of competitiveness is a concern. Following the 2016 flotation, the Egyptian pound fell by 50 percent against the U.S. dollar, reflecting some overshooting, but it has since remained broadly stable notwithstanding portfolio outflows. Net international reserves increased to US$44.4 billion at end-August 2018 (8.5 months of merchandise import coverage), up from US$19 billion on the eve of the exchange rate flotation in October 2016. In addition, the CBE holds other foreign currency assets in the amount of US$12 billion, in part reflecting the repatriation mechanism (a dedicated holding account for foreign exchange based on exit guarantees for investors). With rebuilt international reserves, the authorities repaid arrears to international oil companies, which were reduced to US$1.9 billion in June 2018 from US$3.5 billion at end-2016. Nevertheless, with inflation repressed before 2016 by currency market distortions and then materializing due to the flotation and energy price reforms, the real exchange rate has appreciated significantly. While the level of reserves provides a strong signal of credibility, exchange rate flexibility and a return of inflation to single digits will be needed to enable an export-led response to reforms.

22. Although the banking sector remains profitable and well capitalized, the sector’s net foreign asset position turned negative in July. The average capital adequacy ratio stood at 15.7 percent at end-March 2018, well above the Basel- and CBE-mandated floor. The share of nonperforming loans in total loans declined from 6 percent in 2016 to 4.5 percent in March 2018, with loan-loss provisioning coverage of 98 percent. The banking system remains liquid as evidenced by an overall loan-to-deposit ratio at about 45 percent. Following the flotation, the banks’ net foreign asset position improved during 2017, but with heightened global market volatility the net foreign asset position has been declining since May 2018 and has moved into a negative position in July. As the main financial intermediary in the country, the banking sector is exposed to sovereign risk, owing to heavy borrowing by the Government in recent years to finance its fiscal deficits. The Government accounts for 57 percent of the total domestic credit in FY2017/18, compared with about one-third in 2010. However, the growth in credit extended to the Government has fallen to 4 percent (year-on-year), compared to above 20 percent in FY2016/17.

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

23. Egypt’s near-term growth outlook remains favorable. With improving macroeconomic conditions, the Government is increasingly shifting the focus to the structural reform agenda. Recent legislations, such as the investment and insolvency laws and a new procurement law—the latter being part of the program supported by this operation—would support private investment, including FDI in non-energy sectors, and sustain GDP growth at higher rates over the medium term. The projected growth path is gradual and assumes real GDP growth to increase to 5.6 percent in FY2018/19, up from an estimated 5.3 percent in FY2017/18, driven by private consumption, a pick-up in private investment, and a further recovery in net exports. Real GDP growth is projected to rebound to 5.8 percent in FY2018/19 and to increase further to 6.0 percent thereafter, as economic reforms progress and key sectors continue to recover, especially manufacturing and oil and gas extractives.

24. Inflation is projected to decline in FY2018/19 but remains high by historical standards at an average of 14.5 percent, contributing to real appreciation given the stability of the nominal exchange rate. This is partly because of further increases in domestic energy prices (which remain low in level


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terms), starting in July, and increased global oil prices, which will push up the cost of imported fuel. The CBE has set a target for overall inflation to average 13 percent (plus or minus 3 percentage points) in the fourth quarter of 2018 and remains committed to reduce inflation to single digits over the medium term.

25. With the continuation of the Government’s fiscal consolidation strategy, the fiscal deficit is set to narrow further. The overall budget deficit is projected to decline to 8.6 percent of GDP in FY2018/19, driven by further revenue augmentation and continued rationalization of expenditures. The implementation of fiscal reforms offers the prospect of a return to sustained primary surpluses, projected at 1.8 percent of GDP this fiscal year. Total revenues are projected to increase by 0.4 percentage points to 18.6 percent of GDP in FY2018/19 because of larger tax revenues which will benefit from increased VAT collection, the full-year impact of higher excises on tobacco products, and higher stamp duties. Total expenditure is expected to decrease by 0.8 percentage point to reach 27.1 percent of GDP in FY2018/19, primarily driven by energy price adjustments and wage bill restraint, notwithstanding large debt servicing costs. The FY2018/19 budget also targets increased spending on social protection programs. Following increases in fuel prices in 2016 and 2017, the Government raised fuel prices by an average 44 percent in July 2018, which raised the pre-tax price-to-cost ratio to about 73 percent for key fuel products. Additional increases are envisaged to achieve full cost recovery by end FY2019, although this could prove challenging given the developments in international oil markets. In June 2018, the Prime Minister approved the principle of an automatic fuel price indexation with implementation mechanism planned to be adopted by June 2019.

26. Egypt’s fiscal financing needs are projected to be met in FY2018/19 without recourse to significant central bank financing. The projected fiscal deficit is expected to be financed through primarily domestic and some external borrowing. On the domestic side, elevated borrowing costs led the Ministry of Finance to cancel several domestic debt auctions. Despite a challenging interest rate environment, the government will to some extent tolerate higher borrowing costs to avoid the debt profile from moving toward the shorter end, which could lead to rollover risks. The government can also opt for private debt placements. Risks of monetary financing of the deficit are limited by the existence of an arrangement that limits the CBE to extend financing to the government. According to this arrangement, the Ministry of Finance caps the overdraft account to 10 percent of the previous three years’ average revenues as per the CBE law. This in turn minimizes the risk of Central Bank liquidity injection through direct credit to government. On the external side, disbursements under the International Monetary Fund (IMF) Extended Fund Facility (EFF) will contribute to financing the budget deficit and to lengthening the debt maturity. In addition, some of the Central Bank deposits made available by Gulf states, were recently rolled over. The government also plans to issue Eurobonds provided global financing conditions improve.

27. The deficit in the external current account is expected to remain broadly at current levels going forward. Export recovery is expected to continue, while the steady inflows of capital inputs for infrastructure projects means that non-oil imports are likely to remain elevated. The coming on stream of the Zohr gas field has reduced the need for costly gas imports, although these savings will likely be offset by a higher oil import bill. Meanwhile, a stronger tourism sector and robust remittances will continue to support the external account. As a result, the current account deficit is projected to reach 2.5 percent of GDP in FY2018/19. In view of the improved economic outlook, FDI inflows are expected to recover gradually. Despite an improved external position, a small external financing gap will prevail in FY2018/19.


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28. The external financing gap is estimated at US$1.2 billion and expected to be met through largely IFI financing. The existence of a financing gap despite successful stabilization is related to Egypt’s risk profile, with a large overall budget deficit, and exposure to emerging market spillover risks such as currently in play for Turkey and Argentina. Following successful debt issuances in international capital markets in the previous two years, the authorities have not tapped international debt markets in FY2018/19 given heightened volatility in global financial markets. Egypt’s sovereign debt is still rated 4 to 5 notches below the lowest investment grade category and Egypt has a high reliance on domestic debt, including at the short end of the yield curve, with more than 50 percent of domestic debt of less than 1-year maturity and where yields are highly sensitive to monetary policy rates. If Egypt opted for a 5-year Eurobond to replace the DPF, in current market conditions, it would move towards shorter maturity. The higher interest costs compared to DPF averages at about US$100 million per year.5 If bond market conditions remain volatile, it is likely that government would issue more domestic debt, given its captive investor base.

29. Reduced reliance on domestic debt, enabled by Bank financing, builds policy credibility by mitigating interest rate risks to fiscal sustainability. The budget is already in primary surplus, with the large overall deficit due to interest payments. Therefore, the big gain to Egypt’s risk profile from DPF compared to other sources of financing is the lengthening of maturity of debt, the crowding in of other longer maturity flows, and lessened reliance on short-term domestic debt. Given the high share of short-term domestic debt, debt service costs rise when the central bank tightens policy rates in response to shocks. In other words, an appropriate central bank policy response to a shock worsens the fiscal situation because of the link through rising debt service costs. The risk of a spiral between monetary tightening and debt is lessened when the government is able to shift debt financing to external debt, longer maturity and more favorable terms –as the DPF would enable. Bank financing is not just “filling a gap,” but rather part of the path towards easing the risk of fiscal dominance of monetary policy.

Table 3. External Financing Requirements and Sources

Preliminary Actual Forecast (US$, millions) FY2016/17 FY2017/18 FY2018/19 FY2019/20 Gross financing requirements 23,896 20,344 12,960 14,200 External current account deficit 14,394 5,962 7,350 8,400 Maturing short-term debt 7,017 12,274 3,110 3,200 Amortization of medium- and long-term debt 2,484 2,108 2,500 2,600 Available Financing 23,896 20,344 11,760 14,200 Foreign direct and portfolio investment (net) 23,951 19,522 8,200 10,000 Medium- and long-term disbursement 7,641 8,846 5,600 5,600 Other 7,321 5,364 910 1000 Change in reserves ('-' indicates an increase) (13,717) (12,788) (2,150) (1,600) Other sources of financing (for example, arrears) (1,300) (600) (800) (800) Financing Gap — — 1,200 —

Source: World Bank.

30. After large increases in previous years, the GoE’s debt ratio fell sharply and will continue on a downward path, although significant risks arising from size, composition, and policy reversal remain. 5 Average of first 5 years interest rate profile on a 6.5 percent Eurobond.


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The total budget sector debt6 dropped by almost 10 percentage points to 98.7 percent of GDP in FY2017/18 from 108 percent of GDP the year before, helped by the ongoing fiscal consolidation and strong economic growth. The share of foreign currency debt, which increased sharply because of the devaluation in FY2016/17, also declined, and at about 37 percent of GDP, the risk stemming from debt denominated in foreign currency is moderate. The Debt Sustainability Analysis (DSA) shows that under the baseline scenario, which assumes a gradual pickup in economic growth and a continuation of the fiscal adjustment program, the debt-to-GDP ratio is projected to decline to about 84.6 percent by end-FY2022/23. Despite the improved debt outlook, the debt ratio remains high and the envisaged decline in the debt-to-GDP path over the medium term could be reversed if the projected economic recovery is not sustained and fiscal consolidation efforts lose momentum. These risks are mitigated by a captive domestic investor base and a moderate external debt ratio, which are largely long term and on concessional terms. The Government is also in the process of finalizing an updated medium-term debt management strategy which may contain provisions to set a limit on both internal and external borrowing. Additional details about the DSA and stress tests to the baseline scenario are presented in Annex 5.

31. Egypt’s macroeconomic policy framework is adequate for the purpose of this operation. This assessment is based on the following assumptions reflected in the macroeconomic framework: a substantial macroeconomic adjustment: (1) a rapid decline in the public debt ratio from a peak of 108 percent of GDP in FY17 to an estimated 93 percent in FY19 and just below 90 percent by FY21, (2) a large primary balance adjustment from -5 percent of GDP in FY13 to +1.8 percent in FY19, during which time growth is expected to accelerate, and (3) a disinflation from year-on-year monthly peaks over 30 percent during FY18 to 14 percent in FY19 and moving down to the 10 percent range by FY21. The primary deficit reduction is associated with the reduction in energy subsidies.

32. While the overall macroeconomic outlook is favorable, macroeconomic risks are high. The downside risks to the baseline are related to concerns that the key drivers of the post-2016 adjustment may be weakening and not locked-in as sustained policy commitments: a difficult currency adjustment unraveled by inflation and continued management of the exchange rate, and subsidy adjustment not institutionalized to reduce fiscal vulnerabilities. It is worth noting that one previous current account vulnerability, to gas imports, has been eliminated due to the rapid turnaround of the gas sector to be an exporter. Egypt is highly exposed to a tightening of global financial conditions and/or currency pressures. The risk profile of the country contributes to a potentially rapid pass-through of exchange rate or oil price spikes to fiscal outcomes. In the absence of government’s renewed commitment to maintain key monetary and fiscal anchors, Egypt could face a deteriorating debt outlook. The key anchors are: exchange rate flexibility as a critical shock absorber and fiscal sustainability through steady implementation of the fuel subsidy reform, specifically, fuel indexation. The latter is critical to lock-in government commitment to the fiscal consolidation path required to maintain debt sustainability. In addition to these short-term macro risks, the structural risk to Egypt’s economic outlook is the limited private sector supply response to the substantial macroeconomic adjustment that the economy has undergone over the last two years.

33. Risk-mitigating factors include:

6 ‘Budget sector debt’ is the term used by the MOF to define government debt which includes: (a) central administration, (b) local governments, and (c) public service authorities.


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• Large reserves of US$44 billion, acting as a buffer against shocks; plus an additional US$12 billion held under the repatriation mechanism;

• In the current external environment of tighter financing conditions for emerging markets, the CBE’s commitment to a flexible exchange rate policy will help enhance competitiveness and cushion against external shocks;

• As the recent IMF staff-level agreement notes Egypt’s fiscal policy in 2018/19 and beyond, will continue to aim at keeping general government debt on a clearly declining path;

• Revenue mobilization: Ministry of Finance requested World Bank assistance to improve the efficiency of tax administration and assess tax expenditures; Partially offset higher subsidy spending by reducing “non-priority” spending (e.g. re-phasing of investment projects and tighter controls on new recurrent costs);

• Tighten further interest rates to tackle any upturn in inflation whether caused by further subsidy adjustments or a disorderly depreciation of the exchange rate;

• Ongoing efforts to broaden the debt investor base (e.g. to Asia and private placements) could be accelerated, as can plans for hedging of oil price import risk;

• Adopt a more comprehensive debt management and monitoring (including for SOEs).

2.3. IMF RELATIONS 34. On June 29, 2018, the IMF Executive Board completed the third review of Egypt’s economic reform program, supported by an arrangement under the three-year US$12 billion EFF, which was approved in November 2016. Total disbursements under the EFF amount to about US$8.06 billion. Strong program implementation and generally positive performance have been instrumental in achieving macroeconomic stabilization, with external and fiscal deficits narrowing, inflation and unemployment declining, and growth accelerating. In completing the third review, the Executive Board approved the authorities’ request for waivers for the performance criteria for the primary fiscal balance, which was missed by a very small margin, and the fuel subsidy bill. The latter was missed due to higher-than-programmed oil prices during 2017/18.

35. The recent IMF mission reached a staff-level agreement for completion of the fourth review of the EFF; key focus areas for completion of the review are exchange rate flexibility and continuing energy subsidy reforms.7 Developments since the completion of the prior (third) IMF review point to a slightly slower pace of overall deficit reduction than programmed, which is reflected in the macroeconomic framework presented here. This is due to a combination of higher actual spending on energy subsidies and interest payments. For the fourth review, the IMF noted that in the current external environment, a flexible exchange rate helps enhance competitiveness, protect reserves, and cushion against external shocks. The IMF also noted the government’s commitment to continuing energy subsidy reforms so that fiscal policy for the current fiscal year and beyond can keep general government debt on a clearly declining path. As indicated in the completed programmatic DPF series and previous IMF staff reports, fuel price indexation would institutionalize the fiscal gains from the energy sector reform program.

7 The press release is available at < https://www.imf.org/en/News/Articles/2018/10/31/pr18405-imf-team-reaches-staff-level-agreement-on-the-fourth-review-for-egypts-eff >.

https://www.imf.org/en/News/Articles/2018/10/31/pr18405-imf-team-reaches-staff-level-agreement-on-the-fourth-review-for-egypts-eff

https://www.imf.org/en/News/Articles/2018/10/31/pr18405-imf-team-reaches-staff-level-agreement-on-the-fourth-review-for-egypts-eff


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3. GOVERNMENT PROGRAM

36. On July 3, 2018, the Prime Minister delivered to Parliament the policy statement for Egypt’s newly formed government and launched the Egypt Government program—'Egypt Takes Off’. In his address, the Prime Minister identified the following main priorities for Egypt: (i) national security, (ii) improving living standards, (iii) continuing economic reform, (iv) human development, and (v) foreign policy. The Parliament endorsed the Government program that aims to achieve the vision of the Egypt ‘s development strategy. It states that Egypt will achieve a competitive, balanced, and diversified economy through innovation and knowledge development. It will be based on justice, social integrity, participation and investment in physical and human capital to achieve sustainable development and improve all Egyptians’ quality of life.

37. The key objective of the government program is to address inclusive growth and job creation in the next four years (2018–2022). The government program aims to build a competitive and diversified knowledge-based economy and promoting inclusion. It seeks to implement a package of structural policies to rationalize and directly support beneficiaries; strengthen social safety nets; and develop human capital. The program covers five main themes: (1) Protecting National Security and Egypt’s Foreign Policy, (2) Developing Human Capital, (3) Economic Development and Improving Government Performance, (4) Job Creation, and (5) Improvement of Standard of Living. To allow the Cabinet to regularly assess the program’s progress, success, and impact, the implementing agencies are required to follow regular performance-based monitoring.

38. Pillar 1: Protecting National Security and Egypt's Foreign Policy. National security is to be provided in a comprehensive manner to ensure citizens’ sense of safety based on security for the following dimensions: citizens, water, food, and energy security. The program requires investments of around US$28 billion to increase electricity generation by 26 percent and US$2 billion in oil and gas exploration work to increase self-sufficiency of petroleum production up to 88 percent and increase natural gas production by 98 percent. It will provide natural gas to about 3.4 million housing units, saving up to US$350 million.

39. Pillar 2: Developing Human Capital. The following activities are envisaged by the GoE under this pillar: (a) development of cultural, religious, and media institutions and education systems under a new education strategy; (b) establishment of a charitable endowment fund for education and scientific research, various new colleges, public universities, and sporting fields for youth development; and (c) implementation of the first phase of a new health insurance system in the Suez Canal region.

40. Pillar 3: Economic Development and Improving Government Performance. This pillar aims to achieve the following targets: (a) real GDP growth rate of up to 8 percent by FY2021/22 to cope with rapid population growth and curb inflation, (b) reduction of budget deficit to 4.1 percent of GDP, and (c) improvement in efficiency of tax collection. The government program also includes an explicit commitment to implement policy packages to accelerate economic growth. Among these are mobilizing savings and providing financial resources to achieve the targeted rate of investment of 25 percent of GDP in FY2021/22, requiring a steady increase from 16 percent of GDP currently (FY2017/18).

41. This pillar also supports efforts to improve financial inclusion through the following measures: (a) developing new and innovative savings vessels and financial instruments, (b) promoting a savings


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culture among households and firms, (c) encouraging remittances from Egyptians abroad, (d) expanding investment and entrepreneurship funds, and (e) expanding financing in partnership with international and regional institutions. Other measures envisaged include: (a) developing public-private projects, (b) efficient use of state-owned assets, (c) restructuring public sector companies, including settling their debt, and (d) stimulating participation in publicly owned companies.

42. The program aims to improve industrial development through the following measures: (a) enhancing competitiveness of transformative industries and access to international markets; (b) stimulating industrial investment by offering 38 million m2 of land for industrial investment; (c) establishing integrated industrial complexes in different governorates; (d) simplifying licensing procedures and reducing the cost of doing business; and (e) saving distressed businesses, where EGP 4.2 billion (US$237 million) was allocated for priority projects.

43. The program highlights the importance of developing export capabilities of promising commodity and service sectors by increasing their international competitiveness. This part of the program focuses on: (a) increasing non-petroleum industrial exports; (b) increasing the amount of logistics centers and international exhibitions; (c) increasing production of internationally marketable agriculture produce through developing greenhouses and observing international quality and environmental standards; (d) improving air transport services for tourism by increasing the capacity of new airports; and (e) exporting contracting services, including IT, especially to Arab and African markets.

44. Finally, this pillar aims to improve public sector institutional performance and delivery of government services, including full utilization of data exchange platforms among 100 government agencies. This includes provision of 150 government services on mobile phone applications and development of all notary public services. It also includes establishment of a national database of judicial decisions, including automation of courts, police departments, prosecutors, and forensic offices. In addition, the program entails establishment of 11 new small claims courts and automation of technology centers in municipalities, and establishment of 60 new technological centers and increasing the number of portals in governorates up to 16 gates and at ministries up to 8 gates.

45. The Ministry of Investment and International Cooperation (MIIC) is exerting strong efforts to foster an attractive investment climate, focusing on establishing a conducive legislative environment, and building an institutional framework that promotes private investment. The Investment Law No.72 of 2017, supported by the previous DPF series, is a stepping stone to gear up domestic and foreign investments and aims to establish a conducive investment climate to promote private sector participation in the development process. The law also paves the way for major enhancements in the business climate through streamlining procedures, cutting red tape, providing investment guarantees and incentives to ensure fair and equitable treatment to investors, and fostering governance and accountability. Also, policies are being geared towards promoting financial inclusion and supporting access to finance. In an effort to introduce innovative non-banking financial tools, a financial leasing and factoring law has been enacted. This will contribute to supporting the micro enterprise sector and open new horizons for job opportunities.

46. To further promote confidence, and provide clear and predictable exit mechanisms to investors, a Restructuring, Pre-Insolvency Conciliation and Bankruptcy Law was enacted. The law governs the financial and administrative restructuring of struggling or defaulting enterprises and regulates their exit from the market in a manner that would protect the rights of all parties. The law attempts to simplify and


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streamline post-bankruptcy procedures and represents a key milestone in terms of improving investor confidence in Egypt’s investment climate, as it ensures the shielding of both foreign and domestic investors, and in particular smaller investors, from imprisonment in cases of liquidation and bankruptcy.

47. These efforts are being translated into major improvements of Egypt’s ranking in the latest Doing Business (DB) report. For example, starting a business was made easier by removing the requirement to obtain a bank certificate and by establishing a one-stop shop, thus reducing the time to start a business from 16 days to 11 days. In addition, access to credit was made easier by strengthening the rights of borrowers and lenders with regards to collateral, leading to an improvement in Egypt’s ranking for this indicator by 30 ranks. Furthermore, resolving insolvency was made easier by allowing debtors to initiate the reorganization procedure and granting creditors greater participation in the proceedings. On the whole, Egypt’s ranking improved from 128th in 2017 to 120th in 2018, marking a significant advancement.

48. Pillar 4: Job Creation. This pillar aims to create about 900,000 jobs annually for unemployed and underemployed, with a total of 3.6 million jobs throughout the four-year program, to help reduce the unemployment rate to 8.4 percent compared to 10.68 percent in Q1 of 2018 (implying a total of 3.2 million unemployed persons currently). It aims to do so through the following measures: (a) focusing on MSMEs; (b) introducing legislative and organizational reforms that encourage self-employment and entrepreneurship; (c) boosting integration of the informal sector with the formal system; (d) linking learning outputs to labor market needs through developing education methodologies and curricula; (e) establishing centers for entrepreneurship, technical education, and vocational training programs; and (f) intensifying developmental efforts for labor-intensive industries such as agriculture, industry, trade, and construction. This pillar also highlights inclusion and development of lagging regions by focusing on Upper Egypt governorates which have poorer economic and social indicators relative to other areas.

Figure 1. Selected Targets of Government Program

Source : Government program

8 Central Agency of Public Mobilization and Statistics (CAPMAS) figure.

- Allocation of 10 percent of lands allocated for SMEs- Enhance the role of Micro, Small, and Medium Enterprise Development Agency- Launching interactive platform to provide services to SMEs- Developing updated and modernized database for SMEs

Institutional Reform

- Establishing 200 incubators annually- Designing programs for training on entrepreneurship in universities and schools (entrepreneurs of 2030)

- Providing financial support to 225,000 SMEs- Implementing 2,400 programs to raise awareness of entrepreneurship-Increasing women economic empowerment through the program of (one village/one

product)

Encouraging Entrepreneurship Culture


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49. Pillar 5: Improvement of Standard of Living. This pillar aims to achieve the following: (i) preventing overpopulation in the existing population centers through incentives, increasing awareness, redistribution of population through developing new cities (including fourth generation cities), and improving connectivity to new population centers; (ii) developing areas prone to conflict or violence; (iii) providing housing units; (iv) narrowing developmental gaps among governorates by giving priority to the Upper Egypt region and frontier governorates (with the allocation of US$15.3 billion to projects of Sinai Peninsula development, completion of East Port Said City (Salam), inception of New Rafah and New Be'r El-Abd cities, in addition to implementing projects in the following sectors: roads, services, health, education, industrial development, agriculture and tourism); (v) developing 208 villages; (vi) improving the quality of potable water services; (vii) expanding transport services; (viii) enhancing social safety networks; (ix) eliminating gender-based discrimination; (x) enhancing protection of Egyptian expatriates; and (xi) increasing projects focused on environmental improvements.

4. PROPOSED OPERATION

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

50. The development objective of the operation is enabling financial inclusion, private sector development and strengthening fiscal management for inclusive growth in Egypt. The intervention logic of the DPF builds on the previous DPF series of fiscal consolidation by pushing for improved tax collection via online income tax filing, continuing fuel and electricity subsidy reforms, publishing a medium-term debt strategy and introducing efficiency in capital allocation for local governments. The DPF also helps improving access to finance and bolstering productivity. This means giving small firms better access to finance using digital technology so that they can pursue opportunities, improving financial intermediation and expanding the range of financial instruments. It also involves a stronger legal framework for small firms, more access for such firms to opportunities in public procurement and simplified administrative transactions through electronic tax filing.

51. The pillars of the proposed operation mainly align with two of the five pillars of the GoE program. These include Pillar 3: Economic Development and Improving Government Performance, and Pillar 4: Job Creation. As such, the operation contributes directly to the GoE’s overall vision to place inclusive growth and job creation at the center of the development agenda and contributes to improving governance and transparency. The GoE program provides the anchor for this DPF, supporting selected policy actions. The reforms supported by this operation will enable MIIC, through the General Authority for Investment and Free Zones (GAFI), to coordinate the enhancement of the business environment as needed for promoting private sector development. All measures supported by the DPF carry strong government ownership and are fully embedded within the Government program. The pillars of the proposed operation are thus complementary and interlinked with the GoE program. It is also addressing climate change as committed in the UNFCCC Nationally Determined Contributions (NDC, 2017) document.9

9 The proposed DPF prior actions address adaptation and mitigation goals articulated in Egypt’s First Nationally Determined

http://www4.unfccc.int/ndcregistry/PublishedDocuments/Egypt%20First/Egyptian%20INDC.pdf


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52. The proposed DPF is part of a larger World Bank Group multisectoral and programmatic engagement aimed at supporting inclusive private sector-led growth and strengthened fiscal management in Egypt, by addressing underlying social and economic imbalances. A series of operations are to be considered as part of this programmatic engagement in FY2019 and subsequent years and cover the various dimensions of this agenda in an integrated way. The proposed DPF will set the stage with critical policy reforms and will be complemented by support from other development partners for the government program.

53. The design incorporates lessons learned from previous operations in the following areas:

i. Matching the structure of the operation to the country context. An operation with multisector coverage paving the ground for and followed by subsequent engagements (PforR, technical assistance [TA] or subsequent DPF) focusing on implementation support is best suited to the current context of Egypt.

ii. Monitoring and follow-up of implementation of reforms at the highest level of the Government. The World Bank Group has established a strong dialogue at high levels of the Government, including at the Prime Ministerial level, allowing for strong follow-up of the reforms supported by the World Bank Group engagement.

iii. Fostering inter-ministerial coordination. Designing and implementing such an ambitious Government program requires different ministries and agencies to coordinate closely and develop medium-term coordination systems, overseen by a nodal ministry, to enable timely and successful implementation. Achieving the policy reform actions outlined in the Government’s program as well as this operation requires extensive inter-ministerial and cross-sectoral learning and coordination involving a large set of GoE agencies. This enables these agencies to gain experience in implementing shared visions, which has spillover benefits for all GoE programs and policies. This operation has included coordination with the following agencies: Ministries of Investment and International Cooperation; Finance; Planning and Administrative Reform; Trade and Industry; and the Financial Regulatory Authority.

iv. Focusing on concrete actions to achieve tangible results for the beneficiary population. While progress on legislative reforms has been achieved over the past years, implementation has been uneven, with little impact on private sector-led job creation. The proposed DPF strikes a balance between policy reforms and concrete implementation actions like the rollout of collateral registry, electronic and mobile payment for microfinance companies, and online tax filing that will have tangible results felt by the population in the short term.

Contribution as follows: PA 1 provides “protection to the poor” against climate impacts through access to resilience-generating capital, goods, and services; PA 5 encourages “switching from conventional energy sources to clean energy sources” by incubating cleantech entrepreneurs; PAs 6 and 8 reduce emissions from paper production via e-services and online tax filing thereby promoting “more efficient use of energy especially by end-users”; PA 9 increases the “use of renewable energy” and provides price signaling for energy efficiency to all consumers of electricity and fuels; PA 10 “improve the legislation and legal frameworks promoting the dynamics of sustainable and decentralized development”.

http://www4.unfccc.int/ndcregistry/PublishedDocuments/Egypt%20First/Egyptian%20INDC.pdf


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v. Supporting homegrown reform programs, buttressed by global best practices. This operation builds on a key lesson from previous operations and DPFs. Successful DPFs are based on homegrown reforms with strong political ownership of policy actions tackling difficult structural issues. The reforms undertaken in this operation are based on the GoE’s long-term objectives, as articulated in the Government program. Following transformational reforms focused on the economy, the energy sector, and competitiveness over the last three years (supported by the previous programmatic series of DPFs), this operation also builds on the World Bank Group’s extensive technical dialogue with counterparts on best practices in essential policy reforms related to private sector development, financial inclusion; and governance issues.

4.2. PRIOR ACTIONS, RESULTS, AND ANALYTICAL UNDERPINNINGS


54. The overarching objective of Pillar 1 is to improve access to finance to firms, which is particularly important to avail more funding to private sector from financial markets. The Government is currently borrowing at rates close or below inflation, thereby improving sovereign debt sustainability but also crowding-out private sector lending by banks. With the reduction of public debt and the recovery of the economy, it is expected that public and private banks would change their lending policy and give more space to the private sector in their balance sheets.

55. Stiffer competition in the financial sector is not likely to come in the short term from the entry of new banks in the market, but rather by the emergence of non-bank financial institutions. In this respect, the proposed operation supports the development of non-bank financial institutions (NBFIs), improves financial sector competition and diversification, and broadens the range of financial institutions and products serving SMEs. The introduction of the collateral registry increases the attractiveness of SME finance (not only by banks but also by leasing and factoring companies) and the opening of payment instruments to microfinance companies strengthens NBFIs. Moreover, capital markets will provide alternative financing solutions in addition to the banking sector.

56. Reforms under Pillar 1 will help close gender gaps which have been well-identified by research in Egypt and at the global level. Barriers to access to bank/postal accounts are more acute for women and youth-led enterprises. The World Bank Findex 2017 survey reports that in Egypt only 27 percent of women of age 15 and above had an account at a financial institution, compared to 39 percent for men. The Findex data also point to some early signs that mobile money accounts (which seem gender-neutral as an action) might help narrowing the gender gap. Research in Sub-Saharan Africa shows that six economies managed to close the gender gap on mobile money account at a time when the gender gap with financial institutions’ account persists.10 Women mobile money agents play an important role in encouraging women to open an account, as women feel more comfortable sharing their mobile numbers with other women. Also, the literature on cultural barriers to women inheriting land in Middle East and North Africa shows that small firms owned by women are more likely to have movable collateral rather than immovable collateral. The establishment and the operationalization of the collateral registry is likely

10 In Kenya, for example, men are 18 percentage points more likely to have a financial institution account, but women are 11 percentage points more likely than men to have a mobile money account only.


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to have disproportionate effects for women since land usually gets inherited by male members of the family due to cultural issues, leaving female members of the family unable to use land as collateral, hence the increasingly important for movable assets. For the relevant prior actions, the proposed operation, therefore, includes gender-disaggregated targets.

• Improving access to finance for subsistence entrepreneurs

Prior Action 1: The Borrower, through its Designated Authorized Entity, has issued: (a) Decisions No. 8/2018 and No. 9/2018 to allow the use of mobile payment in microfinance activities; and (b) Decisions No.156/2018 (amending Decision No. 3/2018) and No. 4/2018 to allow the use of electronic payment by microfinance institutions, leading to improvement in access to finance for subsistence entrepreneurs.

57. Rationale: Subsistence entrepreneurs play an important role by forming small businesses that represent a way of life, providing employment at the base of the pyramid and contributing to the alleviation of poverty. Subsistence entrepreneurs face multiple challenges related to limited access to finance, low financial intermediation, and limited financial products. Access to microfinance credit is growing quickly but has not reached its full potential. The microfinance active portfolio increased from EGP 4.5 billion and 1.8 million active borrowers as of December 2016 to EGP 9.7 billion and 2.7 million active borrowers as of June 2018 (215 percent and 150 percent increase, respectively). Despite recent strong growth from a low base, the microfinance institution (MFI) portfolio quality and nonperforming loan levels remain in line with international norms. Recent market assessments suggest the potential market for microcredit to be 10 million microentrepreneurs; thus, the market is only reaching 27 percent of its potential. In Egypt, men are 12 percentage points more likely than women to have an account, so the gender gap is significant. Moreover, while there are many MFIs in Egypt, there are many geographical areas where demand is unmet. Most of the distribution channels of the large NGOs are in Delta governorates and a few are in Upper Egypt while frontier governorates (Red Sea, Sinai, and the New Valley) are lagging with active borrowers less than 3 percent of the total microfinance customers and low penetration rates.

58. At the same time, mobile penetration in Egypt is relatively high (accounting for 66 percent of the population by January 2018), offering an opportunity for diversified payment services. Mobile payment activity has increased significantly in recent years, as evidenced by the increase in the number of mobile phone accounts, which reached 11 million accounts with an annual growth rate of 36 percent by the end of July 201811 and the number of monthly transactions reached 2 million with a total value of EGP 955 million. Moreover, there are 100,000 agents for m-wallets (such as Fawry, Massary, Bee, Aman, and mobile network operators). Thus, the engagement of microfinance NGOs and companies in mobile money services and loan disbursement/repayment is one powerful and quick solution to overcome limited outreach to rural and remote areas in Egypt, especially for women who suffer more from limited mobility.

59. Policy reform: The Financial Regulatory Authority (FRA), the designated authorized entity responsible for supervising and regulating non-banking financial markets and instruments, has issued several decisions that describe the eligibility criteria and necessary documentation to provide mobile payment licenses and e-payment to microfinance companies and NGO-MFIs. The decisions aim at diversifying the services provided to beneficiaries and simplifying loan disbursement and repayment and

11 Financial Stability report, 2017.


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allowing new entrants to provide such services. The decisions allow microfinance NGOs and companies to deal with e-payment networks through commercial banks authorized from the CBE either through prepaid cards or point of sales recommended by e-payment companies. The decisions also ensure that the commitment to adequate compliance/reporting is provided to the FRA to ensure consumer protection.

60. Expected results: The FRA decisions represent a real breakthrough for MFIs, as they will increase the outreach of intermediaries to cover underdeveloped regions, particularly lagging regions with low urbanization rates and limited number of microfinance outlets. The decisions help existing microfinance beneficiaries save time and money, experience greater security, and manage their cash flows with more flexibility through facilitating disbursement and collection operations with services that are available 24 hours/7 days a week. The average micro loan size for 80 percent of end borrowers range from EGP 5,000-8,000 which matches with mobile payment daily transfer ceiling. The decisions are also expected to reduce operational costs for MFIs and provide data on the financial behavior of borrowers along with the credit bureau data. They will help build the ecosystem to promote digital finance products/schemes and develop an end-to-end digital business model for the microfinance industry. The suggested indicator for the DPF operation is the number of microfinance beneficiaries using mobile payment or e-payment (baseline: 0; target: 600,000 in June 2020, of which 40 percent are female and 20 percent are outside Greater Cairo and Alexandria). The reform will contribute to narrowing the gender gap and the reduction of spatial inequalities among governorates.

61. By providing subsistence entrepreneurs with financial services, this prior action strengthens the adaptive capacity of Egyptians who are vulnerable to the impacts of climate change. Access to capital via mobile money microfinance platforms enables rural farmers to purchase resilience-generating goods and services that help them reduce emissions, prepare for extreme weather, and recover from natural disasters.12 In Mongolia and Colombia, microfinance reduced disaster risk and strengthened social protection among vulnerable groups.13-14

62. Future reforms: Additional measures relevant to MFIs that could be addressed by the FRA and the CBE in the future include the review of restrictions on group loans and group accounts (which are currently allowed but capped at limits suitable for individual loans), and the review of balance limits and daily and monthly transfer limits of m-wallet accounts. In general, the microfinance sector will benefit if a clear road map is developed to transform more NGOs into for-profit microfinance companies since the move to for-profit companies will allow them to attract more funding (debt/equity) and to offer additional products to their existing customers. The FRA has submitted a request to the Prime Minister to increase the loan ceiling, which would stimulate further growth in the sector. The World Bank is providing TA to the FRA microfinance unit under the ongoing Inclusive Regulations for Microfinance project (P149677) (Recipient-Executed Trust Fund)—funded by the Middle East and North Africa Transition Fund under the Deauville Partnership. Under the ongoing project, the FRA will continue to facilitate smooth implementation of the mobile payments services within NGO-MFIs by conducting training and awareness activities to raise the awareness about Anti-Money Laundering (AML)/Know Your Customer requirements and the benefits of using mobile payment and consumer protection and coordinate with key stakeholders (e-payment companies, mobile network operators, and commercial banks) to motivate the market to ensure fast movement. The World Bank’s TA also supports the strengthening of the FRA’s supervision 12 Sadler et al. “Making Climate Finance Work in Agriculture,” World Bank Group, Washington DC, 2016. 13 Steer et al. “Social Protection and Climate Resilience,” World Bank Group, Washington DC, 2011, p26. 14 Goldberg and Palladini. “Managing Risk and Creating Value with Microfinance,” World Bank Group, Washington DC, 2010, p60.

http://documents.worldbank.org/curated/en/986961467721999165/pdf/ACS19080-REVISED-OUO-9-Making-Climate-Finance-Work-in-Agriculture-Final-Version.pdf

http://siteresources.worldbank.org/EXTSOCIALDEVELOPMENT/Resources/244362-1232059926563/5747581-1239131985528/WBSocProtec_Final.pdf

https://openknowledge.worldbank.org/handle/10986/2442


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function, which is becoming increasingly important in the context of strong growth of the sector. The Bank is also supporting the GoE in the development of its Financial Inclusion Strategy.

• Facilitating greater access to finance for SMEs

Prior Action 2: The Borrower, through its Designated Authorized Entity, has established and operationalized the electronic collateral registry for security interests in movable property allowing greater access to finance for SMEs by strengthening the implementation of the framework for secured transactions.

63. Rationale: The latest published World Bank Investment Climate Rapid Assessment Survey reveals that only 13 percent of firms have access to bank credit compared to 29.7 percent in Jordan and 33.4 percent in Morocco. The survey also reveals that only 11.1 percent of micro enterprises, 17.4 percent of small enterprises, and 12.4 percent of medium enterprises have access to bank loans, as opposed to 38.2 percent of large enterprises. MSMEs accounts for more than 98 percent of Egypt’s enterprises, more than 85 percent of employment in the non-agriculture private sector, in addition to an overall 40 percent of total employment. Access to finance is a major constraint for this sector. Of the surveyed firms, more than 70 percent raise concerns regarding the surge in the cost of finance post Arab Spring. As a result, they often resort to alternative sources of finance, relying on personal savings (79 percent) or inheritance (15 percent) to raise capital, while only 4 percent access the formal market.

64. Banks in Egypt are reluctant to lend to MSMEs, because of the perceived associated risk. Furthermore, banks continue to lend based on immovable collateral (land and buildings), narrowing the opportunities for MSMEs which mostly own movable collateral (for example, inventory, receivables) to have access to credit. The type and value of collateral needed to secure loans compared to the total loan size significantly hampers their ability to have access to bank loans. Effectively, banks in Egypt are serving large, well-established enterprises. Moreover, NBFIs play a very limited role in this sector.

65. Implementing effective modern secured transactions reform and creating a well-functioning movable collateral registry will enable financial institutions to expand their lending operations against movable collateral and secure their rights. The legal framework necessary to be implemented before the establishment of the collateral registry has been completed by the enactment of the Secured Transactions Law in November 2015 and the approval of its Executive Regulations in December 2016; however, the law could not be implemented without the creation of the registry.

66. The International Finance Corporation (IFC) provided TA to FRA, the designated authorized entity responsible for supervising and regulating non-banking financial markets and instruments, and extensive feedback and recommendations to improve the draft Secured Transactions Law and worked closely with the FRA team to draft the secured transactions Law’s Executive Regulation. Advisory support was provided to ensure the quality and functionality of the registry and support its design and establishment considering the FRA’s choice for outsourcing the collateral registry development and operation.

67. Policy reform: The creation of the first movable collateral registry in the Middle East and North Africa Region is a key step to unlock access to finance in Egypt. This action will also allow a focus on regulatory reforms and follow up with implementation. The adoption of the Secured Transactions Law in 2015 was insufficient in itself to create an impact, which can only happen with the creation of the registry.


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The presence of a functioning movable collateral registry decreases lenders’ risks and helps avoid potential disputes in case multiple rights are taken in collateral. The FRA signed a contract with ‘i-Score’, a private sector firm which was competitively selected, to establish and run the Egyptian Collateral Registry (ECR). The ECR started effectively its operations on March 11, 2018.

68. Expected results: In countries where effective secured lending regimes have been established, borrowers with collateral can get up to nine times the level of credit relative to their cash flow compared to borrowers without collateral. They also benefit from longer repayment periods (11 times longer) and significantly lower interest rates (50 percent lower).15 In general, the implemented reforms are expected to benefit MSMEs; financial institutions (not just banks, but also NBFIs – thus promoting NBFIs as well); and government institutions. Financial institutions will strengthen the rights of creditors in movable collateral and will be able to expand their lending operations against movable collateral and increase and diversify their portfoilios. Enterprises will be able to use their movable assets, inventories, and accounts receivable as collateral and will have greater access to finance. Government institutions will obtain the necessary infrastructure and skills to support effective secured lending in Egypt. The suggested indicator for the DPF operation is the number of published collateral registrations used by MSME, corporate, individual debtors and syndicated loans (baseline: 0; target: 20,000 publications by June 2020). The first six months of the ECR operations have provided promising results already: the number of published registrations exceeded 14,000 and their value exceeded EGP 425 billion.

69. Future reforms. It is crucial to build sector-level knowledge around effective secured transactions reform. The IFC plans to support the FRA in the implementation process and in capacity building and raising awareness activities to build the knowledge of different stakeholders. Also, enforcement remains an issue for all types of collateral (movable/immovable). Deeper reforms will be required to create more effective economic court procedures and improve enforcement.

• Fairer and more efficient capital markets and broadening investor base

Prior Action 3: The Borrower, through its President has enacted Law No. 17/2018 regarding capital markets as published in the Official Gazette on March 14, 2018 amending Capital Markets Law No. 95/1992 to encourage fairer and more efficient capital markets and to broaden access to finance to investors.

70. Rationale: Since the issuance of the Capital Markets Law No. 95/1992, various amendments were introduced therein and implementing decrees issued. However, more than 25 years after its issuance, multiple regulatory aspects had become unsuitable for expanding capital market activities, leading to a limited investor base of capital markets in Egypt. According to the 1992 law, securities firms faced multiple restrictions on the sale of investment fund products to investors. Institutional investors’ footprint (asset managers, insurance companies, pension funds) is limited with only 35 percent of the trading activities, the rest being captured directly by individuals. The banking sector holds around 75 percent of domestic government securities, and conversely, government securities form the bulk of the banks’ securities portfolio. Further, around 95 percent of mutual funds are seeded by existing banks. Moreover, the framework governing mergers and acquisitions was unclear r on the disclosure and protection of minority

15 De La Campa. 2011. “Increasing Access to Credit through Reforming Secured Transactions in the MENA Region.”


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shareholders’ rights. New relevant instruments were introduced and gained momentum at the global level, like Islamic finance/sukuks, contracts, and derivatives, and needed to be reflected in Egyptian legislation. Money laundering has become a global concern and consequently capital markets needed to adhere to stricter disclosure and Anti Money Laundering “AML” requirements.

71. Policy reform: Law No. 17/2018 has introduced key amendments to the 1992 law, allowing for better adherence to the International Organization of Securities Commission standards and objectives. The new law also establishes requirements relating to licensing futures brokers and futures user members and includes important consumer protection and anti-manipulation provisions. More importantly, the new law broadens sales channels and allows securities firms to sell to investors. Under the 1992 law, this was the exclusive purview of banks. This is consistent with practices in most developed countries and should increase competition in the marketplace and broaden access of investors. The new law eliminates the ability of companies to issue bearer shares in line with AML/CFT international standards. It introduces a new regime governing the issuance of sukuk (Islamic finance), the incorporation and licensing of new nongovernment-owned stock exchanges, and the establishment/licensing/operations of futures exchanges. The new law provides a better scope for a takeover regime which encourages fair treatment of shareholders and addresses earlier caveats related to disclosure, protection of minority shareholders’ rights, required actions by directors, and the circumstances triggering mandatory bids.

72. Expected results: The amendments to the Capital Markets Law will assist Egyptian authorities in ensuring a fairer and more efficient capital market that provides an increased array of capital raising, investment, and risk management products for market participants. Better functioning capital markets will help channel Egypt’s savings toward private firms and projects, in turn enabling private sector-led growth and job creation. Capital market reforms are also key to improve access to finance, as new instruments and practices enable large borrowers to replace bank financing with market financing, thus freeing up bank capital to lend more to MSMEs. The suggested results indicator for the DPF operation is the number of new coded investors (baseline: 9,300 before the law; target: 12,000 by June 2020).

73. Future reforms: In addition to the amendments to Capital Markets Law which provided an increased array of capital raising, investment and risk management products for market participants, further improvements are needed to promote ongoing public disclosure (rather than transaction disclosure to the capital markets authorities). In parallel, it will be important to deploy complementary reforms to further develop the project finance market in Egypt. Examples include the possibility of structuring wholesale schemes providing risk-sharing or refinancing facilities to domestic commercial banks engaged in long-term infrastructure finance and developing fixed-rate and hedging instruments in commercial debt markets.

Pillar 2: Private Sector Development

74. The overarching objective of Pillar 2 is to support the development of new and unconnected firms which counterbalance Egypt’s history of elite capture. The ‘Fekretak Sherketak’ initiative is expected to play a critical role in enabling nascent entrepreneurship in Egypt, injecting new blood into the stagnant private sector landscape and promoting private sector principles and approaches in the ecosystem. Supporting the participation of SMEs in public procurement is also expected to spur SME growth and foster increased competition with large connected firms. These reforms support inclusive


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private sector development and, when combined with inclusive access to finance reforms under Pillar 1, will help create a level playing field and increase competition and market contestability. In addition to the proposed DPF, the Bank is providing technical assistance to the Egyptian Competition Authority to improve its independence and effectiveness (a reform supported by the IMF EFF) and has supported the recent legal and regulatory reforms on competition. The Bank is providing advice on a range of issues to improve governance such as fiscal transparency, data dissemination, anti-corruption and management of sovereign guarantees. The Bank is initiating a program on digital economy which includes digital infrastructure, new technologies and digital skills, bringing in both the transparency of the government operation and provision of services and enhancing productivity of the private sector. The enhanced role of the private sector is also being addressed through reforms at the sector level and the preparation of transformational projects involving the private sector across oil and gas, power, renewables, ports, airports, urban transport, water and agriculture.

75. The reforms under Pillar 2 are expected to help create new formal firms and encourage informal firms to formalize. The amended Companies Law and its Executive Regulations simplify the registration process, allow for single person company registration, and strengthen corporate governance, thus encouraging the creation of formal firms and the formalization of informal ones. Online tax filing improves transparency, limits interaction with public officials therefore curbing corruption, and reduces the transaction costs for smaller firms, thus encouraging them to formalize.

• Strengthening corporate governance and minority shareholder protection

Prior Action 4: The Borrower has issued Ministerial Decree No. 16/2018 dated February 8, 2018 amending the Executive Regulations of Companies Law to strengthen corporate governance and minority shareholders’ protection.

76. Rationale: Egypt ranks low on ‘Starting a Business’ and ‘Protecting Minority Investors’ topics in the 2018 Doing Business report (103 and 81 out of 190 countries, respectively). The Companies Law has been amended several times since its introduction in 1981; however, there is a strong need to modernize many of its provisions, together with the Executive Regulations, to improve corporate governance and provide better minority protection. Shareholders had to go to court to enforce shareholder agreements. Issuance of preferred shares was not possible unless the articles of association did not initially provide for such preferred shares upon incorporation. Cumulative voting rights were not allowed, and minority shareholders had limited room to contest majority shareholders’ decisions.

77. Policy reform: MIIC has issued Decree No. 16/2018 to amend the Executive Regulations of the Companies Law. The revised Executive Regulations build on the recent amendments of the Companies Law and include:

(a) Acknowledging the validity of shareholders agreements entered into between companies’ founders or shareholders, thus allowing private equity type of agreements (tag along, drag along, options, minority rights, and so on) to be legally valid and enforceable;

(b) Allowing the issuance of preferred shares by a supermajority of the general assembly (and not only at the time of incorporation);

(c) Facilitating the procedures for establishing companies by notification;


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(d) Simplifying the procedures for attendance of the general assembly by proxy;

(e) Restricting the authority of GAFI to object to a capital increase unless there is violation of the law or severe infringement on minority rights;

(f) Introducing for the first-time cumulative voting in general assembly meetings and clearer rules for splitting companies; and

(g) Allowing 5 percent of shareholders to request GAFI to annul decisions by the general assembly if said decision benefits certain majority shareholders to the detriment of the minority.

78. Expected results: The amended Companies Law and its Executive Regulations will help improve corporate governance and provide stronger protection of minority interests. They will also encourage the activities of private equity and venture capital firms and, hence, facilitate access to finance to new firms and SMEs. The suggested results indicator for the DPF operation is the value of the extent of shareholder governance index (baseline: 6.3 out of 10 in Doing Business Report 2018; target: 7 out of 10 in Doing Business Report 2020).

79. Future reforms: The amendments of the Companies Law and its Executive Regulations provide significant improvements in the legal framework governing companies in Egypt, the most comprehensive to date. In the medium term, the Bank will continue the dialogue with the objective of further aligning the company’s legislation to international good practices.

• Improving the business environment

Second Tranche Release Condition 1: The Borrower has issued a Ministerial Decree which reduces the number of steps required to establish a company in order to enhance the business environment.

80. Rationale: Despite the overall improvement of Egypt’s ranking in the Doing Business Report 2019, Egypt’s specific ranking on Starting a Business has slightly declined from 103rd in the 2018 report to 109th in the 2019 report. To further improve the business environment, the Government has launched a detailed review of the procedures, time and cost to start up and formally operate in Egypt with the aim of simplifying the process and adhering to international best practices. At the moment, six procedures are needed to start a business in Egypt: (1) obtaining a Certificate of Non-Confusion from the Commercial Registry to reserve the company name; (2) submitting documents, paying the fees and receiving the certificate of incorporation and tax card; (3) notarizing the company contracts; (4) opening a company file and registering employees with the National Authority of Social Insurance; (5) registering for value added taxes; and (6) buying and notarizing company books. GAFI, the Notary, the National Authority of Social Insurance and the Egyptian Tax Authority are responsible for the different steps. These take place in the same physical space, GAFI’s one-stop-shop which includes under one roof all the relevant entities, however the process of establishing a company still take on average 11 days, compared to 4.9 procedures and 9.3 days in OECD and High-Income countries16.

81. Policy reform: MIIC plans to issue a decree to reduce the steps to establish companies from six to two procedures. The decree will build on current efforts to reengineer the process of starting a business,

16 Doing Business Report 2019, World Bank


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pushing for more service automation and taking steps toward system interoperability and data sharing between the different entities involved in the process of company establishment.

82. Expected results: The reduction in the number of procedures for starting a business is likely to also have an impact on the time needed to register companies which will significantly facilitate firm creation and further encourage informal firms to register. Egypt’s DB ranking will also likely improve as a result, sending a positive signal to the investors community. The suggested results indicator for the DPF operation is the number of days needed to start a business (baseline: 11 days in DB Report 2019; target: 3 days by June 2020).

Second Tranche Release Condition 2: The Borrower has issued a Ministerial Decree establishing investor facilitation services in two governorates in Upper Egypt and/or Frontier Governorates17, to facilitate business establishment and operations and to improve transparency and predictability for investors.

83. Rationale: The enactment of the Investment Law No.72 in 2017 has been an important step to improve the investment framework in Egypt, providing clear investment guarantees and ensuring fair and equitable treatment of investors. The law also helps streamline investment procedures by setting time-bound commitments for approval to eliminate bureaucracy. Effective implementation of the new law is now key and hence the need to upgrade the services provided to end-clients, the investors, and as interface with other government entities. In an effort to put in place the second-generation one-stop-shops, GAFI has established five Investor Service Centers (ISCs) in the main urban economic centers: Cairo, Alexandria, Ismailia, Asyut and Tenth of Ramadan City, however, frontier governorates and Upper Egypt (except for Asyut) remain poorly served. Firms in these governorates often find themselves obliged to travel long distances spending additional time, money and effort to conduct basic services related to business establishment and operations.

84. Reform action: MIIC will issue a decree to provide investor facilitation services in two lagging governorates. Services provided include: (a) information provision: providing investors with a clear understanding of the requirements they are expected to meet, in order to perform business activities; (b) facilitation of business establishment and ongoing operations, amendments to the Articles of Incorporation, or form of company, or establishing new branches, or listing in the stock exchange; and (c) response to investor requests and grievances. The services will be provided in GAFI’s ISCs which will bring together all the agencies that an investor might need in one place, including the Real State Registration Office, the Commercial Register, the Chambers of Commerce, the Financial Regulatory Authority, and the Egyptian Environment Affairs Authority (EEAA) and/or the environmental delegated authority. MIIC will also issue and electronically publish an investor guide which describes necessary approval processes and timelines in a transparent manner The ISCs will also coordinate and follow-up with other stakeholders, and help adhere to the processing time and service levels stipulated under the Investment Law or other relevant legislation, and will ensure transparency and availability of information, as access to accurate and updated information (regulatory, procedural, statistical, environmental, etc.) is essential for the planning and decision-making stage prior to business establishment.

17 Frontier governorates include: Red sea, New valley, Matrouh, North Sinai and South Sinai.


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85. Expected results: The provision of investor facilitation services in Upper Egypt and/or frontier governorates will reduce travel time for firms and alleviate pressure from the main ISCs that are operational already. After the passage of the new investment law, the number of newly established companies has increased from 15,371 companies in FY2016/2017 to 19,836 companies in FY2017/2018. The new ISCs will significantly facilitate firm creation in the lagging governorates. Furthermore, the publication of a new investor guide will help in improving transparency and predictability to investors. The proposed results indicator for the DPF is the average number of firm registrations per month at the new Investor Service Centers (baseline: 0; target: 20 by June 2020).

• Strengthening the entrepreneurship ecosystem

Prior Action 5: The Borrower has issued Ministerial Decree No. 208/2018 dated October 28, 2018 developing the “your idea, your company initiative”, a program to provide technical assistance, funding, and improve the regulatory framework for private sector-led entrepreneurship.

86. Rationale: The private sector in Egypt suffers from lack of dynamism, which continues to hinder its growth. Entry and exit rates are low and many firms exhibit a low growth potential with almost 97 percent of private sector enterprises being either micro or small, hence the need to encourage innovative start-ups and SMEs with high growth potential as engines for growth and job creation. Start-ups and firms in that segment face challenges related to lack of funding and inadequate business development support. Also, the legal framework that is non-conducive for venture capital and private equity fund operations. According to the 2017 Global Entrepreneurship Monitor Report, the capacity to produce and retain quality start-ups across the spectrum in Egypt is limited, particularly for women entrepreneurs. This is mainly due to weaknesses of ecosystem support providers to adequately address the capacity needs of entrepreneurs, especially women, and provide them with a sustainable access to relevant services.

87. In Egypt, the venture capital and private equity industry is still nascent. Egypt has very few private equity/venture capital firms and lacks funding, particularly in the early start-up stages (‘valley of death’). The most acute shortage is at the angel/seed stage with transaction ranging from US$50,000 to US$250,000, followed by the later seed stage and early stage funding with tickets ranging from US$250,000 to US$500,000. In 2016, Egypt managed to attract only 1 percent of the total private equity/venture capital funding deployed in the Middle East and North Africa Region, given foreign exchange instability and inflation which affected investor sentiment. Having said that, Egypt remains a market that investors have strong desire to access should conditions prove suitable. In the absence of private sector willingness to invest in the seed stage in general, there is a strong case for public sector intervention, following private sector principles and decision-making, to de-risk the market or provide blended finance models that offer incentives for the private players to foster a start-up culture in the Egyptian economy and catalyze the development of the entrepreneurship ecosystem.

88. Policy reform: With the objective of achieving comprehensive and sustainable economic development in Egypt, the GoE announced the intention to grow and support the entrepreneurship ecosystem, giving it significant priority in the Government program launched in 2018. In line with this national direction, the MIIC issued a decree to establish ‘Fekretak Sherketak’ (Your Idea, Your Company) program, offering an integrated package of TA and financing mechanisms to entrepreneurs. The Fekretak Sherketak program operates under three main pillars delivered and decided by private sector professionals and fund managers:


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(a) TA and business development services through ‘start-up service centers’. The start-up service centers are run by private sector professionals with expertise in entrepreneurship support and act as resource hubs that offer a complete package of consulting services to support young entrepreneurs. The start-up service centers provide company establishment services, awareness raising campaigns, business mentorship, legal consultations and services, government support and liaising services, training sessions and workshops, and coworking spaces. Special emphasis is made on mentoring as proven more effective at improving business outcomes than training sessions.

(b) Access to seed financing through accelerators and incubators. The Prime Minister’s Decree No. 870/2017 had already allowed MIIC to establish ‘Egypt Ventures’, the Fekretak Sherketak financing vehicle, an investment firm which, to date, has invested in important incubators and accelerators in Egypt, Flat6Labs, and Falak start-ups accelerator. With the objective to limit the role of the State, there are clear guidelines in place on appropriate governance and transparency mechanisms in the management and selection of investments, and best practice commercial standards are applied, with the public-sector role resting only at a high-level supervision to achieve development indicators, while all investments are led and decided by the private sector.

(c) Advocacy role to improve the legislative environment for entrepreneurship. The Fekretak Sherketak program will also help influence any additional key regulatory reforms that would have strong impact on entrepreneurship agenda (Companies Law, Capital Markets Law, bankruptcy, and so on).

89. Expected results: The suggested results indicator for the DPF operation is: Nongovernment financing as percentage of total financing under Fekretak Sherketak/Egypt Ventures initiative (baseline: 0; target: 50% by June 2020). On the output level, the initiative is also expected to support 1,000 new start-ups by June 2020.

90. The objective of improving the ecosystem for private-sector led entrepreneurship also helps to promote clean technology businesses. A recent Bank study finds that at least 11 percent of these start-ups will pursue cleantech business models.18-19 Fekretak Sherketak’s website encourages climate-smart entrepreneurship by featuring wind turbines, solar panels, and energy efficiency tools on its applicant landing page.20 The next boot camp round will be conducted in cooperation with the Ministry of Environment to focus on cleantech solutions. This in turn will pave the way for significant reduction in greenhouse gas emissions from low carbon business opportunities.21

18 In 2016, following three rounds of growing interest, the American University in Cairo’s Venture Lab Acceleration Program (VLAB) received 20 applications in renewable energy and other green business models out of a total of 180.18 The UNEP-funded program incubated startups in off-grid solar (Karm Solar, Sunutions) and biodiesel recycling (Tagaddod) that have since scaled nationally and achieved commercial success. 19 Todros, Abdel-Razek, et al, “Egypt Climate Innovation Collaborative: Supporting Cleantech Entrepreneurs in Egypt through Partnerships and a Market Development Focus,” World Bank Group, Washington DC, 2018. 20 http://www.sherketak.com/ 21 Ibid, p6. Diesel-powered pumps in Egypt consume an estimated 3.7 million tons of diesel per year, and release 10 million tons of carbon emissions. Moreover, many hotels and resorts along the Red Sea and Mediterranean coasts are not connected to the

http://karmsolar.com/

http://www.sunutions.com/

http://www.tagaddod.com/

http://documents.worldbank.org/curated/en/446291528869419204/Egypt-climate-innovation-collaborative-supporting-clean-tech-entrepreneurs-in-Egypt-through-partnerships-and-a-market-development-focus

http://documents.worldbank.org/curated/en/446291528869419204/Egypt-climate-innovation-collaborative-supporting-clean-tech-entrepreneurs-in-Egypt-through-partnerships-and-a-market-development-focus

http://www.sherketak.com/


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• Promoting and facilitating SME participation in public procurement

Prior Action 6: The Borrower, through its President has enacted Law 182/2018 governing contracts concluded by public entities as published in the official Gazette on October 3, 2018 promoting and facilitating SMEs participation in public procurement.

91. Rationale: The Public Procurement Law No. 89/1998 currently being used in Egypt suffers from multiple gaps and deficiencies in critical areas that result in its inconsistent interpretation and application. Weaknesses in public procurement include inefficiency arising from excessive time taken from advertising to contract award, inaccurate and unreliable cost estimates, excessive rebidding, direct contracting and cancellation of tenders, and cost overruns in civil works, all of which are compounded by insufficient capacity in contract management. Lengthy and delay-prone approval and payment processes exacerbate inefficiency and are clear signals of systematic abuses. Also, the scope of application of the Public Procurement Law excludes SOEs, which perform a large proportion of procurement, and they are instead subject to their own individual procurement rules and practices, thus leaving the legal framework fragmented and only partially covering public procurement.

92. Policy reform: The new Public Procurement Law has taken good steps toward aligning the public procurement system with international standards. Notable developments include solidifying the scope of application of the law by limiting informal exclusions of competitive and transparent procurement procedures, enabling the use of e-procurement, and introducing framework agreements. Furthermore, the new law includes provisions on institutional arrangements in procuring entities, adds a code of conduct for public officials and employees and private sector participants, addresses conflicts of interest in public procurement, and establishes an office and procedures for review of complaints from bidders.

93. The new Public Procurement Law introduces techniques specifically to promote greater opportunities for SMEs in the public procurement market, either directly or through subcontracting opportunities. Additionally, the law mandates the application and full rollout of e-procurement, an SME-friendly tool that facilitates participation of SMEs in public procurement, while boosting transparency. The law is expected to improve the level playing field and provide better opportunities for unconnected SMEs to participate in public procurement.

94. Expected results: The new law will yield substantial benefits in the appropriate use of public funds in terms of cost savings, reduction of inefficiencies in the procurement process, improved competitiveness, enhanced transparency and governance, and overall improvement in value for money. Possible indicators could measure cost savings in public purchases and reduction in the time needed for procurement, including contract implementation. Because the DPF operation focuses mainly on inclusive growth, the proposed results indicator is percentage increase in the number of SMEs participating in public tenders and/or being awarded contracts (baseline: No increase, target: 20% increase by June 2020).

95. The enactment of the new Public Procurement Law is part of a comprehensive approach to the reform and modernization of the procurement system, with additional steps needed to be taken to address other components of the system, including procedures (to be highlighted in the law’s Executive

national grid and are entirely dependent on diesel for all operations including water desalination. These markets could support 2,097MW of solar.


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Regulations), institutional/organizational arrangements, e-procurement, capacity building and professionalization, and establishing a comprehensive scope of application for the legal framework taking into account international standards and best practices of effective national systems. The World Bank, through the UK Trust Fund, has been providing support to the MOF in the development of the legal framework and the introduction of e-procurement. Additionally, the World Bank has spearheaded and financed the development of the Arabic language version of the Massive Open Online Course on Public Procurement and has provided technical support for the preparation of the new Procurement Law.

96. Mandatory e-procurement under Law 182/2018 will also reduce paperwork and increase government efficiency; these measures could decrease the transportation emissions and paper consumption associated with a less efficient and more bureaucratic procurement application process, resulting in potential climate change mitigation effects.

97. Future reforms: The scope of the public procurement law excludes state-owned enterprises (SOEs). It will be important to address the shortcomings of SOE procurement process knowing the significant volume of expenditures in which there is public interest flow through SOEs. Reforms to the SOE procurement process will help open new markets to the private sector. Following enactment of the Public Procurement Law, drafting of the Executive Regulations will be initiated, where procurement procedures will be aligned with best international practices based on core principles of transparency, fairness, open competition, and sound procedural management. These regulations will standardize government procurement rules, procedures and document requirements to encourage broad participation by the private sector, with a clear and robust framework for complaint resolution. The regulations will be applied consistently and uniformly to all government entities’ tenders, including to procurement conducted by budget entities, local authorities and economic authorities. The Government plans to form a committee to conduct a careful assessment of the existing procurement regulations and practices of SOEs and, based on its recommendations, put in place a reform plan to ensure that SOE’s procurement rules are consistent with best practices as highlighted in the new Public Procurement Law.

• Improving the process of property registration in rural and new urban areas to improve security of tenure

Prior Action 7: The Borrower, through its: (a) Cabinet has approved on June 6, 2018 the new draft title registration law and submitted it to Parliament for adoption; and (b) President has enacted Law No. 27/2018 regarding organizing property registration in the New Urban Communities; together leading to simplification in property registration process.

98. Rationale: The legal framework governing land and property registration is outdated and inefficient. It comprises of two parallel systems: (i) a deed registration system (sigueal el-shaksi) governed by Law No. 114/1946 and used primarily in urban areas; and (ii) a title registration system (sigueal el-ainee) governed by Law No. 142/1964 which is today applicable primarily in agricultural and rural areas and was expected to be expanded nationwide, including to urban areas. (See Box 1 on more background on these existing parallel title and deed registrations systems).

Box 1: Systems of property registration in Egypt Egypt has two property registration systems: the ‘deeds’ system (regulated by Law No. 114 of 1946) and the ‘title’ system (introduced by Law No.142 of 1964). The deed system historically covered the whole country however the intention was that the title system would replace the deed system gradually. Both systems are


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maintained by the Real Estate Publicity Department of the Ministry of Justice (MOJ). Title registration system sets up a property-based system in which all matters affecting a particular property are registered using a cadastral file with a unique parcel identifier for each property unit (In this sense it is, all else equal, a more robust system than the deeds recordation system where the transaction parties’ information serves as the identifier, rather than the property itself). The title registration law which dates back to 1964 governs the transition from the deed system to the title system (a process sometimes called ‘first registration’). However, implementation of this system across the country has been extremely slow. Up till now, the system has only been implemented in rural and agricultural areas and few pilots in cities. The rest of the country, especially urban areas, is covered by the deeds registration system. Documentation of lessons learned from the application of the title system in the rural and urban context suggests that significant legal and institutional reform should take place in order to speed up the conversion from the dead to a title system in urban areas and improve the accuracy and reliability of the system.

99. The outdated, inefficient and parallel property registration systems in the country results in long delay in registering property registration and lack of trust in the system by individuals, businesses and banks. The poor and vulnerable are especially impacted by uncertain property rights as they lack the resources and connections to pursue legal resolution in case of property disputes; therefore, they would be among the main beneficiaries of a transparent and reliable property registration system. They also could use the land title as a collateral to borrow funds to invest in agriculture or improve agriculture dwellings. The fact that taxes on transfer in Egypt is one of the lowest in the World (In 2006 Egypt replaced a registration fee set at 5.9% of property value with a small administrative fee that should not exceed a seal of USD 115) makes it easier for people to register transactions once services is improved.

100. The challenge, however, is that the legislation governing the title registration system is outdated and has resulted in many challenges. Indeed, a detailed study by the Land Survey Authority found that although 95 percent of rural properties are registered under the title system, fewer than one in four properties have a fully updated title. This is a result of a complicated, lengthy processes in registering transactions, and therefore, people often do not register transactions. Failure to have updated title records affects all farmers equally but the worst off are poor, smallholder farmers as it is their lands that have been most fragmented over time with land reforms and other mutations

101. In established urban areas less than 10 percent of the properties are registered under the deed system with people living on small plots that were informally occupied and/or illegally subdivided being particularly likely to lack documents. By contrast, in new cities/urban communities where much of the urban population growth has taken place in the past three decades, the deed registration situation is less complicated because the new cities were built on Government-owned desert lands and have witnessed a much fewer number of transactions and mutations. That said, the system suffers from many challenges including time consuming and bureaucratic procedures and regulatory ambiguities that, if left unaddressed, will rapidly result into a deteriorated situation similar to the established urban areas. In particular. Time consuming and bureaucratic procedures to register property discourage most people, especially the poor from formalizing their rights to the land and property they occupy. Small businesses are similarly reluctant and similarly affected, which limits their ability to more productively use their property.

102. Both title and deed registration systems suffer from the following issues:


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(a) Issues with deeds registration system: Registration is time-consuming and involves a large number of official procedures. As a result, large numbers of properties are not formally registered and most people do not register property transactions, preventing government from collecting taxes and fees on property transfers, and preventing people from fully benefitting from accessing credit from banks since Banks will not lend without a full registration.

(b) Issues with title registration system:

i. Under the law, the GoE has only declared certain parts of the country as within the jurisdiction of this system – which are mostly rural/agricultural.

ii. The titling process suffers from ineffective public awareness during the period of the titling program in specific locality. As a result, many claimants are not fully informed of such ongoing exercises, and large numbers of properties are not accurately registered in the title system.

iii. The complete reliance on government surveying staff results in serious delay in the registration process;

iv. Weak government management capacity to effectively implement the titling program; and very weak knowledge of latest technological innovations for effective implementation of such programs

v. These factors significantly affect the title registration system, leading to low rates of registration of transactions. In addition, a large number of properties are without formal title despite falling within the domain of the title registration system.

vi. The weak implementation of the title system, has resulted in the coexistence of dual systems of title and deed registration in the country which creating duplication of efforts and inefficiency.

103. There are many global good practices and lessons in implementing such programs and Egypt will benefit greatly from the Bank’s global expertise and engagement in the sector as they plan and implement such a program.

104. Policy reform: The proposed prior action supports the following reforms:

(a) A new draft law regulating the title registration system for land and properties. This law will replace the existing Law No. 142/ 1964 pertaining to title registration and will substantially improve the effectiveness of the existing title registration process.22

(b) A new law (Law No. 27/2018) improving and regulating the deed registration system for land and properties in “new urban communities” developed by the New Urban Communities Authority (NUCA) on previously desert land. This law will substantially improve the effectiveness of the registration process for properties in existing and future areas developed by NUCA, with specific features for NUCA-developed new urban communities.23 An estimated

22 The draft law was approved by the Cabinet which has submitted it to Parliament for consideration and eventual legislation. 23 The law establishing NUCA and describing its mandate and functions (1979) does not specify which of the two land and


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six million people live in existing NUCA-developed communities, with substantial concentration of recent economic and population growth. NUCA is an agency which is allocated state-owned land, which it further plans and develops into “new urban communities” with varied land uses (residential, commercial, industrial etc.). It then sells/leases/rents this developed land to private landholders.

(c) With this new law, the government will be able improve property registration in these communities within a relatively short time as these cities have been established during the past 20-30 years, so there are relatively few past transactions to be reflected. In addition, information exists mostly in digital format. Simplified and transparent registration will enable all households, but especially poorer households and smaller businesses who may have lacked the resources to pursue a lengthy and bureaucratic to benefit from their property, including in terms of using property as collateral.

105. Some specific salient features are described below:

106. Draft title registration law:

(a) Geographical scope: As in the previous law, the new draft law applies the title registration system once to geographic areas declared as such by the Minister of Justice. These are agricultural/rural areas and selected pilots in new urban communities. In addition, the new law would assist in the expansion of the title system in urban areas, being supported with the right institutional reform and awareness and capacity building activities.

(b) Improving the pace of title registration: The Land Survey Authority is currently mandated to conduct all cadaster surveys of the land to develop property cadasters before titles can be issued. Given the limited capacity within Egypt Survey Authority, this caused serious delays in the past. The new draft law would allow the use of private surveyors to do cadaster surveys, thus will accelerate the process in a meaningful way.

(c) Establishing a process for grievance redress mechanism (GRM): the draft law would establish a committee in each governorate, headed by a judge and membership of two senior civil servants, to examine complaints. Appeals regarding the decisions of this committee could be made to the appeal court.

(d) The draft law would provide incentives to register properties, that include:

i. Process for claimants who do not have registered deeds or titles to submit a request to the Real Estate Publicity Department (REPD) to verify and validate their claims. This includes properties in areas where the cadaster has already been completed but claimants were excluded due to lack of public awareness/information.

ii. Increasing the period in which cadaster sections/geographical areas are open for verification of property claims and conduct of cadaster survey, from 6 months in current law to 1 year (and extendable up to 3 years).

property registration systems will apply in NUCA-developed areas. Thus, the default system applicable in these areas is the deed registration system, since a specific declaration of MOJ is required for the title registration system to be applicable in a particular area.


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iii. Flexibility to re-open certain cadaster sections/geographical areas for re-verification and title confirmation.

(e) The draft law will reduce fees for landholders for obtaining formal title registration in the period in which the cadaster sections are open for titling.

107. The Bank is currently providing TA to the Ministry of Justice (MOJ) to develop a comprehensive action plan for improving the overall land registration system that would include further improvement in the legal framework, plans for Institutional restructuring and strengthening, implementation of additional pilots before designing the national land registration program.

108. New deeds registration law for new urban communities:

(a) Geographical and technical scope: This law only applies to the process of registration of privately-held land and properties in existing and any new urban communities developed by NUCA in desert land. The scope of this law is to accelerate and improve the deed registration process for private landholders in those communities.

(b) The law defines responsibilities and functions of NUCA to ensure fast, efficient and complete registration of properties in NUCA-developed new urban communities which have been sold to private persons ore legal entities.

(c) Improvements to bring unregistered properties into system: a) allow landholders in new urban communities to present documentation showing property transaction between landholders and NUCA to the REPD, which will readily provide formal deed registration to landholders; b) require NUCA to share all data on all properties sold or transferred in their developments with REPD to allow for expedited deed registration; c) allow NUCA to register properties with REPD on behalf of landholders/tenants; and d) enable the establishment of dedicated REPD offices in NUCA-developed new urban communities, on lands provided to REPD by NUCA for this purpose to facilitate more convenient property registration for landholders in these communities, saving them trips to distant REPD offices.

109. If implemented successfully, these changes will ensure that the existing deed registration system is fully extended to the new urban communities and kept up to date. Because data on property holders and maps of these new urban communities exist with NUCA in digital format for the most part, the process of property registration in these areas can be fully completed in a relatively short time span. This will also enable the establishment of modern property registration offices in these new cities, which may then be scaled up to become a model in the other parts of the country.

110. Expected results: The approval of the draft title registration law will reduce the time and transaction cost of property registration in rural areas. This will enable especially smaller, poorer and more vulnerable property owners to register. The law will also ensure the existing cadaster is up to date thus reducing the current uncertainty surrounding the exact status of registered properties. This will be beneficial to the poorer households who lack the resources to identify and address out of date titles. Similarly, the application of the new deed system in the new urban communities would have a positive impact in easing the process of registration as it is customized to the special nature of these communities. This will include a more efficient process of registration and enhance the interagency cooperation between the REPD and the NUCA with the aim of posting the economy and all urban dwellers in these


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cities. Further, by establishing a clear process for property registration, it will prevent disputes over property ownership in the future in these new cities, thus further securing tenure.

111. All these measures will over time increase the proportion of registered properties nationwide and improve access to formally registered land and secure title, thus helping reduce a major constraint for private sector investment and also providing positive social benefit through improved security of tenure. The suggested results indicator for the DPF is percentage of property registration offices in the “new urban communities” implementing the more transparent procedures for deed registration (baseline: 0; target: 10% of offices by June 2020).

112. Future reforms: The GoE recognizes that legislative reform is an essential first step for modernization of land registration in Egypt. To achieve this goal, the Government is preparing a comprehensive action plan to implement planned reforms on modernization of the land registration system, that addresses legal, institutional, capacity, investment needs, and public awareness issues. The Bank is providing technical assistance to MOJ on this, and the roadmap is currently under review. Its implementation may be supported by the Bank through subsequent engagement.

Risks and mitigation measures for the proposed prior action

113. Draft Title Registration law: The objective of the reform is to simplify the process of title registration and encourage formal property registration. A social risk may arise if there are competing claims by various private users on the same property, with one being formal (having formal rights under the existing property registration system) and other(s) being informal. This dispute will require to be resolved for the issuance of a formal title to one private user for that property. As a risk mitigation measure, the competing private claims will be covered by the in-built verification and GRM systems under this draft law. The key features of the draft law are as follows: titles are only provided upon resolution of all such disputes, with all competing claims to properties presented and evaluated by the registration agency. The built-in grievance redress mechanism will also apply in this case. After provision of titles, a grace period is provided for complaints and dispute resolution before title is confirmed permanently. The period for submitting complaints is one year with potential expansion to three years. The law provisions for establishment of a committee in each governate, headed by a judge with membership of two senior civil servants to examine complaints regarding the application of the law. Appeals regarding the decisions of this committee can also be made to the appeal court.

114. Another potential risk may arise in case of formal title registration of any existing state-owned properties. Such property may have existing informal (and unregistered) private use, and title registration of this state-owned property may impact these users if the state decides to displace these informal users. The risk of this is low, as state-owned properties are already well-identified and registered under the existing deed registration system, and title registration will only convert the existing registration to title. However, in the rare case that such a risk materializes and private users are displaced, the following remedies and mitigation measures exist:

(a) The affected informal users have the right to formalization of their informal or squatter occupancy of public land through a process called adverse possession and governed under the Civil Code of Egypt, and which makes it possible for the possessor or user of a plot of land to gain ownership if it is occupied peacefully and continuously for 15 years (Article 968 of the Civil Code).


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(b) For all private claims on state land the President has enacted Law No. 144/2017 to deal with cases of adverse possession and setting clear process that enable land tenants to get ownership or other formal right after confirming that they have visible, uncontested and uninterrupted occupancy of the land. The claimants must claim that they had rights on the land before the date of the enactment of the law. They are allowed to submit their claims for up to three months, with this period being extendable nationwide upon a Prime Minister’s decree. This law also sets clear grievance procedures regarding the decisions of the state authorities, including the right of the land tenants to appeal in the judiciary system. The Government also has an ongoing effort to encourage legalization of informal cases under this law, which is a positive precedent.

115. The implementation of these mitigation measures will be strengthened by provision of relevant information to the general public about procedures introduced by Law No. 144/2017 for regularization / formalization of existing informal land rights on any state land being used as such. The GoE has launched efforts to disseminate this relevant information to the general public, to allow any such informal users to submit claims for formal land rights under the process defined in this law. A website (www.estrdad.gov.eg) has been established which provides all such information, legislations and procedures for the benefit of all citizens, especially informal rights holders on state land. This is being supplemented by use of other media.

116. Deeds registration law for new urban communities: For the law pertaining to improved deed registration in NUCA-developed areas, the scope of this reform is restricted only to the process of registration of privately-held land and properties in existing and new urban communities developed by NUCA. This reform does not at all pertain to how that land was allotted to, or came under possession of, NUCA in the original instance to develop these communities. The scope is to improve the deed registration process for private landholders in those communities after these have been developed by NUCA. The deed system also specifies a process of grievances and litigation (Articles 35 and 36 of the relevant law). In the new urban communities, this risk is expected to be very low as most people have recent contracts issued by NUCA to provide properties.

While the scope of this law does not pertain to how undeveloped land was allocated to NUCA in the first instance for development, NUCA-controlled lands are unimproved desert lands that have no improvements (buildings, plants, water wells, etc.) or grazing rights and as such qualify under Islamic jurisprudence as “Mowat” land (dead or barren land) that cannot have private claimants and is State-owned. In the very rare cases where NUCA-controlled lands might have a prior competing claim, the private claimants would have access to the following risk mitigation process : i) access to relevant provisions in the Civil Code of Egypt as also discussed above; and ii) access to Law No. 144/2017 to deal with cases of adverse possession for all private claims on state land, as also discussed above.

Second Tranche Release Condition 3: The Borrower through its Prime Minister, has issued a Prime Ministerial Decree specifying Executive Regulations relating to the Ride Sharing Law including the procedures for issuance of operations licenses, a framework for taxes and social insurance premiums, and data requirements for ride-sharing companies; leading to a framework for facilitating job creation.

http://www.estrdad.gov.eg/


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117. Rationale: Ride-sharing services have addressed a gap in quality transport services in Egypt’s urban centers and especially the Greater Cairo Region, and have added dynamism to transport services being provided in the country. However, up until recently, while taxi drivers have been required to be licensed and pay taxes and license fees, ride-sharing service providers have not. To facilitate the rise in ride-sharing services in a regulated manner and to increase consumer protection, GoE enacted the Ride Sharing Law (Law 87 of 2018) in 2018. The law requires that within three weeks of its creation, a steering committee headed by the Minister of Transport should propose a decree to the Prime Minister specifying the executive regulations that pertain to the law, including concerning the conditions, procedures and controls required for issuance of operations licenses, taxes and charges, and operations cards; a framework for taxes, charges and social insurance premiums; and specifying the data and information required to be kept and maintained by ride-sharing companies.

118. There are approximately 45,000 registered taxi drivers in the Greater Cairo Region, and 400,000 ride-sharing drivers registered with ride-sharing companies.24 About 140,000 of the ride-sharing drivers are active at any given time. While ride-sharing drivers currently pay no taxes, insurance or licensing fees, each taxi driver pays approximately EGP 3,800 in licensing fees and EGP 500 in annual taxes. Taxi drivers also pay EGP 50 annually for car insurance, although it is very difficult for them to file a claim. Taxi drivers, although part of the taxi syndicate, are not offered health insurance or other benefits. Addressing these disparities will help address the current tension between taxi drivers and ride-sharing drivers while facilitate creating quality jobs in Egypt.

119. Policy reform: The Ride Sharing Law requires that the Government, through its Prime Minister, issues a decree specifying Executive Regulations concerning the conditions, procedures and controls required for issuance of operations licenses, taxes and charges, and operations cards; a framework for taxes, charges and social insurance premiums; and specifying the data and information required to be kept and maintained by ride-sharing companies. To help limit the level of congestion and pollution in Egypt’s urban centers, especially in the Greater Cairo Region, it is recommended that taxes should be proportional to the number of kilometers driven. Further, to efficiently facilitate the formalization of ride-sharing drivers, it is recommended that ride-sharing drivers are allowed to apply for their licenses and pay their taxes and fees either at the Department of Motor Vehicles or at one-stop shops managed by MIIC (existing and new ones proposed to be set up). It will also ensure that both taxi drivers and ride-sharing drivers will be protected by social insurance and will help increase revenue for the state which can support the development and maintenance of quality transport infrastructure.

120. Expected results: The adoption and implementation of the executive regulations of the Ride Sharing Law will help formalize ride-sharing drivers through increasing the number of ride-sharing driver licenses issued (baseline: 0; target: 100,000 by June 2020).

121. Next steps: The Bank will be providing technical assistance on developing the executive regulations to the law as deemed essential to harmonize concerns of existing taxi operators with new ride-sharing drivers, as part of the ongoing technical assistance to Ministry of Transport on urban transport. This is part of a programmatic support to provide advice to Government and regulators on judicious balance of needed regulation of the sector along with freedom of using digital platforms, and harmonizing tax and social insurance obligations across all drivers. This is essential to align stakeholder on much needed private sector-led job creation opportunities through greater use of technology platforms.

24 As per data received from Uber North Africa.


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122. The GoE has made important strides in fiscal consolidation which included key measures such as energy subsidy reforms, introduction of the VAT, and reforms to public sector wages, which led to a marked improvement in fiscal balances. The government’s fiscal policy in this fiscal year and beyond is geared toward further reducing the overall deficit and keeping general government debt on a clearly declining path. Fiscal consolidation is essential to free up financial sector financing through reduced dependence of the banking sector on public borrowing.

123. This operation supports complementary reforms that are aimed at improving the quality and predictability of fiscal management. Prior Action 8 supports online tax filing, providing transparency and improved governance of tax administration. This will also enable the Government to undertake data analysis over a period of time to detect leakages and inconsistencies for enhancing the tax base. Prior Action 9 recognizes Government’s continued commitment on energy subsidy reforms for fifth year in a row, rationalizing tariffs for fuel products as well as electricity and sending a positive signal about the remaining path to cost recovery. These measures are being augmented with compensatory increase in social protection measures through the budget as well as programmatic engagement form World Bank through projects on social protection, education and health sector, which have specific measures for benefitting poor and marginalized sections of the society.

124. Predictability is also needed at the level of local administrations. Prior Action 10 will improve how local administrations25 plan and deliver key infrastructure and services to support economic growth. It strengthens the system of allocation of central government transfers to Local Administrative Units (LAUs), ensuring medium-term allocations over a three-year period and providing the process by which a predictable and transparent formula for the allocation of such funds is established. It will enable local administrations to improve outcomes in service delivery, which will underpin private sector-led growth and also improve living conditions for citizens. Though the size of spending that will be channeled through the formula is small at around 0.5 percent of total public expenditure, this prior action represents an important step in implementing the constitutional requirement of decentralization.

• Simplifying tax payment and improving the business environment

Prior Action 8: The Borrower has issued Ministerial Decree No. 221/2018 dated May 22, 2018 requiring mandatory electronic filing of tax returns for entities with legal personality leading to simplification of tax payment and improvement of the business environment.

125. Rationale: Currently, taxpayers in Egypt file their annual income tax and monthly VAT returns manually where they fill in paper forms, sign off, and submit, in person, to the relevant offices of the Egyptian Tax Authority (ETA). This is an inefficient process, both time consuming and prone to human errors. Electronic filing benefits both taxpayers and the tax administration. It is more convenient for the taxpayers as returns can be filed remotely, limiting the number of visits to tax offices, and at any time,

25 The hierarchical structure of local administration in Egypt below the central government includes the following levels of local administrative units (LAUs): 27 governorates, 188 districts, 91 urban districts, 226 cities, and 1,326 LAUs at the village level.


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regardless of the ETA’s official working hours. Taxpayers can get electronic confirmations that tax returns were successfully received by the ETA.

126. In a paper-based environment, the ETA has to keep millions of paper tax returns in secured archives and enter their data in a digital format to process those returns—this is an expensive task. Electronic filing brings more efficiency for the tax administration in terms of the ability to validate the mathematical accuracy of returns, saving the costs of data entry, and freeing physical space. Staff time can be shifted to carrying out more value-added tasks such as analytical reviews of tax returns, risk-based field audits, collection of arrears, and support services to taxpayers.

127. Policy reform: On May 22, 2018, the Minister of Finance issued Decree No. 221, amending a few articles in the Executive Regulations of Income Tax Law No. 91 of 2005. Article No. 104 of the said decree made the electronic filing of tax returns mandatory for all legal persons. The decree became effective the day following its issuance. Because the deadline for filing tax returns is April 30 for taxpayers with calendar year 2018, their first electronic filing would be due on April 30, 2019. For taxpayers with June 30 year-end, income tax returns are filed no later than October 31, 2018. These taxpayers are mostly SOEs.

128. The portal for electronic filing was developed where taxpayers enter their returns in a digital format. After electronic validation by a chartered accountant, details of the e- payment of the tax liability should accompany the return. Detailed guidelines are now available on the Income Tax Department’s website. The ETA held several workshops for a selected group of large taxpayers and accounting firms to explain and test the validity of the new arrangements.

129. This is an important step toward modernizing the tax administration to be implemented gradually, focusing first on income tax payers and then moving toward other types of taxes with more frequent filing requirements such as VAT. The MOF is currently drafting a request for proposals, which will be sent out to IT companies to build databases and develop comprehensive back-end functionalities.

130. Expected results: The introduction of this reform will save taxpayers’ time, leading to lower tax compliance cost for the business community and will contribute to enhancing taxpayers’ perception of tax administration in Egypt. This will also have a positive impact on the business environment. Upon the ETA’s completion of its information systems development, tax revenues are expected to increase as the ETA will be able to adopt a risk-based approach to managing registration, filing, payment, collection, and audit functions. The suggested results indicator for the DPF operation is number of companies filing annual income tax returns electronically (baseline: 0; target: 30,000 companies by June 2020). The target will cover all large firms (according to ETA definition) and the upper echelon of SMEs during the first 18 months.

131. Future reforms: The World Bank has started the dialogue with the Ministry of Finance to provide support in the implementation of the Medium-Term Revenue Strategy which is currently under preparation. Possible areas for support include administrative reform changes at ETA, change management, HR management and ICT system issues, tax expenditure analysis, taxpayer compliance costs study, taxpayer satisfaction survey, with links to the Doing Business agenda on paying taxes and trading across borders and support on customs administration and single window plans.


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• Continuing energy price adjustment for enhancing energy supply and promotion of private sector investment in clean energy

Prior Action 9: The Borrower has issued Ministerial Decree No. 157/2018 dated June 4, 2018 on annual electricity price adjustment; and through its Prime Minister, has issued Prime Ministerial Decrees No. 1130/2018, No. 1131/2018, No. 1132/2018, and 1133/2018 dated June 13, 2018 on fuel price adjustment for FY2018/19 consistent with the FY2018/19 Budget Statement, for reducing overall energy subsidies as required for promoting private sector participation in energy sector and creating fiscal space for human capital investment.

132. Rationale: Egypt generated about US$14 billion annually from energy subsidies over 2014-2017 compared to ‘no energy price adjustment scenario’. These savings were utilized for fiscal consolidation and allocating higher budgets for targeted social protection of the poor and marginalized sections of the society. The Government is committed to energy subsidy reforms manifested in fifth annual adjustment on electricity and petroleum products implemented in July 2018.

133. Policy reform: This latest tariff adjustment in June / July 2018 raised diesel and gasoline prices by 51 percent, and electricity tariffs by an overall 26 percent on average for FY2018/19. In addition to key petroleum products, the prices for LPG were increased by 67 percent (even after the latest increase, cost recovery is estimated at 40 percent only). The electricity price adjustment is across the domestic consumer slabs with average expected increase of 29 percent for households and about 41 percent for industries. To address the impact of continued energy price adjustments, the budget for social protection measures has been increased by more than 50 percent.

134. Expected results: Egypt is one of the few countries that have successfully undertaken annual discretionary price adjustments in electricity and petroleum products for five consecutive years in a row, demonstrating best practice of spreading energy price adjustment over a period of years while expanding the conditional cash transfer program for poor and marginalized sections. The careful handling of these tariff increases, through ensuring better quality of supply, eliminating power shortages, communicating proactively with the public, and implementing parallel social protection measures, helped secure public acceptance of repeated large tariff adjustments despite a challenging social context.

135. The subsidy bill which was at 6.6 percent in FY2013/14 reached 3.8 percent of GDP by FY2017/18 and is expected to come down to 2.5 percent of GDP by FY2018/19, continuing a downward trend thereafter. The higher international oil prices in FY2018/19 have resulted in lower than expected increase in cost coverage ratios in electricity tariffs and petroleum prices. Cost recovery level of electricity tariffs is on track as cost recovery is expected to increase from below 50 percent in FY2013/14 to an estimated 85 percent in FY2017/18. For other fuels, cost recovery has also increased by 15-20 percentage points on average26. The continued energy tariff adjustment has provided fiscal space for Government investment in human capital, where the budgetary allocation for social protection increased by 400% between FY 2015/16 to FY 2018/19. This has also provided right incentives for energy efficiency reducing demand of petroleum products by 6% over last one year. It has also led to greater international confidence of global investors in the sector where the renewable energy tariff in solar has come down from US 7.1 cents/ kWH 26 Cost recovery is defined here as the electricity sector’s financial cost recovery, including operating expenditures, depreciation and financing expenditures.


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as supported by previous DPFs to a competitively determined tariff of US 2.8 cents/ kWH for 200 MW solar plant, qualifying as one of the lowest competitive solar tariffs worldwide demonstrating Egypt’s ability to reduce sector wide risks through continued reforms and promoting private sector interest in clean energy. The suggested results indicator for this DPF is: reduction in energy subsidies as a percentage of GDP from 3.8 percent in FY17/18 to 2.5 percent by June 2020.

136. Consistent with the World Bank’s 2016 Climate Change Action Plan, this prior action, which relates to efficiency pricing of fuels and electricity, is expected to contribute to the reduction of carbon emissions due to the anticipated demand response resulting from the increase in prices to end consumers. It is considered part of the MDB list of eligible mitigation activities under Category 9.1 “efficient pricing of fuels and electricity (efficient end-user tariff).”

137. Future reforms: The government is committed to continue the energy subsidy reforms to improve the operational and financial sustainability of the sector, including institutionalizing an indexation mechanism for fuel products. This is being complemented with internal efficiency gains through a program on modernization of energy sector with an objective for enhancing regional energy trade creating opportunities for regional peace dividend and promote clean energy generation with a target of 20 percent renewable energy by 2025. Government approved an explicit fuel pricing formula in June 2018, which adjusts domestic fuel prices to changes in global oil prices, the exchange rate, and the share of imported fuel in domestic consumption. Domestic fuel prices are then changed at pre-specified regular intervals to reflect changes in international prices. The mechanism is designed to maintain the cost-recovery ratios for fuel products and safeguard the budget from unexpected changes in the exchange rate and global oil prices, including the process of caps to allow for protection of inflationary impact of big changes in international oil prices. It also helps to protect fuel tax revenues.

• Medium-Term Debt Management Strategy

Second Tranche Release Condition 4: The Borrower has issued a Ministerial Decree adopting and publishing an expanded Medium-Term Debt Management Strategy for the period covering FY2018/19 to FY2020/21.

138. Rationale: After large increases in previous years, the GoE’s debt ratio fell sharply in FY2017/18 helped by strong fiscal consolidation and robust economic growth. Despite last year’s improvement Egypt faces a challenging debt situation with a total budget sector27 debt ratio of 98.7 percent of GDP in FY2017/18, of which some 42 percent is short-term. Total government debt is dominated by domestic government debt accounting for about 80 percent of GDP and the remainder due to external government debt. The government’s domestic debt component has a challenging maturity structure with about half of outstanding debt issued on a short-term (of up to one-year basis). Medium-term treasury bonds (of maturities 1 to 5 years) take up about 40 percent of domestic government debt. This maturity structure significantly increases the government’s exposure to rollover and liquidity risks, in case of tighter monetary policy or changes in market sentiment. Egypt’s debt is sensitive to shocks emanating from exchange rate and interest rate movements. Spending on interest payments increased from 6.2 percent of GDP in FY11/12 to almost 10 percent of GDP in FY17/18. About 35 percent of total expenditure and 70

27 ‘Budget sector debt’ is the term used by the MOF to define government debt which includes: (a) central administration, (b) local governments, and (c) public service authorities.


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percent of tax revenues is dedicated to debt servicing costs, crowding out spending on much-need productive investment.

139. Policy reform: Publishing an expanded medium-term debt management strategy (MTDS) and updating the strategy on a regular basis is an urgent priority. The latest strategy covering FY2015/16 to FY2017/18 was published in December 2015. Its objectives of issuing bonds with longer maturities and diversifying the funding sources (for example, sukuk) were only partially achieved as the macroeconomic environment proved challenging, including a sharp increase in domestic interest rates in addition to the large exchange rate depreciation. Also, the decision by the CBE to issue large volumes of Treasury bills denominated in USD and EUR to domestic banks was not fully anticipated in the strategy. Unlike the previous MTDS the expanded MTDS for the period FY2018/19 to FY2020/21 will provide specific targets for interest rate risk, exchange rate risk, and refinancing risk for the end of year 1 and year 3 and will provide guidance for domestic and external borrowing. The MTDS should further include expanded debt data coverage of significant SOEs, particularly utility SOEs, and this data should be publicly disclosed on a regular basis. The new MTDS for the period FY2018/19 to FY2020/21 will help improve Egypt’s debt profile by properly accounting for debt risks in additional to financial costs. Further, with a view to reducing risks, the MTDS will increase fiscal discipline through guidance on domestic and external borrowing.

140. Expected results: The publication of an updated MTDS will further strengthen efforts to safeguard sound debt management, which is critical to macroeconomic stability, and inform investors and lenders about the Government’s intended policies and plans. By sharing key debt management goals, investors are given higher certainty about market developments, which will reduce risk premiums. The suggested result indicator for this DPF is publication of an updated expanded medium-term debt management strategy.

• Improving predictability, efficiency, and transparency of public capital expenditures for local development

Prior Action 10: The Borrower has issued joint Ministerial Decree No. 121/2018 dated October 21, 2018 specifying the process for adopting and applying a formula-based capital allocation system for governorates and districts.

141. Rationale: Despite the 2014 Constitution envisioning gradual administrative, financial, and economic decentralization, LAUs in Egypt have limited powers and currently play a minor role in the provision of services which are limited to five areas, commonly known as the ‘local development programs’.28 This limited role results from substantial legal, fiscal, administrative, and capacity constraints. These constraints include the limited mandates, financial authority, and resources provided to local administrations for planning, executing, and managing capital expenditure and infrastructure investments. This is manifested in: (a) limited fiscal allocations for capital expenditures by local administrations—in FY2017/18 these totaled EGP 6,069 million (US$4 per capita on average), around 0.5 percent of total public sector expenditure; and (b) an ad hoc, widely varying, and inequitable allocation of

28 These are: (a) electricity, including electricity networks and lighting equipment; (b) roads and transportation; (c) environment improvement including waste management, managing canals, water courses, and green spaces; (d) security, fire engines and traffic; and (e) supporting fiscal needs of LAUs below the governorate tier.


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this annual capital budgets horizontally across LAUs. In combination, these factors severely limit the ability of local administrations to respond effectively to local investment needs and priorities.

142. The Government aims to gradually move toward implementing the constitutional requirement of decentralization in a phased manner through a series of policy reforms over time. The first policy reform is focused on the local development programs at the governorate and district levels across the country by improving predictability, efficiency, and transparency of public capital expenditure for local development through the introduction of a fair, predictable, and transparent formula-based annual capital budget allocation process for governorates (Diwans) and districts. This reform will put in place the process to define such formula-based allocation system, thereby enabling both the governorates and districts’ LAUs to more effectively use public capital resources and to provide local services and promote local development in a more equitable manner. An improved budget allocation process can substantially improve the quality, planning, and sustainability of public capital expenditure at the regional and local level in the country. In addition, a phased approach to fiscal decentralization will, through subsequent actions, eventually lead to district administrations being independent budget entities instead of their current status as spending units under governorates’ public Diwans. This will be accompanied by parallel actions to increase transparency, participation of, and accountability to the local population.

143. Policy reform: To improve predictability, efficiency, and transparency of public capital expenditure for local development, the Government has issued Decree No. 121/2018 that introduces a transparent formula-based allocation system, within the existing budget framework, for the allocation of annual capital budgets to governorates (Diwans) and districts. This system comprises the following elements:

(a) An inter-ministerial committee, established for this purpose and comprising representatives of the Ministries of Finance, Local Development, and Planning, among others, will determine the further vertical division (amount or ratio) of the total local administration pool between (i) the 27 governorate-level (Diwan) local administrations (the ‘governorate share’), and (ii) the share for district (local units) local administrations (the ‘District share’).

(b) The committee will in due course develop and determine: (i) a formula to allocate the ‘governorate share’ among the 27 governorates (to determine the total monetary amount of capital budget for each governorate annually); and (ii) a formula to allocate the ‘district share’ among the 188 districts (to determine the total monetary amount of capital budget for each district annually). This formula will include indicators such as population, urbanization level, and poverty-level criteria.

(c) The governorate and district formula, the governorate and district shares, and the formula-based resource allocation for the first year and indicative for other outer years for each governorate and district will be published as part of the annual budget, and investment plan formulation process. This is to enhance transparency, ensure that LAUs can plan within their available resources, and citizens are aware of their governorate and district allocations.

(d) The committee will also elaborate the governance arrangements to adopt the formula, monitor implementation, assess their impact, and carry out regular review processes.


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144. The governorates and districts will use these funds for capital expenditures for local development programs under their mandate. The Egyptian Government will issue planning and reporting guidelines to ensure that governorate Diwans and district LAUs: (a) prepare their Annual Investment Plans, allowing for discretion over project selection within their functional mandates and budget envelopes, using participatory planning processes and make these plans publicly available; and (b) report publicly on the expenditures and activities of their capital budgets and plans. This allocation system will remain in place for the medium term (three-year indicative allocations), substantially improving predictability and transparency of available capital budget for LAUs. Based on successful testing of this allocation system, the Government envisions that, over time and in a phased manner, all transfers to LAUs, including recurrent budgets and directorate funds, will be made using such predetermined rule-based allocation systems, using relevant formula-based allocation systems.

145. The reform commits to introducing a formula-based system for allocating funds for capital expenditures. This includes: (a) the criteria on which the formulae will be based, including factors such as population and poverty; (b) the institutional mechanism through which the formulae will be developed; (c) stipulations that the formulae and related development allocations to local units will be published; (d) provisions for elaborating the institutional framework concerning the approval and monitoring of the implementation of the formulae and evaluation of impacts. This is a crucial first step. The formulae themselves are to be developed through the aforementioned system and will require substantial technical effort and dialogue to be finalized. The Bank is currently supporting these efforts through TA and lending, which will among other items, help with the analysis of the fiscal impact on various LAUs to ensure that the inclusion dimension is fully reflected in its detailed formulation.

146. Expected results: In the short and medium term, this reform will contribute to: (a) improved planning and quality of locally responsive capital expenditure at governorate and district level, due to a more predictable and transparent financing; (b) increased citizens’ knowledge regarding available resources that are made at the governorate and district levels; (c) enhanced engagement and participation of citizens and the private sector in the preparation of the governorate and district investment plans; and (d) enhanced capacity of the central government to monitor the ability of districts and governorates in allocating their capital investments. In the medium to long term, this policy action will help the GoE move toward administrative, financial, and economic decentralization and all LAUs toward being independent, accountable, and horizontally integrated budget entities, especially at the governorate and district levels. The suggested results indicator for the DPF is number of governorates and districts preparing their FY2020/21 capital investment plans in accordance with the formula-based system (baseline: No formula-based system; target: All 27 governorates and 188 districts by June 2020).

147. Future reforms: The World Bank is providing TA to the MOF, Ministry of Planning, Monitoring and Administrative Reform, and Ministry of Local Development to support the detailed development of formula-based allocation for capital investments and an action plan for rolling out this reform nationwide starting from FY2020/21. In addition, TA is being provided to support piloting of the application of the formula-based capital allocation in two pilot governates within the scope of the Upper Egypt Local Development Program.

148. In addition to the TA mentioned, the Bank is also supporting the relevant ministries in developing the planning and reporting guidelines for LAUs referenced above and helping selected LAUs in increasing their capacity to follow these guidelines and improve their planning processes, to better enable them to benefit from this policy action. These activities are part of the ongoing program-for-results in the lagging


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regions of Upper Egypt and are also expected to be included in a planned operation for integrated development of Sinai. TA is also supporting the national committee formed for the development and implementation of this formula-based system highlighted in this policy action. Further, guidelines issued for the determination of the formulae list certain indicative criteria or factors which are to be considered.

Table 4. DPF Prior Actions and Analytical Underpinnings

Prior Actions Analytical Underpinnings


Prior Action 1

- Financial Stability Report, 2017 - World Bank. 2017. “Market Assessment of the Egyptian Microfinance Sector.” - IBRD Technical Assistance, “Inclusive Regulations for Microfinance.” (Project ID:

P149677)

Prior Action 2 - IFC Technical Assistance, “Egypt Secured Transactions and Collateral Registry (STCR).” (Project ID: 601560)

Prior Action 3 - World Bank. 2018. “Does the Egyptian Financial Sector Contribute to Growth and

Shared Prosperity?” - IMF, World Bank, FSAP Report 2007.


Prior Action 4 - World Bank. “Investment Climate Assessment.” - World Bank. 2018. “Entrepreneurship Ecosystem Assessment.” - EBRD, EPEA, PwC. 2017. “Developing Private Equity and Venture Capital in Egypt.”

Second Tranche Release Condition 1 - World Bank Doing Business reports, 2018 and 2019 editions.

- “Equal Access and Simplified Environment for Investment” (EASE) Project (P153487). Second Tranche Release Condition 2

Prior Action 5 - World Bank. “Investment Climate Assessment.” - World Bank. 2018. “Entrepreneurship Ecosystem Assessment.” - EBRD, EPEA, PwC. 2017. “Developing Private Equity and Venture Capital in Egypt.”

Prior Action 6

- “Public Resource Management for Fiscal Consolidation” (P163373) project. - The Egypt Programmatic Governance TA (P162146). - Technical Assistance in the development of the legal framework, namely through the

review and suggested improvements to the new Public Procurement Law. - Support in the development of a Massive Open Online Course on Public

Procurement.

Prior Action 7

- World Bank. 2018. “Recommendations for Registering Property, Part 1: Improving the Doing Business Ranking.”

- World Bank. 2018. “Recommendations for Registering Property, Part 2: Issues Analysis and Action Plan.”

- USAID, Egypt—Land Tenure and Property Rights Profile 2. - De Soto. 1997. Dead Capital and the Poor in Egypt, Distinguished Lectures Series 11.

The Egyptian Center for Economic Studies.

Second Tranche Release Condition 3

- Ongoing technical assistance on urban transport in Cairo metropolitan area - Feasibility study on Bus Rapid Transit corridors in Cairo metropolitan area - Evaluation of public-private partnership opportunities across transport sub-sectors in

Egypt - Review of Ride Sharing Law



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Prior Actions Analytical Underpinnings

Prior Action 8 - Public Resource Management for Fiscal Consolidation (P163373) - The Egypt Programmatic Governance TA (P162146). - World Bank. 2015. “Public Financial Management Strategy Report.”

Prior Action 9

- Energy strategy 2035 - Energizing Egypt: White paper on energy, March 2015 - Programmatic support to energy sector (P156023) - Transition fund support on subsidy reforms (P144305) - Modernization program on Petroleum Sector - Advisory support on Renewable Energy Law, Electricity Law and Natural Gas Law - TA on Capacity Building and Strategic Communication on Reforms

Second Tranche Release Condition 4 - Ongoing World Bank technical assistance to Ministry of Finance

Prior Action 10

- UN. 2013. “Institutional Development and Transition: Decentralization in the Course of Political Transformation, The Economic and Social Commission for Western Asia (ESCWA).”

- Boex. 2018. “Strengthening Fiscal Decentralization and Intergovernmental Fiscal Systems in Egypt, Current Practices, International Experiences and Options.” A Working Paper, World Bank.

- Nada. 2012. “Local Planning Challenges.” Institute of National Planning. - World Bank. 2012. Egypt, Arab Republic of - Reshaping Egypt's Economic Geography:

Domestic Integration as a Development Platform. Main report (English). Public expenditure review (PER). Washington, DC: World Bank.

4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY

149. The proposed program’s focus on private sector-led economic growth, inclusion, and job creation are top priorities of the World Bank Group engagement in Egypt, as identified in the CPF 2015–19. The program is consistent with World Bank Group’s Strategy for the Middle East and North Africa Region, which aims to promote peace and stability in the region, particularly, its pillar on renewing the social contract toward an open, private sector-led model of economic growth to spur more and better jobs. This operation also builds on the findings of the SCD and the CPF focusing on implementation and institutional aspects in addition to legislative reforms with well-drafted follow-up regulations.

150. The operation also builds on a strong portfolio of World Bank lending and analytical work in Egypt in private sector development, economic and financial inclusion, strengthened fiscal management and local development. This includes a recently completed programmatic series of three DPFs on fiscal consolidation, sustainable energy, and competitiveness and the ongoing operation supporting development of the lagging region of Upper Egypt. The design also draws on substantial analytical work conducted by the World Bank Group on the Doing Business Indicators, financial inclusion, financial markets reforms, public expenditure review, local development, decentralization and cross-sector work on enabling private investment and commercial financing in Egypt.

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS

151. The policy areas of the proposed DPF have been developed based on a consultative process through the Government’s own engagement with a wide range of stakeholders. This included consultations across different ministries and agencies of the GoE, as well as wider stakeholder groups


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within the country. Each legislation supported by the DPF has undergone Parliamentary consultations, including debate within the specific Standing Committees of the Parliament, and multiple deliberations with major industry chambers, academic think tanks, regulatory bodies and key stakeholders where applicable. This is applicable for key legislations supported by the DPF, including the Public Procurement Law which had multiple rounds of consultations with different arms of the Government, the private sector, and other key stakeholders. The same is true for the Capital Markets Law (requiring deliberations with private sector chambers) and other laws requiring consultations between governments levels at Cairo, governorates, and districts.

152. MIIC held consultations with civil society institutions and private sector representatives on the DPF policy reforms, where more than eleven NGOs and leading academic think tanks supported the proposed reforms on financial inclusion, private sector enablement and strengthened fiscal management, highlighting the integration between proposed reforms and need for effective implementation. The consultations were also held with more than fifteen major international and bilateral donors and embassies in Cairo where there was broad support on the proposed reforms with willingness by partners to provide TA to ensure effective implementation support. Multiple development partners are already supporting implementation of the government reforms through the coordinated joint TA program.

5. OTHER DESIGN AND APPRAISAL ISSUES

5.1. POVERTY AND SOCIAL IMPACT

153. Given their scope, the prior actions supported by this DPF are expected to have both direct and indirect effects on the wellbeing and job prospects of the poor and vulnerable over the short and long term. Annex 4 presents an assessment of the potential impact of each of the prior actions. Prior action 9 on energy price adjustments is expected to directly and negatively affect all households in the short term, especially those at the bottom of the income distribution. The Government is utilizing available social assistance mechanisms such as the Takaful cash transfers (the budgetary allocation for Takaful and Karama have gone up by 400% over 2015 to 2018) and the food smart cards to mitigate the effect on the poor, especially those living in Upper Egypt. In the long run, the positive effects of reducing regressive and expensive subsidies, rebalancing investment in economic sectors, and the stronger ability of the government to efficiently support the most vulnerable are expected to outweigh the short-term losses. For all other prior actions, a common thread of the assessment is that there is a potential for actions to have positive indirect effects via private sector job creation.

154. Prior action 9 (pillar 3) is expected to have a direct negative impact on households’ welfare through the increase in price of energy products, especially LPG cylinders, purchased by Egyptian households. Given the large share of the poor residing in Upper Egypt, the negative effect is expected to be spatially concentrated in that part of the country.29 The PSIA simulates the direct effects of subsidy

29 The results from this PSIA should be interpreted with caution and with several caveats in mind. First, the results do not incorporate second round (i.e. indirect) effects of price changes and thus may underestimate the negative impacts of the subsidy reduction. As previous studies have shown, indirect impacts can be important and of comparable magnitude as direct effects (due for instance to the increased cost of transportation of items purchased by households). Second, the analysis does not incorporate any adjustments on the labor market or consumption patterns of households. The macroeconomic changes


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elimination within a partial-equilibrium framework following the approach used for the previous DPF series. Recent household survey data are not yet available to evaluate the impact of these reforms, therefore, the PSIA simulates welfare impacts using household income expenditure and consumption (HIECS) data from 2015. These simulations suggest that the most recent energy price adjustments could negatively affect households’ welfare in the short term when households have limited ability to adjust their consumption or income (Table 5). The poorest quintile (bottom 20 percent of the distribution) is estimated to experience a welfare loss equivalent to 5.2 percent of their household budget spending; the richest quintile is estimated to lose about 1.6 percent of their budget spending. Around 70 percent of these welfare losses are a result of fuel price increases, and the rest are due to electricity price increase. Impacts vary across locations, with larger welfare losses found among households residing in regions with higher poverty rates (Table 6). Households living in rural Upper Egypt are estimated to experience a welfare loss of around 4.1 percent with most of it coming from the fuel price increase (a loss of 3.1 percent). Households in better off regions such as metropolitan Egypt and urban Lower Egypt experienced lower welfare losses of around 2 percent.

155. The GoE is committed to continue to strengthen the safety net system to mitigate the short-term impacts on the most vulnerable populations. Simple extrapolations based on welfare losses and average household sizes suggest that the bottom quintile households would need to be compensated by about EGP 1,262 a year to fully protect them from welfare losses arising from the recent energy price increases. Those in the second quintile would have to be compensated by a similar amount. It is notable that the estimated losses for households in the richest quintile are larger in absolute terms than for these two groups: EGP 1,619 per year on average. These energy price adjustments are expected to be beneficial in the long term as they could spur private sector and export growth, which would be particularly beneficial for the employment and income prospects of the poor, vulnerable, and the middle-class households.

Table 5. Welfare losses estimated from the direct impacts of price increases, by quintile of consumption

Quintile Electricity Fuel Total Direct 1 -1.3% -3.9% -5.2% 2 -1.3% -3.3% -4.6% 3 -0.6% -1.5% -2.2% 4 -0.6% -1.3% -1.9% 5 -0.5% -1.1% -1.6%

Source: own calculations using HIECS 2015 data. Notes: Results show upper bound effects as they do not allow for changes in the level of consumption due to price increases. Fuel items include: gasoline 92, LPG for households and natural gas for transportation.

experienced in the country, the reform package implemented by the government and high inflation (estimated at an average 22.5% in FY17-FY18) could all impact the behavior of households and lead to over- or under-estimations of the true effects on households. Lastly, the results presented here are based on HIECS 2015 and would need to be updated using HIECS 2017-18 data when it becomes available. Data from HIECS 2017-18 survey will be best suited to simulate welfare impact of energy price adjustments. These should be made available to update the analyses presented here in order to more accurately estimate the impacts on households as well as the necessary compensation needed to enable the most vulnerable populations to weather the short-term impacts of the price increases.


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Table 6. Welfare losses estimated from the direct impacts of price increases, by region

Region Electricity Fuel Total Direct Metropolitan -0.6% -1.3% -2.0% Urban Lower -0.8% -1.3% -2.1% Rural Lower -0.9% -2.3% -3.2% Urban Upper -0.9% -2.1% -3.0% Rural Upper -1.0% -3.1% -4.1%

Source: own calculations using HIECS 2015 data. Notes: Results show upper bound effects as they do not allow for changes in the level of consumption due to price increases.

156. The energy subsidies reform has facilitated budgetary expansion of social protection programs by 400% between FY2015/16 to FY2018/19 which are targeted to poor and marginalized sections of society covering 10 million individuals and 2.2 million households currently, exceeding the goals of the program by two years in advance. In addition, World Bank is working with the Government on an integrated mitigation strategy for the potential income loss through an additional finance to existing social protection program (proposed operation of US$500 million), complemented with recently approved projects supporting health sector (US$530 million) and education reforms (US$500 million). The social protection program seeks to expand the coverage of conditional cash transfer program of Takaful and Karama from 2.2 million households to 3 million households, while supporting human capital development by linking cash transfers to school attendance by 80 percent of children of marginalized families and at least 4 visits to health centers by the poor and marginalized families. This is complemented by the health program expanding the supply of primary health services in lagging governorates. Finally, an economic inclusion program called Forsa is being launched as part of social protection program providing training to at least 30,000 individuals on job skills or small assets transfers for livelihood support and job creation.

157. Other prior actions are not expected to have a significant direct adverse effect on the poor or vulnerable. These actions could have potential indirect and positive effects via their impact on job growth. In a context where micro firms dominate the landscape, Prior action 1 (Pillar 1) aimed at introducing mobile payment for existing microfinance borrowers could have an important impact via more convenient access to credit. However, take-up of mobile payment by new borrowers that were not previously banked is not a given and will have to be monitored to assess the inclusion effect of this measure. The remaining prior actions under Pillars 1 and 2 could stimulate job growth by formal firms which to date appears to have been low (Assaad, Krafft, and Yassin, 2018).30 If limited access to formal finance (including through better ability to use movable and immovable collateral), costs of doing business (such as tax processing) and limited domestic market opportunities are binding constraints for formal firms (or if these factors discouraged formal firm entry), then measures under Pillars 1 and 2 could support greater job creation. Ex-ante, it is unclear to what extent these prior actions will benefit small informal firms which account for the dominant share of establishments in Egypt. In the 2016 Enterprise Survey (covering formal firms), more than 80 percent of firms reported that they were required to meet with tax

30 Assaad et al (2018) analyze job growth between 2006 and 2017 establishment censuses and show that informal firms have been the main driver of job growth between 2006 and 2017 with sectors dominated by formal firms showing low job growth.


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officials, a much higher share than in other MENA region countries. The measure on online tax filing (Pillar 3) could reduce this cost of doing business and encourage formalization.

158. Since jobs are an important avenue for poverty reduction and inclusive growth, it would be important to monitor the job creation impact especially of prior actions under Pillars 1 and 2. Egypt periodically conducts census and surveys of establishments as well as of businesses in the unorganized sector and these data could be used to monitor job creation. The 2017 Establishment Census found that there are about 3.9 million private businesses located in establishments (shops, factories, etc.) across Egypt employing 12.9 million workers (accounting for approximately half of total employment in Egypt). Almost 97 percent of these establishments are “micro” in size since they employ fewer than 10 persons and cover all sectors including agriculture (Figure 2).

Figure 2. Distribution of Private Sector Business Establishments by Number of Workers, 2017

Source: CAPMAS, 2018. Results of Census 2017. Accessible at http://capmas.gov.eg.

159. Prior action 10 under pillar 3 has the potential to improve basic services provision since governorates with high poverty rates (across Upper Egypt and some frontier governorates) also have poor access to basic services and infrastructure. Access to improved services such as water and sanitation services can directly enhance living standards of the population as well as their human capital accumulation and improve households’ welfare. The formula for capital allocation will improve allocation and planning of capital expenditure at governorate and district levels due to more predictable and transparent financing. These levels of government are responsible for local development functions such as sanitation, transport, health, education, etc. The formula-based capital allocation to governorates and districts should be evaluated for their responsiveness to poverty rates once the parameters of the formula are identified. Responsiveness of the formula to poverty levels or population needs will depend on: a) the extent of the formula’s correlation with poverty, and b) the capacity of local governments to channel investments that meet marginalized communities’ needs.

POTENTIAL EFFECTS OF THE SECOND TRANCHE RELEASE CONDITIONS

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160. Some of the second tranche release conditions (STRC) are expected to have direct (through prices) and indirect effects on households’ welfare. STRC 4 under pillar 3 is not expected to have any direct or indirect effects on poverty. Positive indirect effects will be realized to the extent that firms are able to expand and boost job creation.

161. STRC 1 and 2 under Pillar 2 will continue to improve the business environment by reducing the initial cost of creating a firm due to long bureaucratic procedures, as well as facilitating the access to information for firms and investors. To the extent that these costs of doing business (or access to finance due to low investor confidence) are binding constraints for formal firms, STRC 1 could support greater job creation. Stronger potential effects lie within the large pool of informal firms. To the extent that such firms are being discouraged from becoming formal due to the burden of setting up procedures, these measures could increase the likelihood of becoming formal and also support the creation of formal jobs. The geographical focus of STRC 1 and 2 could help improve the living conditions of households residing in typically lagging regions. Close monitoring will be required to assess how local population that has usually low skills (Upper Egypt) or are sometimes marginalized (Frontier) will be able to benefit from these new jobs.

162. STRC3 (regulation pertaining to ride-share platforms) is not expected to have any direct adverse poverty effects. Indirect effects on employment opportunities in the sharing economy sector cannot be unambiguously determined. In the United States, compared to traditional taxi drivers, drivers on the ride-hailing platform, Uber, tend to be younger and better educated workers with a preference for flexible working hours rather than workers who are unemployed or out of the labor force (Hall and Krueger, 2016). Most of these Uber driver-partners tend to be using the platform to supplement regular income. Rizk’s (2017) survey-based study of 810 Uber driver-partners conducted in Cairo in 2016 presents a somewhat similar profile. Cairo’s Uber driver-partners were also more educated than the average population: around 51 percent have college degrees in contrast to 14 percent among the overall population of 25+ year olds. In addition, most were employed prior to starting work on the platform, with a third of the driver-partners being self-employed prior to driving on the platform. Nonetheless, a majority of the driver-partners appeared to be using Uber as a main source of income and more than half had no other jobs aside from driving on the platform. The potential effect of STRC3 on job creation or improved employment opportunities will depend both on demand for ride-share platforms (rise in ridership) as well as supply, that is, willingness of people to drive on the platform. STRC3 does not address the demand side. On the supply-side, the net impact on number of drivers joining the platforms is uncertain. More jobs will be created if the incentive of better quality employment opportunity for drivers on the platforms (due to availability of social insurance) more than compensates the expected higher cost of them driving on these platform (due to new taxes and charges).

5.2. ENVIRONMENTAL ASPECTS

163. Over the past two decades, Egypt has continuously updated its environmental policy and regulatory framework with provisions to integrate environmental concerns with national development plans and ensure the protection of human health and the sustainability of natural resources. The most recent national sustainable development strategy is putting equal emphasis on its three pivotal dimensions: economic, social and environmental dimensions.

164. The analysis conducted by the World Bank to determine whether specific reforms supported by the DPF are likely to cause significant effects on the country’s environment and natural resources


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concluded that the DPF-supported policies are not likely to have significant negative impacts on Egypt’s environment or its natural resources. The following areas of consideration aim at capitalizing on the sustainability of the natural capital for future development and at minimizing and/or mitigating any potential negative impacts:

(a) Pillar 1 prior action under the umbrella of ‘Fekretak Sherketak’ will lead to a significant growth in the number of start-up companies and SMEs, including those that are industry-based, agriculture-based, and fisheries, among others. Hence, the expected surge in SMEs might entail negative environmental impacts. The mitigation of these impacts would be managed based on the provisions of current Egypt’s environmental regulatory framework and available national institutional and technical capacities;

(b) Prior Action 9 on energy tariff increases should have neutral or positive environmental and climate change effects depending on the price elasticity of demand. If demand goes down in response to electricity tariff increases, then positive impacts are expected, which is the more likely scenario. On the other hand, if electricity tariff increases, it could lead people (especially those who cannot afford it) to use cheaper options such as solid fuels, then the overall impact may be neutral at best. It is worth to be mention that the GoE is also focusing on promoting RE which is leading to lowering the cost of solar energy, which in the longer term will lead to lowering the cost of energy for consumers, and therefore, will have positive environmental and Climate Change impacts;

(c) Second Tranche Release Condition 3 on the Ride Sharing Law could potentially result in negative environmental impacts particularly in terms of air quality. Recent Presidential Decree (419/2018) which provides economic incentives (custom deductions) for cleaner fuel cars (electric, hybrid, CNG-powered cars) coupled with the removal of subsidies for gasoline fuel could help mitigate the environmental impacts. However, it would be important to ensure that pertinent national air emission inspection for the vehicles used are periodically and strictly implemented.

165. On the regulatory side, the Egyptian environmental framework is governed by Law no. 4/1994 amended by Law no. 9/2009. The Law for Protection of the Environment includes obligations to prepare environmental impact assessments (EIAs) for all investment and development projects depending on the classification of the project. Guidelines for preparing EIAs were issued by the Egyptian Environmental Affairs Agency (EEAA) in 2005 and were updated in 2009 to include revised screening procedures for different project categories. In 2013, the EEAA carried out an institutional reorganization and restructuring to further enhance the EIA process implementation and compliance. As a consequence, two additional central departments were established: The Central Department for Environmental Inspection and Environmental Compliance (CDEIEC) and the Central Department for the Protection and Improvement of Industry, Environment and Energy. More recently, the Environment Management Sector at EEAA has established an additional directorate whose function is to follow up on the implementation of mitigating measures during the construction phase of projects, in addition to the CDEIEC follow-up during the operation phase. For Pillar 3, the current lending engagement of the Bank (including the ongoing Upper Egypt Local Development Program) and related TA are enhancing the capacity of LAUs to better prioritize local capital investment plans based on environmental consideration, among other factors, as well as advancing their skills regarding environmental screening of investment projects and preparation of Environmental Impact Assessments.


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166. Accordingly, Egypt’s current environmental framework has adequate basic requirements to address any related potential environmental impacts associated with the prior actions of this DPF. Finally, given the potential climate change impacts on the overall development agenda of Egypt there is a dialogue underway with Ministry of Environment to introduce and mainstream systematic and proactive climate risk management into national development and sector planning.

167. The climate change risks associated with this DPF are considered moderate to high based on Egypt Climate and Disaster Risk Screening Report.31 The Government of Egypt has developed and submitted its Intended Nationally Determined Contribution (INDC) and climate action plan to the UN Framework Convention on Climate Change (UNFCCC) in 2015.

168. Some of the DPF prior actions may implicitly contribute to climate change co-benefits as described below:

(a) Prior Action 5: This action would encourage and avail opportunities for the development of clean energy and environment-friendly technologies and support services by the young firms and entrepreneurs and would hence entail mitigation co-benefits.

(b) Prior Action 9: Consistent with the World Bank’s 2016 Climate Change Action Plan, this prior action, which relates to efficiency pricing of fuels and electricity, is expected to contribute to the reduction of carbon emissions due to the anticipated demand response resulting from the increase in prices to end consumers. It is considered part of the MDB list of eligible mitigation activities under Category 9.1 “efficient pricing of fuels and electricity (efficient end-user tariff).”

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS

169. The Egyptian Constitution provides the legal basis for the budget, for appropriating and spending public funds, and for preparing and approving the final accounts. A range of laws deal with specific aspects of financial management (budget, government accounting, and audit). In addition, there are specific laws for entities such as economic authorities and special funds. The Government announced plans to review the current public financial management (PFM) legislations to enable medium-term budget framework, incorporating multi-year expenditure ceilings based on functional classification of spending.

170. The state budget covers the activities of the central government, governorates, and public service authorities. The budget is made publicly available annually on the MOF website. Annual ‘Pre-budget Statement’ and ‘Citizen Budget’ have been prepared since 2012. This has contributed to notable improvement in Egypt score on the Open Budget Index. Economic authorities and SOEs prepare budgets and financial statements separately. Their level of transparency suggests that there is a good potential for improvement. According to the IMF review in July 2018 under the ‘EFF’ and its attached ‘Memorandum of Economic and Financial policies’, the Government confirmed its intention to introduce proper sectoral classification for economic authorities in accordance with Global Financial Management System (GFMS) 2014. The Government will also prepare consolidated fiscal accounts integrating economic authorities


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accounts in the general government accounts by March 2019. To strengthen the monitoring and transparency of SOEs, the Government plans to prepare and publish a comprehensive report on SOEs, including sector overview, full list of companies, information on board members, management, and amount of subsidies. This is in addition to the plans to modernize tax administration as per the same memorandum referred to earlier.

171. Monitoring of fiscal risk and contingent liabilities is among the priorities of the MOF. In July 2017, the ministry established a ‘Sovereign Guarantees Committee’. The ministry is also working on developing a comprehensive system to assess new state guarantees. The fiscal statement issued for the FY2018–19 budget included reporting on contingent liabilities from sovereign guarantees with a tentative estimate that amounted to 19 to 20 percent of GDP by the end of December 2017.

172. The Parliament has passed a revised new Procurement Law in July 2018. The law becomes effective 30 days after issuance in the Official Gazette, which typically happens days after the President’s approval. As per the established procedure, executive regulations shall be prepared mandatorily within six months from the effectiveness date. To ensure smooth implementation of the new procurement law and its executive regulations, it is important to develop a well-designed capacity-building program to create and nurture appropriate knowledge and develop required skills in a systemic way for consistency of implementation of the law. Such a program may include, but not be limited to, a three-pronged approach:

(a) Developing a core group of procurement professionals who will provide policy guidance and clarifications in the implementation of the law, including its executive legislations.

(b) Developing a critical mass of national trainers (training of trainers) covering procurement practitioners from all implementing ministries/agencies. These trainers will act as Procurement Focal Persons for their respective ministries/agencies.

(c) Comprehensive procurement training for all procurement practitioners at the implementing ministry/agency/entity level, containing modules for procurement of goods, works, and consultancy services.

173. The GoE has an e-GP platform related to the old law, developed and managed in-house. The system has a few initial functionalities of an e-GP system and falls significantly short of a standard e-GP system. With the recent passage of the new law, and recognizing the mandate of regulating public procurement, the e-GP system now needs to be aligned with the new law and enhanced to reap the benefits of its full potential. Transition to Digitized Public Procurement (e-GP) would transform the entire procurement system, yielding substantial benefit in the appropriate use of public funds in terms of cost savings, reducing inefficiencies in the procurement process, improving competitiveness, enhancing transparency and the governance environment, and ensuring an overall improvement in value for money.

174. An ex ante control system is implemented by the MOF’s financial controllers and includes transaction-based compliance controls. There is currently no function in the line ministries that carries out independent internal audit. The financial inspection directorate carries out ex post reviews of compliance by accounting units, but no risk-based approach is used for formulating the annual work program. The MOF issued a financial control manual in 2014 to help standardize controls and make their


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application more predictable. It has also established an internal audit unit in October 2017 to pilot independent risk-based ex post audits within the MOF. However, the first set of these audits is not completed yet.

175. The implementation of the Government Financial Management Information System has showed notable progress. The MOF has announced the completion of automating all accounting units in March 2018. However, it is not clear if the full budget execution process utilizing the ‘procure-to-pay’ functionalities has been put in place yet.

176. The MOF exercises monitoring of cash transactions and balances of the accounting units included in the state budget and maintained in the CBE. The introduction of the treasury single account, the closing of many special accounts and funds in commercial banks, and the implementation of centralized e-payments have strengthened cash management. The MOF stopped the use of paper checks by the end of November 2017 and moved to e-payments for staff salaries as well as payments to suppliers and contractors.

177. Egypt Supreme Audit Institution, known as the Accountability State Authority (ASA), has a comprehensive scope of coverage and issues annual audit reports on all government accounts. The 2014 Constitution introduced elements to strengthen the ASA’s independence and transparency. However, Law No. 89 of year 2015 allows the dismissal of heads of independent bodies and regulatory authorities in four cases specified in the law. According to article 217 in the Constitution, the annual reports of the regulatory and oversight bodies (including the ASA) shall be submitted to the Parliament and made publicly available. Although the submission to the Parliament takes place annually, the public availability of the ASA audit reports has not been applied.

178. The CBE had its audited financial statements published on its website starting with the year ended June 2013. The financial statements as of June 30, 2017, were audited jointly by two auditors from the Central Audit Authority and a local audit firm, who issued an audit report with unmodified (clean) opinion on September 26, 2017.32 The report referred to the auditors’ consideration of internal controls related to the preparation and fair presentation of the financial statements. As of October 10, 2018, the audit of the year ended June 2018 was not published. World Bank disbursements for several investment loans are channeled in a satisfactory manner through Designated Accounts maintained in the CBE. Based on the review of the CBE’s audited financial statements of 2017, enhanced level of disclosure was noted, compared to the previous year.

179. Disbursement procedures for two-tranche DPF will apply to this operation. Once tranche conditions are met by the Borrower, upon submission of the Withdrawal Application by the Borrower, the World Bank will disburse the loan proceeds into a deposit account in U.S. dollars (foreign currency deposit account) that forms part of the country’s official foreign exchange reserves held by the CBE. An amount equivalent to the loan proceeds will be immediately credited in local currency to an account of the MOF’s treasury single account, thus becoming available to finance state budget expenditures. The Loan Agreement will indicate the borrower agreement not to use the loan proceeds to finance excluded expenditures (negative list). The Government will confirm the loan deposit and credit through written confirmation within 30 days of disbursement. If an audit of the foreign currency deposit account is

32 2018 audit is not out yet.


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requested by the Bank, the Borrower shall furnish to the Bank a certified copy of the audit report within four months of such request, and make it publicly available.

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 180. MIIC, through the General Authority for Investment and Free Zones (GAFI), will be the main coordinating agency for monitoring and evaluation among the participating ministries/agencies of this program. The prior actions detailed in this operation are the prime responsibility of concerned Ministries and entities of the Government of Egypt. MIIC will coordinate with other ministries and agencies on achievement of results. Being the main counterpart of the World Bank Group in Egypt, MIIC will have the responsibility of presenting the information related to the reform implementation and progress made toward results on time and in a format satisfactory to the World Bank.

181. The DPF operation is part of a multiyear engagement on changing the social contract in Egypt toward a private sector-led job creation through inclusive growth, ensuring comprehensive social inclusion, focusing on lagging regions and digital economy for future jobs. This DPF is complemented with an operation on social inclusion that seeks mainstreaming of social protection schemes of Takaful and Karama to entire eligible population, increase targeting of social protection measures in lagging regions, and launching of a program on economic inclusion. A future operation focusing on Sinai and other lagging governorates would build on the policy reforms supported by this DPF to move forward the agenda of social inclusion, private sector-led growth, and local government strengthening in lagging regions. Analytical work is also underway to partner the Government in enhancing digital infrastructure, digital skills, digital entrepreneurship, and digital platforms for preparing Egyptian youth for jobs of tomorrow.

182. Grievance redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

6. SUMMARY OF RISKS AND MITIGATION

183. The overall risk rating of this operation is high. The major risks to the operation’s ability to achieve its development objective include: (a) macroeconomic challenges associated with higher global volatility around emerging markets, high inflation, high interest rates, and large public debt-to-GDP ratio; (b) challenging social conditions on the ground; (c) governance and institutional challenges on continued implementation of structural reforms; (d) the high degree of cross-sectoral coordination needed for implementation of private sector-led job creation; and (e) the potential spillover effects of regional and

http://www.worldbank.org/GRS

http://www.inspectionpanel.org/


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geopolitical challenges. These risks, if materialized, could singly or jointly affect the Government’s ability to implement the reforms or make development outcomes less successful.

184. Macroeconomic risks remain high with higher global volatility especially with emerging markets. While important economic reforms that took place over the past three years have helped restore confidence and improve macroeconomic stability, Egypt continues to face significant near-term challenges especially with higher global volatility and risks to emerging markets. Elevated inflation and high unemployment, especially among the youth, impose economic and social hardships particularly on low-income groups and may affect the reform momentum. To mitigate the effect of inflation on vulnerable groups, the Government is using freed-up resources to strengthen the social protection system. Additionally, even though the debt-to-GDP ratio has improved by 10 percent over the last fiscal year, it is still very high at 98 percent with debt dynamics particularly sensitive to the implementation of growth-enhancing reforms and the fiscal consolidation strategy assuming considerable wage restraint and subsidy reductions over the projected horizon. These risks are mitigated by the strong commitment of the GoE to the reform agenda and the continuation of the IMF program, which together with real sector reforms to support private sector development is expected to further strengthen the macroeconomic framework.

185. The political and governance risk is rated high for the following reasons: (a) limited institutional capacity in relevant agencies, (b) domestic private investment normally responds with a lag after policy changes and in this lag (or transition) period middle-income households can see a potential loss in disposable income and welfare, and (c) envisaged governance and policy reforms on institutional change can unfold and be implemented relatively slowly, with tangible impact not being observed in the immediate term. While economic and social reforms are progressing, advancing the governance agenda is critical. Governance reforms have largely focused on initiatives to enhance state efficiency in certain areas such as business registration and automation of investor services. On the risk of connected firms and need for level playing field, effective implementation of new legislations on Investments Law, Bankruptcy Law, Companies Law and upcoming Economic Competition Authority Law provide for fair treatments of minority shareholders, domestic and international firms and promotion of new and un-connected firms. Progress is needed on legislations on ‘Right to Information’ and ‘Whistleblower Protection’, as well as the regulations for the ‘Conflict of Interest’ law, and measures to ensure that citizens’ voice is heard on policy decisions and their implications. At a sector level, improvements in corporate governance practices are being institutionalized in the electricity and petroleum SOEs with the World Bank’s TA support; but greater emphasis is needed on enhancing a wider accountability institutional framework. In a context of high inflation and scarcity of jobs, empowering civil society and supporting its role as an important partner in the fight against corruption and for greater social inclusiveness is key to face the mitigate risks arising from economic hardships while trying to achieve development goals.

186. The sector strategies risk is high, while the technical design of the program and stakeholder risk is substantial. The long-term and structural nature of the reforms means that risks from difficulties with cross-ministerial coordination, collaboration across agencies, and continued focus on implementation remain high. The risk is mitigated by the continued engagement with the inter-ministerial group that worked on an earlier series of programmatic operations. Beyond the Government, there are various stakeholders like the FRA; state-owned organizations like GOPP etc.; governorate and district level employees; industry associations; SMEs and informal employees who would need to be involved for


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successful implementation of the program. The World Bank provides technical assistance under each of the three pillars ensuring continued dialogue and support. The lagging region program of Upper Egypt and proposed program of Integrated Development of Sinai would provide coordination of implementation support on the system of formula-based capital allocation at Governorates level. Similarly, ongoing TA support on public procurement law would provide inputs to executive regulations of the law and its effective implementation. The structural reforms program of procurement reforms and corporate governance in select sectors is aligned to IMF program as well. There is high ownership at the political and executive level of these reforms, which are reviewed regularly by the Cabinet. In addition, the Government is launching extensive communication campaigns to raise public awareness of key initiatives on private sector enabling measures.

187. The institutional capacity for implementation and sustainability risk is high. The reform program is progressing well on the legislative side, with many important laws adopted to foster private sector contribution to growth and job creation. Enacting good laws is an important and necessary first step, but consistent implementation is required for their provisions to translate into effective change. Incomplete implementation due to capacity constraints could undermine the impact of this operation. To ensure an efficient implementation of the legislation, there is an urgent need for enhancing institutional capacity and addressing operational constraints. This requires putting in place adequate resources and implementation can be further enhanced through wider consultations and effective staff and citizen engagement to provide feedback on implementation bottlenecks and inform decisions.

188. Fiduciary, environmental, and social risks are rated substantial. The fiduciary risk is assessed as substantial considering the PFM assessment, as described in the appraisal summary. In line with the CPF, the World Bank will continue policy dialogue and provision of TA to support implementation of PFM reforms. The social protection strategy aims to protect the poor and marginalized, leaving the middle class to bear the short-term costs of inflation. To mitigate income losses for the middle class and as part of the proposed additional financing under the Social Protection project, enhanced focus on skills and job creation is being initiated by the Government to provide hope for opportunities going forward. World Bank has just completed a technical assistance program on improving air quality and is engaged on environmental sustainability measures on industrial zones. These are being taken forward to implementation stage to address environment risks. In addition, to mitigate these risks, the Government is undertaking a comprehensive campaign on its reform program and intends to institutionalize a GRM and a citizen outreach program to build greater acceptability of reforms within society. The World Bank has already enhanced its portfolio to Upper Egypt, which has the highest concentration of the poor, and plans operations on social protection, lagging regions, and TA to support the unified registry.

189. The risk of not supporting and engaging with the GoE vision outweighs the high program risks outlined earlier. Egypt has taken bold steps in its reform program to restore confidence and macroeconomic stability. Further efforts are still needed to build on these important achievements to unleash the potential of the country and to foster sustainable private sector-led growth that is focused on job creation. With Egypt’s large and growing population and important economic and political weight in the region, the World Bank Group has a unique opportunity to support the country as an element of stability in a turmoiled region by encouraging the continuation of reforms and facilitating the implementation of the program.


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Table 7. Summary Risk Ratings

Risk Categories Rating

1. Political and Governance High

2. Macroeconomic High

3. Sector Strategies and Policies High

4. Technical Design of Project or Program Substantial

5. Institutional Capacity for Implementation and Sustainability High

6. Fiduciary Substantial

7. Environment and Social Substantial

8. Stakeholders Substantial

9. Other

Overall High

.


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ANNEX 1: POLICY AND RESULTS MATRIX

Sr Prior Actions of DPF Results33

Program Development Objective: enabling financial inclusion, private sector development and strengthening fiscal management for inclusive growth in Egypt.


1


Number of microfinance beneficiaries using mobile payment or e-payment (baseline: 0; target: 600,000 in June 2020, of which 40 percent are female and 20 percent are outside Greater Cairo and Alexandria)

2


Number of published collateral registrations used by MSME, corporate, individual debtors and syndicated loans (baseline: 0; target: 20,000 publications by June 2020).

3

Prior Action 3: The Borrower, through its President has enacted Law No. 17/2018 regarding capital markets as published in the Official Gazette on March 14, 2018 amending Capital Markets Law No. 95/1992 to encourage fairer and more efficient capital markets and to broaden access to finance to investors.

Number of new coded investors (baseline: 9,300 before the law; target: 12,000 by June 2020)


4 Prior Action 4: The Borrower has issued Ministerial Decree No. 16/2018 dated February 8, 2018 amending the Executive Regulations of Companies Law to strengthen corporate governance and minority shareholders’ protection.

Value of the extent of shareholder governance index (baseline: 6.3 out of 10 in Doing Business Report 2018; target: 7 out of 10 in Doing Business Report 2020)

5 Second Tranche Release Condition 1: The Borrower has issued a Ministerial Decree which reduces the number of steps required to establish a company in order to enhance the business environment.

Number of days needed to start a business (baseline: 11 days in Doing Business Report 2019; target: 3 days by June 2020)

6 Second Tranche Release Condition 2: The Borrower has issued a Ministerial Decree establishing investor facilitation services in two governorates in Upper Egypt and/or Frontier

Average number of firm registrations per month at the new Investor Service Centers (baseline: 0; target: 20

33 End target date of all results indicators is end-June 2020.


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Governorates34, to facilitate business establishment and operations and to improve transparency and predictability for investors.

by June 2020)

7

Prior Action 5: The Borrower has issued Ministerial Decree No. 208/2018 dated October 28, 2018 developing the “your idea, your company initiative”, a program to provide technical assistance, funding, and improve the regulatory framework for private sector-led entrepreneurship.

Non-government financing as percentage of total financing under Fekretak Sherketak/Egypt Ventures initiative (baseline: 0%; target: 50% by June 2020)

8 Prior Action 6: The Borrower, through its President has enacted Law 182/2018 governing contracts concluded by public entities as published in the official Gazette on October 3, 2018 promoting and facilitating SMEs participation in public procurement.

Percentage increase in the number of SMEs participating in public tenders and/or being awarded contracts (baseline: No increase, target: 20% increase by June 2020)

9


Percentage of property registration offices in the “new urban communities” implementing the more transparent procedures for deed registration. (Baseline: 0; target: 10% by June 2020)

10


Increase in number of ride-sharing driver licenses issued. (Baseline: 0; target: target 100,000 by June 2020)


11 Prior Action 8: The Borrower has issued Ministerial Decree No. 221/2018 dated May 22, 2018 requiring mandatory electronic filing of tax returns for entities with legal personality leading to simplification of tax payment and improvement of the business environment.

Number of companies filing annual income tax returns electronically (baseline: 0; target: 30,000 companies by June 2020)

12


Reduction in energy subsidies as a percentage of GDP from 3.8% in FY17/18 to 2.5% by June 2020

34 Frontier governorates are defined as governates that reside in the eastern and western boundaries of Egypt and include the following governorates: Red sea, New valley, Matrouh, North Sinai and South Sinai.


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14 Second Tranche Release Condition 4: The Borrower has issued a Ministerial Decree adopting and publishing an expanded Medium-Term Debt Management Strategy for the period covering FY 2018/19 to FY 2020/21.

An updated expanded medium-term debt management strategy will be published. (baseline: No; target: Yes)

15 Prior Action 10: The Borrower has issued joint Ministerial Decree No. 121/2018 dated October 21, 2018 specifying the process for adopting and applying a formula-based capital allocation system for governorates and districts.

Number of governorates and districts preparing their FY2020/21 capital investment plans in accordance with the formula-based system (baseline: No formula-based system; target: All 27 governorates and 188 districts by June 2020).


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ANNEX 2: FUND RELATIONS ANNEX International Monetary Fund Washington, D.C. 20431 USA IMF Team Reaches Staff-Level Agreement on the Fourth Review for Egypt’s Extended Fund Facility

Press Release No. 18/405 - October 31, 201835

• As a result of the authorities’ strong implementation of the reform program. GDP growth accelerated from 4.2 percent in 2016/17 to 5.3 percent in 2017/18.

• The government also remains committed to continuing energy subsidy reforms and raising revenues which will help create fiscal savings to invest in a well targeted social safety net, human development including health and education, and infrastructure

• Improving access to industrial land, promoting competition, improving transparency and accountability of state owned enterprises, and fighting corruption, will help the private sector growth and create jobs for Egypt’s young and growing population.

An International Monetary Fund (IMF) team led by Mr. Subir Lall visited Egypt on October 18-31, 2018 to conduct the fourth review of Egypt’s economic reform program supported by a three-year Extended Fund Facility (see Press Release No. 16/501). At the end of the visit Mr. Lall issued the following statement:

“The IMF staff team and the Egyptian authorities have reached a staff-level agreement on the fourth review of Egypt’s economic reform program, which is supported by the IMF’s SDR 8.597 billion (about $12 billion) Extended Fund Facility arrangement. The staff-level agreement is subject to approval by the IMF’s Executive Board. Completion of this review would make available SDR 1,432.76 million (about US$2 billion), bringing total disbursements under the program to about US$10 billion.

“The Egyptian economy has continued to perform well, despite less favorable global conditions, supported by the authorities’ strong implementation of the reform program. GDP growth accelerated from 4.2 percent in 2016/17 to 5.3 percent in 2017/18 while unemployment declined to below 10 percent. Meanwhile, the current account deficit narrowed to 2.4 percent of GDP in 2017/18 from 5.6 percent the year before, primarily driven by strong remittances and a recovery in tourism. Gross general government debt declined from 103 percent of GDP in 2016/17 to about 93 percent of GDP in 2017/18, supported by fiscal consolidation and higher growth.

“The Central Bank of Egypt’s (CBE) prudent monetary policy helped bring down annual inflation from 33 percent in July 2017 to 11.4 percent in May 2018. However, inflation increased again to about 16 percent in September 2018, reflecting the pass-through from energy price increases in June and a stronger than expected increase in volatile food prices in September. In the medium term, the CBE aims to reduce inflation to single digits. Meanwhile, in the current external environment of tighter financing conditions for emerging markets, the CBE’s commitment to a flexible exchange rate policy will help enhance 35 Press released accessed from < https://www.imf.org/en/News/Articles/2018/10/31/pr18405-imf-team-reaches-staff-level-agreement-on-the-fourth-review-for-egypts-eff?cid=em-COM-123-37899 >

https://www.imf.org/en/News/Articles/2016/11/11/PR16501-Egypt-Executive-Board-Approves-12-billion-Extended-Arrangement

https://www.imf.org/en/News/Articles/2018/10/31/pr18405-imf-team-reaches-staff-level-agreement-on-the-fourth-review-for-egypts-eff?cid=em-COM-123-37899

https://www.imf.org/en/News/Articles/2018/10/31/pr18405-imf-team-reaches-staff-level-agreement-on-the-fourth-review-for-egypts-eff?cid=em-COM-123-37899


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competitiveness, protect Egypt’s foreign reserves, and cushion against external shocks. Egypt's banking system remains liquid, profitable, and well capitalized.

“Egypt’s fiscal policy in 2018/19 and beyond will continue to aim at keeping general government debt on a clearly declining path and achieving a primary surplus of 2 percent of GDP. The government also remains committed to continuing energy subsidy reforms and raising revenues which will help create fiscal savings to invest in a well targeted social safety net, human development including health and education, and infrastructure. To improve fiscal transparency and public access to information, the authorities have continued to expand the data disseminated on the budget process and execution throughout the year.

“We welcome the authorities’ comprehensive efforts to improve the living standards of the most vulnerable. These efforts include: Takafol and Karama, which has expanded to cover around 10 million individuals; Forsa, which has created job opportunities for graduates of the Takafol program; and, Mastoura, which provides microfinancing to women for sustainable income generation. These programs are being complemented with the Sakan Karim program to provide clean drinking water and sanitation to rural areas. Moreover, a social package consisting of an additional increase in the salaries of public servants, an increase in pensions, and a progressive increase in tax credits has been implemented.

“The government continues to make efforts to implement reforms that aim to help the private sector invest and create the jobs needed to achieve more inclusive and sustainable growth for Egypt’s young and growing population. These reforms include: improving access to industrial land; promoting competition; improving transparency and accountability of state owned enterprises; and fighting corruption.

“The team would like to thank the Egyptian authorities and the technical teams in the CBE and the Ministry of Finance, and other interlocutors, for their openness, candid discussions, and hospitality.”


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ANNEX 3: LETTER OF DEVELOPMENT POLICY


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ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS

Sr # Prior Actions Significant Positive or Negative

Environment Effects Significant Poverty, Social, or Distributional Effects

Positive or Negative (yes/no/to be determined)


1


No environment effects expected.

Potentially positive impact on MFI borrowers if e-payment improves take-up of credit (as international evidence for mobile banking or e-money services has shown). To date, there is no rigorous evidence documenting the impact of mobile payments on microfinance borrowers. The global evidence on the transformative effect of microfinance itself on the average borrower shows that the effects tend to be quite limited (see for example, review of microfinance program impact in six countries (Ethiopia, Mexico, India, Bosnia and Herzegovina, Mongolia, and Morocco) by Banerjee, Karlan, and Zinman, 2015). Take-up of mobile payment by borrowers that were not previously banked will also have to be monitored to assess the inclusion aspect of the action. The experience of Musoni, an MFI in Kenya that is entirely mobile-based (built on the M-PESA platform) indicates the importance of providing clients with adequate support to carry out mobile transactions.

2


No environment effects expected. No direct adverse effects on poverty expected. Potentially positive indirect impact via job creation. Effects mostly expected from formal SMEs.

3 Prior Action 3: The Borrower, through its President has enacted Law No. 17/2018 No environment effects expected. No direct adverse effect on poverty expected. Potentially

positive indirect impact via job creation if greater


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Positive or Negative (yes/no/to be determined) regarding capital markets as published in the Official Gazette on March 14, 2018 amending Capital Markets Law No. 95/1992 to encourage fairer and more efficient capital markets and to broaden access to finance to investors.

availability of capital to formal SMEs and large firms results in job creation.


4

Prior Action 4: The Borrower has issued Ministerial Decree No. 16/2018 dated February 8, 2018 amending the Executive Regulations of Companies Law to strengthen corporate governance and minority shareholders’ protection.

No environment effects expected.

No direct adverse effect on poverty expected. Potentially positive indirect impact if the reform leads to greater firm entry and net job creation. Venture capital may also increase competition in some sectors leading to job reallocation or firm turnover.

5

Second Tranche Release Condition 1: The Borrower has issued a Ministerial Decree which reduces the number of steps required to establish a company in order to enhance the business environment.

No environment effects expected. No direct adverse effect on poverty expected. Potentially positive indirect impact if the reform leads to greater firm entry and net job creation.

6

Second Tranche Release Condition 2: The Borrower has issued a Ministerial Decree establishing investor facilitation services in two governorates in Upper Egypt and/or Frontier Governorates36, to facilitate business establishment and operations and to improve transparency and predictability for investors.

No direct environment effects expected. However, investor facilitation services may lead in the short and/or long term to proliferation of business in development sectors which may have negative impacts if sound environmental practices are not applied.

No direct adverse effect on poverty expected. Expected positive impacts if this measure leads to job creation. It is unclear ex-ante the extent to which job creation will benefit local population (especially those with low skills or in marginalized communities) or pull in workers from rest of Egypt. For social sustainability, it will be important to monitor the extent to which the local labor force is benefiting from this job creation.

7 Prior Action 5: The Borrower has issued Ministerial Decree No. 208/2018 dated October 28, 2018 developing the “your idea,

No environment effects expected. Potentially positive indirect impact if the reform leads to greater SME participation and growth and job creation. A potential obstacle could be the requirement to formalize.

36 Frontier governorates are defined as governates that reside in the eastern and western boundaries of Egypt and include the following governorates: Red sea, New valley, Matrouh, North Sinai and South Sinai.


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Positive or Negative (yes/no/to be determined) your company initiative”, a program to provide technical assistance, funding, and improve the regulatory framework for private sector-led entrepreneurship.

8

Prior Action 6: The Borrower, through its President has enacted Law 182/2018 governing contracts concluded by public entities as published in the official Gazette on October 3, 2018 promoting and facilitating SMEs participation in public procurement.

Potential indirect environment impacts associated with the new SMEs in various development sectors (industrial, information and communication technology, agriculture, fisheries, and so on) may result. The cumulative impact of these SMEs may be significant if the carrying capacity of the recipient environment is not taken into consideration.

Potentially positive indirect impacts (via job creation) are expected as formal SMEs are able to tap into a new market. Effects are potentially larger for firms that had not previously participated in public procurement due to cumbersome procedures.

9


No environment effects expected. Possibly positive (indirect) impact on poverty reduction of strengthened property rights (due to higher investments and increased asset values).

10


Ride sharing Law could potentially result in negative environmental impacts particularly in terms of air quality. However, recent Presidential Decree (419/2018) which provides economic incentives (custom deductions) for cleaner fuel cars (electric, hybrid, CNG-powered cars) coupled with the removal of subsidies for gasoline fuel could help mitigate the environmental impacts. It

No expected direct adverse effects on poverty. Indirect possible effect on job creation or improved employment opportunities is uncertain since it depends both on demand for ride-share platforms (rise in ridership) as well as supply, that is, willingness of people to drive on the platform. This measure does not address the demand side. On the supply-side, the net impact on number of drivers joining the platforms is uncertain since this measure offers better quality employment opportunity for drivers on the platforms along with higher cost of them driving on these


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Positive or Negative (yes/no/to be determined) would be important to ensure that pertinent national air emission inspection for the vehicles used are periodically and strictly implemented.

platform (taxes, charges).


11

Prior Action 8: The Borrower has issued Ministerial Decree No. 221/2018 dated May 22, 2018 requiring mandatory electronic filing of tax returns for entities with legal personality leading to simplification of tax payment and improvement of the business environment.

No direct environment effects expected.

Potentially positive indirect effects if this measure significantly reduces obstacles to doing business and hence supports firm growth and hiring. Strong support to formal SMEs not e-savvy will be needed to minimize errors in tax filing. This measure could also potentially incentivize formalization of firms.

12


The removal of energy subsidies, in principle, has positive environmental impacts through minimizing air pollution and mitigating climate change.

Price adjustments are likely to have a direct negative impact on households in the short term. Simulations show a welfare loss of between 5.2% (poorest quintile) to 1.6% (richest quintile) of household budget spending. Welfare loss as a share of household spending is simulated to be higher for poorer households and households in rural Upper Egypt (where a large share of the poor reside). As a mitigation measure, the Government allocates additional resources to its social safety net system, especially through proxy means-test (i.e. targeted) programs like Takaful.

14

Second Tranche Release Condition 4: The Borrower has issued a Ministerial Decree adopting and publishing an expanded Medium-Term Debt Management Strategy for the period covering FY 2018/19 to FY 2020/21.

No environment effects expected No direct adverse effect on the poor expected.

15 Prior Action 10: The Borrower has issued joint No environment effects expected. The increased transparency and predictability of capital


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Positive or Negative (yes/no/to be determined) Ministerial Decree No. 121/2018 dated October 21, 2018 specifying the process for adopting and applying a formula-based capital allocation system for governorates and districts.

allocations can have positive effects on the investment planning of local governments. Impacts on poverty will depend on: a) the extent of the formula’s direct correlation with poverty, and b) the capacity of local governments to channel investments that meet marginalized communities’ needs. Potential effects of the formula-based resources will be proportional to the share of such resources in the local government’s overall budget.


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ANNEX 5: DEBT SUSTAINABILITY ANALYSIS

1. The World Bank team conducted a DSA to assess the trajectory of the budget sector debt-to-GDP ratio. The baseline scenario assumes (a) economic growth to increase from 4.2 percent in FY2016/17 to 5.3 percent in FY2017/18 and to 6 percent over the medium term; (b) the fiscal consolidation plan to remain on track, with the primary surplus that was achieved in FY2017/18 increasing thereafter; and (c) inflation and subsequently interest rates to decline gradually (Table 8). Under these assumptions, the debt-to GDP ratio is projected to reach 84.6 percent of GDP by FY2022/23, down from 108 percent of GDP in FY2016/17, supported by the projected path of fiscal consolidation as well as lower real interest rates, along with the favorable growth outlook (Figure 3). Under the baseline scenario, both domestic and external portions of government debt are declining, although domestic debt is expected to decrease at a slightly higher pace, as the government replaces the costly short-term domestic debt (less than 1-year maturity), with longer maturities, at more favorable terms. This will in addition lead to an expected improvement in the overall maturity structure of total government debt, and thus ameliorate its risk profile over the forecast horizon. Section 2.2. above in this Program Document discusses the outlook of macroeconomic variables, including the financing sources for domestic and external accounts.

Table 8. Egypt Budget Sector DSA - Baseline Scenario

1/ Public sector is defined as budget sector, including central administration, local governments and public service authorities. 2/ Based on available data. 3/ EMBIG (bp). 4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

in percent of GDP unless otherwise indicated As of May 23, 20182/ 2016 2017 2018 2019 2020 2021 2022 2023 Sovereign Spreads

Nominal gross public debt 1/ 85.1 102.8 108.0 98.7 93.4 90.4 89.3 87.0 84.6 Bond Spread (bp) 3/ 4135Y CDS (bp) 334

Public gross financing needs 20.5 32.8 27.3 51.6 59.0 59.1 63.5 59.2 59.1

Real GDP growth (in percent) 4.2 4.3 4.2 5.3 5.6 5.8 6.0 6.0 6.0 Ratings Foreign LocalInflation (GDP deflator, in percent) 11.9 6.2 22.9 21.6 13.6 11.1 7.8 8.5 8.5 Moody's B3 B3Nominal GDP growth (in percent) 16.6 10.9 28.1 28.0 20.0 17.5 14.2 15.0 15.0 S&Ps B BEffective interest rate (in percent) 4/ 8.9 10.7 11.4 17.2 15.2 15.3 15.2 14.6 14.5 Fitch B BPrimary Balance -2.9 -3.5 -1.8 0.1 1.8 1.8 1.9 2.0 2.0

(in percent of GDP unless otherwise indicated)

Debt, Economic and Market IndicatorsProjections

2007-2015Actual


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Figure 3. Egypt’s Debt Dynamics: Contributions to Debt-to-GDP Ratio

Stress Tests

2. A real GDP growth shock scenario assumes a 1.5 percentage point drop in the real growth rate, compared to the baseline scenario.37 Slower growth will be associated with a lower momentum of fiscal consolidation, with adverse implications for the cost of debt servicing and government revenues. Under this scenario, the debt-to-GDP ratio would decline at a considerably slower pace, reaching only 94 percent by FY2022/23 compared to 84.6 percent under the baseline.

37 The real growth rate shock deviates from the standard one embedded in the MAC-DSA template. The latter assumes a 2-year drop in growth (only in 2019 and 2020) after which the baseline scenario growth resumes normally. This scenario also renders a declining debt-to-GDP ratio that reached 91.5 percent in FY20122/23. The World Bank team however runs a shock-scenario where growth is consistently lower than that of the baseline scenario between FY2018/19 and FY2022/23. That is, to evaluate the debt-to-GDP trajectory for a scenario of underperforming growth throughout the full forecast horizon.


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Table 9. Real GDP Growth Shock

Figure 4. Real GDP Growth Shock

3. A constant primary balance scenario assumes a slowdown in fiscal consolidation efforts, with the primary balance stagnating at its level in FY2017/18 (0.1 percent of GDP) throughout the forecast horizon. Holding all else constant, this scenario assumes under-achievements on both the expenditures and revenues sides. Similar to the real GDP growth shock, the debt-to-GDP ratio declines only marginally and reaches 93.2 percent in FY2022/23, almost 9 percentage points higher than under the baseline scenario.

Table 10. Primary Balance Shock

Figure 5. Primary Balance Shock

4. Under the assumption that both the gradual increase in real GDP growth and fiscal consolidation efforts are maintained, an additional real exchange rate depreciation of 35 percent in FY2018/19 (on top of the large depreciation that already took place in FY2016/17) will result in a slower pace of reduction in the debt-to-GDP ratio, reaching 88.8 percent of GDP in FY2022/23. Initially, interest rates increase sharply to contain the associated inflationary pressures, but real interest rates will eventually decrease gradually over the medium term. Because the pace of growth remains favorable, together with the projected path of fiscal adjustment, the debt outlook is expected to continue improving, albeit at a slower pace than under the baseline scenario.

Real GDP Growth Shock 2018 2019 2020 2021 2022 2023

Real GDP growth 5.3% 4.1% 4.3% 4.5% 4.5% 4.5%

Inflation (GDP Deflator change) 21.6% 13.2% 10.7% 7.4% 8.1% 8.1%

Non-interest revenue-to-GDP ratio 18.2% 18.6% 18.5% 18.1% 18.0% 17.7%

Non-interest expenditure-to-GDP ratio 18.1% 17.1% 17.3% 16.2% 16.0% 15.7%

Primary Balance 0.1% 1.5% 1.2% 1.9% 2.0% 2.0%

Interest rate shock (bps) compared to baseline 0 7 15 0 0 0

Constant Primary Balance Scenario 2018 2019 2020 2021 2022 2023

Real GDP growth 5.3% 5.6% 5.8% 6.0% 6.0% 6.0%




Primary Balance 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%



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Table 11. Real Exchange Rate Shock

Figure 6. Real Exchange Rate Shock

Downside Risks to Debt Sustainability

5. A combined macro-fiscal shock can lead to the disruption of the downward trajectory of the debt-to-GDP ratio. Under this scenario, fiscal consolidation occurs at a slower pace and the primary balance remains in surplus but is consistently 1 percentage point lower than under the base scenario throughout the forecast horizon, while interest rates increase. In addition, this scenario also assumes a lower growth trajectory (about 1.5 percentage points lower than the baseline). Under the combined macro-fiscal shock, the debt-to-GDP ratio is projected to increase to 113.6 percent of GDP by FY2022/23, some 29 percentage points higher than the baseline scenario in the same year.

Table 12. Macro-Fiscal Shock

Figure 7. Macro-Fiscal Shock

6. Similarly, a policy slippage scenario is expected to lead to an unsustainable debt-to-GDP trajectory. In this scenario, growth drops in FY2018/19 to its historical average before the adoption of the reform program, and it stagnates at just below 4 percent throughout the forecast horizon, and fiscal consolidation efforts fade, resulting in a primary balance that remains in deficit through the forecast period. This leads to an increase in the debt-to-GDP ratio to 117.3 percent by FY2022/23.

Exchange Rate Shock 2018 2019 2020 2021 2022 2023

Real GDP growth 5.3% 5.6% 5.8% 6.0% 6.0% 6.0%




Primary Balance 0.1% 1.8% 1.8% 1.9% 2.0% 2.0%


Combined Macro-Fiscal Shock 2018 2019 2020 2021 2022 2023

Real GDP growth 5.3% 4.1% 4.3% 4.5% 4.5% 4.5%




Primary Balance 0.1% 0.8% 0.7% 0.9% 1.0% 1.0%



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Table 13. Policy Slippage Scenario

Figure 8. Policy Slippage Scenario

Historical Scenario 2018 2019 2020 2021 2022 2023

Real GDP growth 5.3% 3.9% 3.9% 3.9% 3.9% 3.9%




Primary Balance 0.1% -3.0% -3.0% -3.0% -3.0% -3.0%



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ANNEX 6: DETAILED POVERTY AND SOCIAL ANALYSIS

1. The prior actions across the three pillars are expected to have direct adverse effects as well as indirect positive effects on the poor or vulnerable. Annex 4 presents an assessment of the potential impact of each of the prior actions; a common thread of this assessment is that there is a potential for actions to have positive indirect effects via private sector job creation.

POTENTIAL DIRECT EFFECTS OF ENERGY PRICE ADJUSTMENTS ON HOUSEHOLDS’ WELFARE

2. The PSIA uses the Household Income Expenditure and Consumption Survey (HIECS) (2015) conducted by the CAPMAS. While the HIECS 2015 information may be dated due to the economic reforms of recent years, the survey is the most recent one available for analysis; CAPMAS is completing data collection for the most recent HIECS round. The HIECS data contains information about the consumption of households, including expenditures on electricity and fuel items. The estimates of welfare loss reported below are based on a widely used methodology for estimating short-term welfare impacts of price increases: welfare impacts are estimated by the loss in purchasing power of households due to the increase in prices and expressed as the percent of consumption expenditure that would be needed to help them purchase the same basket of items before the price increase. The consumption data of HIECS 2015 are used to create (yearly) consumption distributions that allow having a benchmark in which to estimate the simulations. The HIECS 2015 consumption distribution is the first baseline. This distribution is adjusted to create a benchmark as of July 2016 (i.e. start of FY17) by incorporating: i) the growth experienced by the economy in FY 2015/16, ii) the inflationary effects of the devaluation of March 2016, iii) the increased allotment to food smart card recipients, and iv) a simulation for the expansion of Takaful and Karama. Further adjustments that take into account growth between FY2016/17, the inflationary pressure of the flotation in November 2016, the increase allotment to 50 EGP per person per month of the Tamween program and the further expansion of Takaful/Karama38 provide the benchmark consumption distribution as of July 2017 (i.e. the start of FY18). Finally, to create the consumption used for this PSIA, we further include the expected growth in FY2017/18 to simulate the consumption distribution as of July 2018 – when the prior action’s price increase took effect.

3. The price increases are estimated to have a negative impact on households. The short-term impacts of the price increases are larger in relative terms for poorer households (Table 6.1). Based on HIECS 2015, the PSIA analysis simulated the change in prices of electricity, gasoline (92 octane), LPG for households, as well as natural gas for transportation39. LPG, an item widely consumed by the poorer segments of the Egyptian population experienced a particularly large price increase. In July 2018 its price went up by 67%, whereas the second largest increase was only 38% for natural gas. Thus, the bottom 20% of the distribution are estimated to experience a loss of 5.2%, whereas for the richest quintile, the losses are estimated at 1.6% of their consumption. Around 70% of the losses are a results of fuel price increases, and the rest from the increase in electricity prices.

4. Impacts are simulated to vary across locations, with larger welfare losses found among households residing in regions with higher poverty rates (Table 6.2). Households living in Rural Upper 38 Due to data constraints, the exact structure of payments of Takaful and Karama could not be replicated. Instead, a simple increase of 100 LE was used to account for changes in the benefits of the program in July 2017. 39 Diesel is not captured in the HIECS 2015. Other items such as kerosene or natural gas for household consumption are assumed to not experience price changes.


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Egypt are estimated to experience a welfare loss of around 4.1%, with most of it coming from the fuel price increase (a loss of 3.1%). Households in better-off regions such as Metropolitan Egypt and Urban Lower Egypt experienced lower welfare losses: 2% and 2.1%, respectively.

5. These effects highlight the importance of the GoE to strengthen the safety net been rolled out in recent years, improve its targeting, and use its force to mitigate the impacts of the most vulnerable populations. Simple extrapolations based on welfare losses and average household sizes, indicate that among the bottom quintile households, they would need to be compensated by about 1262 LE a year to protect them fully from the price increases. Those in the second quintile would have to be compensated by a similar amount. It is notable that households in the richer quintile experienced larger losses in absolute terms than these two groups: 1619 LE per year on average.

Table 6.1. Welfare losses estimated from the direct impacts of price increases, by quintile of consumption

Quintile Electricity Fuel Total Direct

1 -1.3% -3.9% -5.2% 2 -1.3% -3.3% -4.6% 3 -0.6% -1.5% -2.2% 4 -0.6% -1.3% -1.9% 5 -0.5% -1.1% -1.6%

Source: own calculations using HIECS 2015 data. Notes: Results show upper bound effects as they do not allow for changes in the level of consumption due to price increases. Fuel items include: gasoline 92, LPG for households and natural gas for transportation.

Table 6.2. Welfare losses estimated from the direct impacts of price increases, by region

Region Electricity Fuel Total Direct

Metropolitan -0.6% -1.3% -2.0% Urban Lower -0.8% -1.3% -2.1% Rural Lower -0.9% -2.3% -3.2% Urban Upper -0.9% -2.1% -3.0% Rural Upper -1.0% -3.1% -4.1%

Source: own calculations using HIECS 2015 data. Notes: Results show upper bound effects as they do not allow for changes in the level of consumption due to price increases.

6. The results from this PSIA should be interpreted with caution and with several caveats in mind. First, the results do not incorporate second round (i.e. indirect) effects of price changes and thus may underestimate the negative impacts of the subsidy reduction. As previous studies have shown, indirect impacts can be important and of comparable magnitude as direct effects (due for instance to the increased cost of transportation of items purchased by households). Second, the analysis does not incorporate any adjustments on the labor market or consumption patterns of households. The


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macroeconomic changes experienced in the country, the reform package implemented by the government and high inflation (estimated at an average 22.5% in FY17-FY18) could all impact the behavior of households and lead to over- or under-estimations of the true effects on households. Lastly, the results presented here are based on HIECS 2015 and would need to be updated using HIECS 2017-18 data when it becomes available. Data from HIECS 2017-18 survey (expected to have completed fieldwork in October 2018) will be best suited to simulate welfare impact of energy price adjustments. These should be made available to update the analyses presented here in order to more accurately estimate the impacts on households as well as the necessary compensation needed to enable the most vulnerable populations to weather the short-term impacts of the price increases.

POTENTIAL INDIRECT EFFECTS ON JOBS

7. A growth decomposition exercise conducted for the latest Egypt Poverty and Equity Assessment shows that between 2010 and 2016, labor productivity (output per worker) was the main contributor to GDP per capita growth. The number of people employed or changes in the size of the working age population did not play a role. While the positive contribution of labor productivity is good news, the inability of the economy to employ a large share of the working age population limits the ability of the labor market to sustainably lift people’s incomes and reduce poverty.

8. Solving the problems of declining employment for men and persistently low employment among women and absorbing those moving out of agriculture requires robust job creation by businesses especially in tradable sectors. All data point to weak job creation by Egyptian firms. The Industrial Production Surveys of 2007 and 2011 show no net job creation by private sector firms in industry (World Bank 2014). More recent data from the 2016 Egyptian Enterprise Survey data also shows that formal private sector firms (spanning industry and service sectors) reduced employment in the three years prior to the survey. Analysis of establishment data suggests that even in the recent period informal firms have been the main driver of job growth between 2006 and 2017 with formal firms showing low job growth (Assaad, Krafft, and Yassin, 2018). Job creation by Egyptian firms may be hampered by factors such as limited competition and employment protection regulations. In-depth studies have shown that the consequences of unfair application of rules was to significantly slow employment growth and skew the distribution of employment toward smaller, less productive firms (World Bank 2014; Diwan et al. 2016). More detailed evidence shows that these connections occurred through the channels of trade protection, energy subsides, access to land, and regulation enforcement – each of these areas have been the focus of recent reform efforts by GoE.

9. In this light, it would be important to monitor the job creation impact especially of prior actions under Pillars 1 and 2. Egypt periodically conducts census and surveys of establishments as well as of businesses in the unorganized sector and these data could be used to monitor job creation. The 2017 Establishment Census found that there are about 3.9 million private businesses located in establishments

Figure 6.1. Growth Decomposition, 2010–16

Source: Data from WDI and CAPMAS. World Bank Egypt Poverty and Equity Assessment.


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(shops, factories etc.) across Egypt employing 12.9 million workers (accounting for approximately half of total employment in Egypt). Almost 97 percent of these establishments are “micro” in size since they employ fewer than 10 persons and cover all sectors including agriculture (Figure 6.2).

10. Promoting entrepreneurship is one of GoE’s policy goals. Entrepreneurship (both with employers and the self-employed) is an important type of employment among the poor, vulnerable, and middle class. Indeed, the middle class is often considered to be the “entrepreneurial” class driving investment and innovation. The 2015 HIECS shows that about 26 percent of the employed middle class consider themselves as self-employed or an employer, and almost all of them (95 percent) work in a firm with fewer than 10 employees. Among this group, 30 percent works in wholesale and retail and about 27 percent work in agriculture.40 Krafft (2016), using ELMPS data, shows that household small and microenterprises in Egypt consist mainly of shop owners (wholesale and retail trade) or people engaged in manufacturing, construction work, and transportation and storage among other (nonagricultural) sectors. These small and microenterprises mainly serve as employment avenues for those with low education whose likely alternative would be low quality paid work. In this sense, the small and microenterprises appear necessity driven rather than being innovative and opportunity led.

Figure 6.2: Distribution of Private Sector Business Establishments by Number of Workers, 2017

Source: CAPMAS, 2018. Results of Census 2017. Accessible at http://capmas.gov.eg.

11. In a context where micro firms dominate the landscape, Prior Action 1 (Pillar 1) aimed at introducing mobile payment for existing microfinance borrowers could have an important impact via more convenient access to credit. However, take-up of mobile payment by new borrowers that were not previously banked is not a given and will have to be monitored to assess the inclusion effect of this measure. The remaining prior actions under Pillars 1 and 2 could stimulate job growth by formal firms

40 In the overall small firm universe, agriculture (35 percent) and wholesale and retail (30 percent) are the largest sectors, followed by transport (9 percent) and manufacturing (8.8 percent). Interestingly, among the small firms owned by poor individuals, 46 percent work in agriculture and 26 percent in wholesale/retail.


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which to date appears to have been low (Assaad, Krafft, and Yassin, 2018).41 If limited access to formal finance (including through better ability to use movable and immovable collateral), costs of doing business (such as tax processing) and limited domestic market opportunities are binding constraints for formal firms (or if these factors discouraged formal firm entry), then measures under Pillars 1 and 2 could support greater job creation. Ex-ante, it is unclear to what extent these prior actions will benefit small informal firms which account for the dominant share of establishments in Egypt. In the 2016 Enterprise Survey (covering formal firms), more than 80 percent of firms reported that they were required to meet with tax officials, a much higher share than in other MENA region countries. The measure on online tax filing (Pillar 3) could reduce this cost of doing business and encourage formalization.

12. Prior Action 10 on formula for capital allocation will improve allocation and planning of capital expenditure at governorate and district levels due to more predictable and transparent financing. These levels of government are responsible for local development functions such as sanitation, transport, health, education, etc. The formula-based capital allocation to governorates and districts should be evaluated for their responsiveness to poverty rates once the parameters of the formula are identified. Responsiveness of the formula to poverty levels or population needs will depend on: a) the extent of the formula’s correlation with poverty, and b) the capacity of local governments to channel investments that meet marginalized communities’ needs. Once the formula is implemented and capital funds allocated to LAUs, this prior action has the potential to improve basic services provision since Governorates with high poverty rates (across Upper Egypt and some frontier governorates) also have poor access to basic services and infrastructure. Access to improved services such as water and sanitation can directly enhance living standards of the population as well as their human capital accumulation and improve households’ welfare.

POTENTIAL EFFECTS OF THE SECOND TRANCHE RELEASE CONDITIONS

13. The DPF program is divided in two tranches. The effects of the first tranche’s prior actions have been discussed above. Certain second tranche release conditions (STRC) are expected to have direct (through prices) and indirect effects on households’ welfare. STRC 4 under pillar 3 is not expected to have any direct or indirect effects on poverty. Positive indirect effects will be realized to the extent that firms are able to expand and boost job creation.

14. STRC 1 and 2 under Pillar 2 will continue to improve the business environment by reducing the initial cost of creating a firm due to long bureaucratic procedures, as well as facilitating the access to information for firms and investors. To the extent that these costs of doing business (or access to finance due to low investor confidence) are binding constraints for formal firms, STRC 1 could support greater job creation. Stronger potential effects lie within the large pool of informal firms. To the extent that such firm are being discouraged from becoming formal due to the burden of setting up procedures, these measures could increase the likelihood of becoming formal and also support the creation of formal jobs. The geographical focus of STRC 1 and 2 could help improve the living conditions of households residing in typically lagging regions. Close monitoring will be required to assess how local population that has usually low skills (Upper Egypt) or are sometimes marginalized (Frontier) will be able to benefit from these new jobs.

15. STRC 3 (regulation pertaining to ride-share platforms) is not expected to have any direct adverse poverty effects. Indirect effects on employment opportunities in the sharing economy sector cannot be

41 Assaad et al (2018) analyze job growth between 2006 and 2017 establishment censuses and show that informal firms have been the main driver of job growth between 2006 and 2017 with sectors dominated by formal firms showing low job growth.


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unambiguously determined. In the United States, compared to traditional taxi drivers, drivers on the ride-hailing platform, Uber, tend to be younger and better educated workers with a preference for flexible working hours rather than workers who are unemployed or out of the labor force (Hall and Krueger, 2016). Most of these Uber driver-partners tend to be using the platform to supplement regular income. Rizk’s (2017) survey-based study of 810 Uber driver-partners conducted in Cairo in 2016 presents a somewhat similar profile. Cairo’s Uber driver-partners were also educated than the average population: around 51 percent have college degrees in contrast to 14 percent among the overall population of 25+ year olds. In addition, most were employed prior to starting work on the platform, with a third of the driver-partners being self-employed prior to driving on the platform. Nonetheless, a majority of the driver-partners appeared to be using Uber as a main source of income and more than half had no other jobs aside from driving on the platform.

16. The potential effect of STRC3 on job creation or improved employment opportunities within the ride-share industry will depend both on demand for ride-share platforms (rise in ridership) as well as supply, that is, willingness of people to drive on the platform. STRC3 does not address the demand side. On the supply-side, the net impact on number of drivers joining the platforms is uncertain. More jobs will be created if the incentive of better quality employment opportunity for drivers on the platforms (due to availability of social insurance) more than compensates the expected higher cost of them driving on these platform (due to new taxes and charges).


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