Board Members Governor and Chairman of the Board Dr. Farouk Abd El Baky El Okdah Deputy Governor Mr. Hisham Ramez Abdel Hafez Dr. Ziyad Ahmed Bahaa El Din Mr. Momtaz El-Said Dr. Ashraf Mohamed El-Sharqawy Mr. Hassan Abdalla Mr. Tarek Hassan Aly Amer Mr. Abd El Salam El AnwarMr. Mohamed Kamal El-Din Barakat Mr. Hazem Zaki Hassan Mrs. Mona Zulficar Dr. Mahmoud Abd El-Fadeel Hussein Mr. Aladdin Saba
A Central Bank of Egypt – Annual Report 2010/2011 Preface I have the honor to present the CBE Annual Report for FY 2010/2011. TheReport sheds light on the major domestic economic developments, especiallyeconomic growth, inflation, the state budget, the balance of payments, and foreigntrade, besides reviewing the CBEs activities and the main monetary, credit andbanking developments. On the domestic arena, the central event that marked FY 2010/2011 was theoutbreak of the 25 January Revolution and the Arab spring revolutions, which aspiredto change the political landscape and better the economic, social and politicalconditions of the region, after the transition periods elapse and their aftereffects aresubdued. As far as Egypt is concerned, the major challenge is security instabilitywhich cast its dark shadows on tourism, travel, and investment, and drove downemployment and production rates in a large number of factories. Unfortunately, suchrepercussions coincided with the fallout of the turmoil in the neighboring Arabcountries, the credit crisis of the euro area, and the adverse world economicdevelopments. In this setting, real GDP growth (at factor cost) slowed to 1.9 percentfrom 5.1 percent and, to 1.8 percent (at constant prices) from 5.1 percent. Obviously,the decline intensified in Q3 (Jan./March 2011), where GDP at factor cost recorded anegative 3.8 percent (against a positive 5.6 percent), and a negative 4.2 percent atconstant prices (against a positive 5.4 percent) due to the spillovers of the Revolutionin this transitional period. The decisions of the Monetary Policy Committee (MPC) during FY2010/2011 continued to be supportive of economic growth, and in line with theoverriding objective of the monetary policy (price stability). The MPC’s decisionswere tuned to this objective, keeping the overnight lending and deposit rates broadlyunchanged at 8.25 percent and 9.75 percent, respectively, and the discount rate at 8.5percent in its eight meetings held during the reporting year. These rates remained ineffect at the time of preparing the report and just before the meeting held on 24November 2011, where the MPC raised the lending rate by 100 basis points to 9.25percent, the overnight lending rate by 50 basis points to 10.25 percent, and thediscount rate by 100 points to 9.50 percent. In March 2011, the MPC launchedregular repurchasing agreements (repos), to pump the necessary funds to banks thatare likely to face liquidity pressures. These operations bore an interest rate of 9.25percent, which remained applicable until 24 November 2011, where it was increasedby 50 basis points to 9.75 percent. Prompted by a resolute commitment to the banking reform program, theCBE launched the second phase, after the success of the first phase that provedeffective in cushioning banks against the risks posed by spillovers from the globalfinancial crisis. In the reporting year; specifically at the time of the Revolution and inits aftermath, the CBE responded with a number of decisions to regulate the banking
BCentral Bank of Egypt – Annual Report 2010/2011activity and strengthen supervision over transfers abroad. Moreover, banks wererequired to open accounts for donations from the countrys stakeholders for socialresponsibility projects (the Report will tackle this in further detail). In the context of applying governance rules as one of the targets of the secondphase of the reform program, the CBE Board of Directors issued on August 23 2011,its decree dated 5 July 2011, regarding banks governance rules. Accordingly, banksregistered at the CBE are required to comply to the regulation by maximum 1 March2012 as due date each according to the scope and complexity of its business, policies,and respective risk management capacity. At the time of preparing the Report at hand, Decree Law no. 125 was issued on8 Oct., 2011, amending certain provisions of Law No. 88 of 2003 of the CentralBank, Banking Sector and Money, to enforce governance rules and prevent anyconflict of interests pertaining to the CBEs Board of Directors. Accordingly, a newboard was formed to replace the former that served its term by end of November2011. The new board comprised 9 members, instead of 15 (the CBE Governor andhis two deputy governors, a representative of the Ministry of Finance, the Chairmanof the Egyptian Financial Supervisory Authority; and four members with expertise infinancial, economic, and legal matters). The aggregate financial position of banks (39 in number) reached LE 1.3trillion as at the end of June 2011, with total equity of LE 81.1 billion, deposits of LE957.0 billion, and investments in securities and bills of LE 474.2 billion. As forfinancial soundness indicators, the capital adequacy ratio (capital/risk-weightedassets) reached approximately 16.0 percent as at the end of June 2011, against aminimum requirement of 10 percent. Profitability indicators showed animprovement in 2010, as return on assets reached 1 percent, on equity 14.3 percent,and net interest margin 2.3 percent (against 0.8 percent, 13 percent, and 2.2 percent,respectively, in FY 2009). Out of its belief that the ability of the foreign exchange market to satisfy thefinancing needs of clients is a prerequisite for fostering confidence in that market, allthe more so during the Revolution and at its aftermath, the CBE has kept up itseffective and balanced management of the forex market, through the dollar interbanksystem, to safeguard the market against any drastic volatility, especially after thenoticeable decline in foreign investments (direct and indirect) and the dramatic fall intourism revenues amidst the political unrest in Egypt. The weighted average of theUS dollar in the interbank market posted LE 5.9690 as at the end of June 2011,against LE 5.8496 as at the end of January, signifying the depreciation of the LEvalue by 2.0 percent; albeit lesser than expected by international institutions. Later,the US dollar exchange rate posted LE 6.0319 as at the end of December (the periodis not covered by the report).
C Central Bank of Egypt – Annual Report 2010/2011 Net international reserves (NIR) at the CBE were adversely influenced bythe events that the country witnessed in the second half of the reporting year. NIRreceded by US$ 8.6 billion or 24.6 percent in the year of the report, ending the year atUS$ 26.6 billion (against US$ 36.0 billion at end of Dec. 2010 and US$ 35.2 billionat end of June). The decrease in NIR was heavily felt in the second half of the FY,which bore witness to the repercussions of the recent events that came over thecountry. Tourism receipts plummeted by 47.5 percent in the second half of the FY ascompared with the first half, and for the first time, the FDI recorded a negative figureof US$ 65 million, and portfolio investments revealed a net outflow of US$ 7.1billion. The drain on NIR continued at the time of preparing the report, pushing themdown further to US$ 18.1 billion at end of December 2011. Transactions with the external world unfolded an overall BOP deficit of US$9.8 billion (against an overall surplus of US$ 3.4 billion a year earlier). In the secondhalf of the FY (January/June 2011), the BOP ran an overall deficit of US$ 10.3billion (against an overall surplus of US$ 571.7 million in the first half), on the backof the Arab spring events in Egypt and the Arab region. The overall deficit in thereporting year reflected the current account deficit that narrowed by 35.9 percent toUS$ 2.8 billion (against US$ 4.3 billion in the year of comparison), along with thenet outflows of US$ 4.8 billion of the capital and financial account (against netinflows of US$ 8.3 billion). While the report is being prepared, the BOP registered anoverall deficit of US$ 2.4 billion in July/Sept. 2011/2012 (contrasted to an overallsurplus of US$ 14.7 million in July/Sept. 2010/2011). Finally, I seize this opportunity to thank and pay tribute to the former membersof the CBE Board of Directors for their sincere efforts, noting that their term of officecame to an end by the time the amendments to Law No. 88 of 2003 were issued.Also, I would like to extend my thanks to all the staff of the CBE and the bankingsystem for their efforts that enabled the banking system to continue performing itsrole under the umbrella of development and modernization. May God help us serveour dear country and further its progress and prosperity. The CBE Governor Dr. Farouk El Okdah
Contents of the Annual Report Main Indicators of the Performance of Egyptian Economic Sectors A-B Executive Summary C-IChapter 1 Central Bank of Egypt1/1 Monetary Policy 11/2 Reserve Money 31/3 Payment Systems and Information Technology (IT) 61/4 Domestic Liquidity and Counterpart Assets 101/5 Supervision Sector 141/6 Banking Sector Reform 201/7 Management of the Foreign Exchange Market and International Reserves 231/8 Domestic and External Public Debt 241/9 Human Resources Development (HRD) 36Chapter 2 Banking Developments2/1 Financial Position 412/2 Deposits 442/3 Lending Activity 452/4 Cash Flows at Banks 472/5 Bank Performance Indicators 49Chapter 3 Macroeconomic Developments3/1 Gross Domestic Product (GDP) 533/2 Inflation 593/3 Consolidated Fiscal Operations of the General Government 643/4 Balance of Payments and External Trade 683/5 Non-Banking Financial Services Sector 89 Annex Statistical Section 95
A Central Bank of Egypt – Annual Report 2010/2011 Main Indicators of the Performance of Egyptian Economic Sectors Fiscal Year 2009/10 2010/11Real SectorReal GDP growth rate at factor cost (%), 5.1 1.9of which : The share of the private sector (percentage) 4.0 0.8Real GDP growth rate at market and constant prices (%), 5.1 1.8of which: Share of private consumption (percentage) 2.9 3.2 Share of public consumption (percentage) 0.5 0.4 Share of investment (percentage) 1.6 -0.8 Share of net external demand (exports of goods and services - imports of goods and services) (percentage) 0.1 -1.0CPI inflation (urban) July/June (%) 10.1 11.8PPI inflation, July/June (%) 8.6 19.4Financial & Monetary SectorDomestic liquidity growth rate M2 (%) 10.4 10.0Growth rate of time & saving deposits in local currency (%) 13.4 7.0Growth rate of foreign currency deposits (%) (5.4) 11.9Foreign currency deposits/ Total deposits (dollarization rate)(%) 20.2 21.0Private business sector credit/ Total credit (%) 42.1 36.2Net claims on the government /Total credit (%) 42.0 49.0Household sector credit/ Total credit (%) 12.0 11.1Public business sector credit/ Total credit (%) 3.9 3.7Change in private business sector credit/Change in totalcredit (%) 27.4 (2.7)Change in net claims on the government/Change in totalcredit (%) 66.3 94.6
BCentral Bank of Egypt – Annual Report 2010/2011 Main Indicators of the Performance of Egyptian Economic Sectors (contd.) Fiscal Year 2009/10 2010/11Change in household sector credit/ Change in total credit(%) 10.3 5.5Change in public business sector credit/ Change in totalcredit (%) (4.0) 2.6Net international reserves (US$ mn) at end of the period 35221 26564NIR in months of merchandise imports 8.6 6.3Banks’ Financial Soundness Indicators (FSIs), of which: Capital adequacy ratio (%) 16.3 16.0 Nonperforming loans/Total gross loans (%) 13.6 11.0 Loan provisions/ Total nonperforming loans (%) 92.5 93.6 Return on average assets* (%) 0.8 1.0 Return on average equities* (%) 13.0 14.3External SectorTrade Balance/GDP (%) (11.5) (10.1)Service Balance/ GDP (%) 4.7 3.3FDI in Egypt (net)/GDP (%) 3.1 0.9Net transfers/ GDP (%) 4.8 5.6External DebtExternal debt/ GDP (%) 15.9 15.2Short-term external debt/Total external debt 8.8 7.9External debt service/Exports of goods and services (%) 5.5 5.7Budget SectorExpenditure/GDP (%) 30.3 28.5Revenues/GDP (%) 22.2 18.8Total wages/Total public revenues (%) 31.8 36.6Primary deficit**/GDP (%) 2.1 3.7Overall deficit/GDP (%) 8.1 9.5Gross domestic public debt/GDP (%) 73.6 76.2* According to the latest audited financial statements for FY 2009 and 2010. The fiscal year ends on June 30 for public sector banks and on December 31 for other banks.** Overall deficit, excluding the interest payments.
C Central Bank of Egypt – Annual Report 2010/2011 Executive Summary The Annual Report for FY 2010/2011 highlights major international economicdevelopments and the CBE’s activity, along with the main monetary, credit andbanking developments. Also, the Report sheds light on the key domestic economicdevelopments, including economic growth, inflation, the state budget, balance ofpayments and external trade. In FY 2010/11, real GDP growth at factor cost slowed to 1.9 percent (from5.1 percent a year earlier) and to 1.8 percent (from 5.1 percent) at market andconstant prices. The sectors that primarily underperformed were the manufacturing,construction and building, finance, and communications and information. Theslowdown was intense in the third quarter (Jan./March 2011) in which real GDPgrowth at factor cost slackened to a negative 3.8 percent (down from a positive 5.6percent) and to a negative 4.2 percent (from a positive 5.4 percent) at market andconstant prices. This is traced to the events of the January 25th Revolution, and theresultant disruption and instability of most economic sectors. However, GDP growthincreased in the last quarter of the year, recording a positive 0.3 percent at factor costand 0.4 percent at constant and market prices. The recovery was led by the betterperformance of some sectors, especially agriculture and irrigation; transportation andstorage; wholesale and retail trade; and real estate activities. Implemented investments at current prices fell by 1.2 percent (against a riseof 17.6 percent in the year of comparison), to reach LE 229.0 billion. The decline wasmainly in the second half of the year, particularly in Q3 (Jan./March). Interestingly,the private sector’s investments escalated by 15.7 percent (against 11.6 percent), toregister LE 146.6 billion or 64.0 percent of total investments in the reporting year.The rise in the private sectors investments was specifically in the first half of the year(14.8 percent), contrasted with 0.9 percent in the second half. Reacting to the political changes in Egypt in the second half of FY 2010/2011,which cast their shadow over the level of economic activity and the performance offinancial markets, and eventually over the available liquidity in the market, the MPC(in its meeting dated 10 March, 2011) decided to launch weekly repo operations on aregular basis under the operational framework of the CBE monetary policy, with amaturity of one week and an interest rate to be set by the MPC in each meeting. Theaim is to provide adequate liquidity for banks that may face potential pressures ontheir liquidity position. The Committee set an interest rate of 9.25 percent per annumon repos, and the rate remained in effect till the end of June 2011. At the time ofpreparing this Report, the Committee decided in its meetings on 21 July, 25 August,and 13 October 2011, to keep the rate unchanged. Later, on 24 November, the MPCincreased the 7-day repos by 50 bps to 9.75 percent.
DCentral Bank of Egypt – Annual Report 2010/2011 Reserve money reached LE 251.0 billion at end of June 2011, up by LE 47.9billion or 23.6 percent during FY 2010/11, well above the LE 28.0 billion and 16percent of the preceding FY. Noticeably, 68 percent of the increase took place in thesecond half of the year (Jan./June 2011). The bulk of the increase (roughly 80percent) was in the currency in circulation outside the CBE, to meet the withdrawalsfrom deposit and client accounts during, and in the aftermath of, the Egyptianrevolution. Domestic liquidity went up by LE 91.9 billion or 10.0 percent (as compared toLE 86.2 billion and 10.4 percent in the preceding FY) ending the year at LE 1009.4billion. The rise in domestic liquidity was reflected in the growth of money supplyand quasi money. Money supply scaled up by LE 34.7 billion or 16.2 percent andquasi money by LE 57.2 billion or 8.1 percent. The pickup in quasi money was anoutcome of the rise in LE time and saving deposits by LE 38.4 billion or 7.0 percentand in foreign currency deposits by LE 18.8 billion worth or 11.9 percent. Giventhese developments, the dollarization ratio (foreign currency deposits/total deposits)inched up to 21.0 percent at end of June 2011 (from 20.2 percent at end of June 2010and from 19.0 percent at end of Dec.). While this indicates a partial shift to foreigncurrency savings, especially in the second half of the reporting year, time and savingdeposits in LE continued to represent the bulk of banking deposits (69.4 percent) atend of June 2011. Out of its commitment to the banking reform program, launched inSeptember 2004, the CBE is currently executing the second phase of the program(2009-2011). The main pillars of this phase are: preparing and implementing acomprehensive program for the financial and managerial restructuring of specializedstate-owned banks; following up - on a periodic basis - the results of the first phase ofthe restructuring program of the National Bank of Egypt (NBE), Banque Misr (BM)and Banque du Caire (BdC), which revealed that the first phase of the reformprogram had already borne fruit and positively affected their performance levels; andfulfilling all requirements for upgrading the efficiency of these banks in financialintermediation and risk management. The second phase aims also at applying Basel IIstandards in Egyptian banks to enhance their risk management practices. The CBEsstrategy for the implementation of Basel II framework is based on two mainprinciples, namely simplicity and communication with banks, to ensure banks’compliance with these standards. The strategy will be phased in over four stages. Thesecond phase of the reform program also aims at adopting an initiative promoting thedevelopment and growth of banking services and access to finance especially forsmall- and medium-sized enterprises (SMEs), as well as reviewing and strictlyapplying the international governance rules of banks.
E Central Bank of Egypt – Annual Report 2010/2011 In this respect, the CBE exempted banks deposits - equivalent to the amount ofloans extended thereby to finance SMEs - from the reserve requirement ratio (14percent). On the other hand, the CBE approved bank governance rules, which aim athelping banks set/develop their governance systems. As such, each bank shall applythese rules in accordance with the volume and complexity of its activities, andstrategy, as well as capacity for risk management. Banks were also given a graceperiod till the 1st of March 2012 to put these rules into effect. The second phase of the banking reform program has proceeded, after the firstphase was successfully implemented, where some voluntary and state-forced mergerstook place, decreasing the number of banks operating in Egypt from 57 at end ofDecember 2004 to 39 banks at end of Dec. 2008, and till the end of the reportingyear. Also, during the first phase of the program, state-owned banks wererestructured, and the problem of non-performing loans was addressed, as more than90 percent of NPLs (excluding debts of the public business sector) were settled.Furthermore, debts of the public business sector were fully settled and the CBE’sSupervision Sector was upgraded. Due to the exceptional circumstances that Egypt has gone through since thebeginning of the year, a number of decisions and measures were taken by the CBE toregulate banking business and minimize potential risks. Salient of these decisionswere setting limits on transfers abroad and cash withdrawals by individuals. Bankswere also requested to submit weekly statements on loan balances, client deposits, thelocal and foreign currency liquidity ratios; and daily statements on cash withdrawalsand deposits, and inward and outward external transfers. In the last quarter of the FY,banks were provided with detailed regulations and procedures for applying the Boardof Directors’ decision regarding regulations for the limits of the concentrations inlocal banks investments with countries and financial groups and institutions abroad.Furthermore, a plan was set to review the outstanding credit facilities of all customersand their guarantees, given that the position of each customer shall be studied on acase-by-case basis, taking into consideration the effect of the current crisis oncustomers’ solvency and the quality of credit extended. As for the tourism sector in particular, a six-month grace period (from Jan. toJune 2011) was extended for the installment payments due on customers thereof, tosubdue the negative effects on this sector. In addition, delay interest on deferredinstallments will not be imposed, and this will not deem the facilities non-performing.Moreover, out of social responsibility, the CBE required banks to open accounts attheir branches to raise donations for scientific projects and the eradication of squatterareas.
FCentral Bank of Egypt – Annual Report 2010/2011 The financial position of banks operating in Egypt (excluding the CBE)amounted to LE 1269.7 billion at end of June 2011, up by LE 49.0 billion or 4.0percent. Deposits at banks grew by LE 64.5 billion or 7.2 percent (against LE 82.8billion or 10.2 percent during the preceding FY), reaching LE 957.0 billion andconstituting 75.4 percent of the aggregate financial position of banks at end of June2011. Lending and discount balances went up by LE 8.1 billion or 1.7 percent(against LE 36.0 billion and 8.4 percent), ending the year at LE 474.1 billion. Banksinvestments in securities and bills escalated by LE 68.3 billion or 16.8 percent(against LE 73.3 billion and 22.0 percent in the previous FY), to stand at LE 474.2billion at end of June 2011. The CBE issued the financial soundness indicators (FSIs) of the bankingsystem (i.e., capital adequacy, profitability, liquidity and asset quality). A follow-upof banks’ compliance came up with the following: - Capital adequacy: The capital/risk weighted assets slightly retreated to 16 percent at end of June 2011, from 16.3 percent at end of June 2010 (against a minimum established ratio of 10 percent). Equities/assets declined as well, to 6.4 percent, from 6.7 percent. However, Tier 1 capital to risk-weighted assets improved, registering 13.3 percent against 12.7 percent. - Profitability: Relative to FY 2009, profitability indicators in 2010 improved: the return on assets reached 1 percent, the return on equities 14.3 percent and net interest margin 2.3 percent (against 0.8 percent, 13 percent and 2.2 percent, respectively). - Asset quality: Non-performing loans/ total gross loans decreased to 11 percent at end of June 2011, from 13.6 percent at end of FY 2010, as state- owned banks wrote off a number of non-performing loans. Concurrently, provisions/total non-performing loans increased from 92.5 percent to 93.6 percent. - Liquidity: Liquidity indicators improved, as liquidity ratios in local and foreign currencies posted 55.3 percent and 51.1 percent, respectively, at end of June 2011, against 44.7 percent and 40.6 percent, at end of FY 2010. This reflected liquidity levels available at banks and their ability/willingness to cater for clients needs in order to stimulate the economy. Moving to the payment systems and information technology (IT), the CBEkept upgrading these systems to bolster the soundness and stability of the financialsystem, reduce credit risks, expedite payment settlements, and ensure their reliabilityand confidentiality. Such efforts virtually supported the financial stability in Egypt,especially during the revolution. The Report tackles – in some detail – the mainmeasures that have been taken in this area.
G Central Bank of Egypt – Annual Report 2010/2011 Attesting to the CBEs successful management of the foreign exchangemarket through the dollar interbank system, the market - which proved resilient tothe repercussions of the global financial crisis- has gone another tough test, and againit proved its robustness. The market managed to prudently and efficiently address thecrisis it had encountered in the wake of the events of the revolution, which wasassociated with a noticeable reduction in the volume of foreign investments in thesecond half of the reporting year. Such a prudent management proved effective inprotecting the Egyptian pound from sharp fluctuations. The weighted average of theUS dollar in the interbank market posted LE 5.9690 at end of June 2011 (against LE5.8496 at end of January) with a decline of only 2.0 percent, lower than predicted byinternational institutions. Later, the rate registered LE 6.0319 per dollar at end ofDec. 2011. This ascertains investors and dealers confidence in the efficiency of theforeign exchange system, a fact that is conducive to a stable and orderly tradingmarket, free from turmoil or fears. The profound confidence in the forex market alsohelps cushion the negative effects of the crisis on the Egyptian economy andstrengthen the ability of the economy to recover. Overall, reviewing FY 2010/2011 asa whole tells us that the rate of decline in the value of the Egyptian pound was all inall 4.6 percent. Amid the extraordinary events witnessed in the second half of the year, netinternational reserves at the CBE shrank by about US$ 8.6 billion or 24.6 percent,to end the year at US$ 26.6 billion, against US$ 36.0 billion at end of Dec. 2010 andUS$ 35.2 billion at end of June 2010 (the decline in Jan./June 2011 was by aboutUS$ 9.4 billion or 26.2 percent). Withdrawals from NIRs were mainly to make up forthe departure of many foreign investors from the market in the second half of theyear. Notwithstanding their contraction, NIRs covered 6.3 months of merchandiseimports at end of June 2011. At the time of preparing this Report, NIRs continued todecline further, standing at US$ 18.1 billion at end of December, thereby covering3.7 months. In FY 2010/2011, Q3 (Jan./March), the Egyptian Exchange was closed from28 January to 22 March 2011 (38 consecutive trading sessions) amid theunprecedented events attending the January 25th Revolution and the months thatfollowed. Trading over the counter was also suspended till 28 March, following thesharp decline in the benchmark index (EGX 30) by 16 percent on 26 and 27 January,closing at 5646.5 points against 6723.2 points before the outbreak of the events. Onthe first day of resuming trading (23 March), the index plunged by 23.5 percent (ascompared with its pre-revolution level), recording the third sharpest daily fall sinceits launch on 2 Feb. 2003. The fall due to large sales of investors amidst growingconcerns of larger losses. On its part, the EGX undertook a number of exceptionalmeasures to bolster investors confidence (Egyptians and foreigners alike) in themarket.
HCentral Bank of Egypt – Annual Report 2010/2011 Overall, the benchmark index (EGX 30) fell by 10.9 percent in FY 2010/2011,to record 5373.0 points at end of June 2011 (against 6033.1 points at end of June2010), owing to the political unrest associated with the January 25th revolution.However, EGX 70 (index of small - and medium-sized enterprises) moved up by 19.3percent to register 629.6 points, and so did EGX 100 by 7.1 percent to 972.9 points atend of June 2011. As regards public finance, the FY 2010/11 witnessed an increase of 7.1percent in total expenditures, and a decrease of 3.2 percent in total revenues, affectedby the events and repercussions of the revolution. The overall deficit reached someLE 130.4 billion, up by 33.0 percent compared with the previous FY, thus exceedingthe estimated figure for the year by 19.5 percent. To address the consequences of the current events, the government took anumber of measures. The most important of which were (i) establishing an additionalbudget appropriation of LE 10.0 billion to meet the basic requirements of subsidizingfood commodities in the subject year, (ii) establishing a compensation fund forindividuals and small and micro enterprises affected by these events, (iii) appointing,on a permanent basis, some of the temporary-contract employees, (iv) raising thenumber of beneficiary families of the social solidarity pension, (v) disbursingexceptional pensions and compensations to the families of the revolutions martyrs,and (vi) exempting those with overdue insurance premiums from paying delay fines. According to the preliminary actual data of the consolidated fiscal operationsof the general government (administrative system - local administration - serviceauthorities) in FY 2010/11, total revenues reached LE 259.6 billion and totalexpenditures LE 392.1 billion. Against this background, the cash deficit amounted toLE 132.5 billion or 9.6 percent of GDP during the year. By adding the net acquisitionof financial assets (LE -2.1 billion) to that cash deficit, the overall deficit would postLE 130.4 billion or 9.5 percent of GDP. Local financing sources, mainly banks’subscriptions for treasury bills (LE 74.0 billion), were chiefly used to finance theoverall deficit, while an amount of only LE 5.0 billion was provided from externalsources. Domestic public debt reached LE 1044.9 billion at end of June 2011(76.2percent of GDP). It consists of the sum of net government debt, public economicauthorities debt and that of the National Investment Bank (minus intra-debts ofpublic economic authorities and the government to NIB). Moving to external transactions, the balance of payments ran an overalldeficit of US$ 9.8 billion, constituting 4.1 percent of GDP (against an overall surplusof US$ 3.4 billion and 1.5 percent of GDP a year earlier).
I Central Bank of Egypt – Annual Report 2010/2011 The current account deficit narrowed by 35.9 percent, to US$ 2.8 billion or 1.2percent of GDP (against US$ 4.3 billion a year earlier). The decline came on the backof a 5.3 percent retreat in the trade deficit to stand at US$ 23.8 billion, and a 25.6percent increase in net unrequited transfers, on the one hand, and a 23.8 percentdecrease in services surplus, on the other hand. Capital and financial transactionswith the external world unfolded a net outflow of US$ 4.8 billion (against a netinflow of US$ 8.3 billion), as data shows a reversal in portfolio investments from anet inflow of US$ 7.9 billion, to a net outflow of US$ 2.6 billion. FDI (net basis) inEgypt rolled back by 67.6 percent, registering US$ 2.2 billion (against US$ 6.8billion). The external debt increased by about US$ 1.2 billion. Its outstanding balance(public and private) denominated in US dollar posted US$ 34.9 billion at end of June2011, as compared with the end of June 2010. The increase was ascribed to theappreciation of most currencies of borrowing versus the US dollar by an amountequivalent to US$ 2.4 billion; the retreat in the balances of Egyptian governmentbonds and notes issued in international markets (as part of those bonds and notes hasbeen purchased by resident entities at a value of US$ 242.0 million); and to netrepayments of loans and facilities in the amount of US$ 1.0 billion.
Chapter 1: Central Bank of Egypt 1/1- Monetary Policy 1/2- Reserve Money 1/3- Payment Systems and Information Technology (IT) 1/4- Domestic Liquidity and Counterpart Assets 1/5- Banking Supervision 1/6- Banking Sector Reform 1/7- Management of the Foreign Exchange Market and International Reserves 1/8- Domestic and External Public Debt 1/9- Human Resources Development
1 Central Bank of Egypt – Annual Report 2010/2011 Chapter 1 Central Bank of Egypt1/1- Monetary Policy Embracing price stability as the ultimate objective of the monetary policy, theCBE seeks to bring inflation to an appropriate and stable level that helps buildconfidence and sustain appropriate levels of investment and achieve the targetedeconomic growth. The CBE adopted the overnight interbank interest rate as the operational targetof the monetary policy, by applying a framework based on the corridor system,within which the ceiling is the overnight interest rate on lending from the bank, andthe floor is the overnight deposit interest rate at the bank. The decisions taken by the MPC in the eight periodic meetings held in FY2010/2011 were responsive to the changes in inflation and the Committeesassessment of inflationary pressures. In these meetings, the MPC decided to keep theCBE key interest rates (the overnight deposit and lending rates) and the discount rateunchanged at 8.25 percent, 9.75 percent and 8.50 percent per annum, in order. Theserates were kept applicable at the time of preparing this Report and till the meeting ofthe Committee on November 24, 2011. In that meeting, the overnight deposit ratewas raised by 100 bps to 9.25 percent and the overnight lending rate by 50 bps to10.25 percent. The discount rate was also raised by 100 bps to 9.5 percent. In light of the political events in Egypt in the second half of the FY, whichinfluenced the pace of economic activity and the performance of financial markets,and affected in turn the available liquidity in the market, the MPC (in its meeting on10 March, 2011) decided to launch weekly repo operations on a regular basis underthe operational framework of the CBE monetary policy, to provide adequate liquidityfor banking system units that may face potential liquidity pressures. The MPCassigned a maturity of one week for these operations and an interest rate to be set bythe Committee in each meeting. The interest rate on these operations was determinedat 9.25 percent per annum, and this rate was kept applicable till the meeting of theCommittee on November 24, 2011. In this meeting, the MPC decided to raise the 7-day repo by 50 bps to 9.75 percent. The following are the CBE’s key interest rates according to the MPC’sdecisions in its eight meetings held during FY 2010/2011:
2Central Bank of Egypt – Annual Report 2010/2011 Overnight Deposit Overnight Lending Lending & Interest Rate Interest Rate Discount Rate 17 June 2010 8.25% 9.75% 8.50% 29 July 2010 Unchanged Unchanged Unchanged 16 September 2010 " " " 4 November 2010 " " " 16 December 2010 " " " 27 January 2011 " " " 10 March 2011 " " " 28 April 2011 " " " 9 June 2011 " " " Given the excess liquidity at the banking system in the period starting July 1,2010 till the end of January 2011, the weighted average of the overnight interbankrate was close to the CBE overnight deposit rate. However, in light of the politicalevents that Egypt went through and their economic impacts on the money market, thebalance of excess liquidity at the banking system decreased. Accordingly, theweighted average of the overnight interbank interest rate rose in the second half ofFY 2010/2011, hovering around the middle of the corridor. (see the following chart) (٪) O/N Interbank Rate and Policy Rates 14.00 13.50 13.00 12.50 12.00 11.50 11.00 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7 08 8 09 9 10 0 08 08 09 09 10 10 11 11 00 00 00 01 20 20 20 20 20 20 20 20 20 20 20 r2 r2 r2 r2 r r r ne ne ne ne ch ch ch ch be be be be be be be Ju Ju Ju Ju ar ar ar ar em em em em em em em M M M M 30 30 30 30 ec ec ec ec pt pt pt 31 31 31 31 Se Se Se D D D D 31 31 31 31 30 30 30 Overnight interbank Deposit facility rate Lending facility rate The MPCs decisions led to a relative stability of the market interest rates+ ondeposits and loans, as the average interest rate on deposits with maturities of threemonths posted some 6.6 percent per annum at end of June 2011 (against 6.3 percentper annum, at end of June 2010). Concurrently, the average interest rate on loans ofone year declined to 11.0 percent per annum, from 11.1 percent per annum.+ Data on interest rates (deposits and loans) were compiled, using the Domestic Money Monitoring System (DMMS)launched in June 2010.
3 Central Bank of Egypt – Annual Report 2010/2011Open Market Operations: The reporting year witnessed a decline in the outstanding balance of liquidity,which the CBE had absorbed through its deposit acceptance operations. This waslargely attributed to the higher foreign currency sales by the CBE to banks. Withinthe framework of open market operations, the balance of deposits accepted by theCBE registered some LE 101.5 billion at end of June 2010, decreasing to some LE83.1 billion at end of January 2011 and continued to gradually decline through therest of the FY. As an outcome of the repo operations launched by the CBE to pumpliquidity for some banks starting from March 2011, net open market operations(absorption and injection) revealed liquidity-injecting operations of LE 14.5 billion atend of June 2011.1/2- Reserve Money Reserve money reached LE 251.0 billion at end of June 2011, up by LE 47.9billion or 23.6 percent during FY 2010/2011 (against LE 28.0 billion or 16.0 percenta year earlier). The increase in reserve money was reflected in a growth in currencyin circulation outside the CBE by LE 34.8 billion and in banks local currencydeposits by LE 13.1 billion. Reserve Money and Counterpart Assets* (LE mn) Balances at End of Change During the FY June 2011 2009/2010 2010/2011 Value ValueA- Reserve Money 250992 27967 47921 - Currency in circulation outside the CBE 179096 17985 34843 - Banks local currency deposits 71896 9982 13078B- Counterpart Assets 250992 27967 47921Net Foreign Assets 147197 18502 (43037)Foreign Assets 156331 25550 (42274)Foreign Liabilities 9134 7048 763Net Domestic Assets 103795 9465 90958Claims on the Government (Net) 102562 11998 21951Claims on Banks (Net) 147 28676 (28863)Net Balancing Items 1086 (31209) 97870* Derived from the CBE’s balance sheet.
4Central Bank of Egypt – Annual Report 2010/2011 As for the components of reserve money, the currency in circulation outsidethe CBE contributed most of the increase (72.7 percent), with a pickup of LE 34.8billion or 24.2 percent in the reporting year (against LE 18.0 billion and 14.2 percenta year earlier), to post LE 179.1 billion or 71.4 percent of reserve money at end ofJune 2011. Moreover, banks local currency deposits at the CBE augmented by LE13.1 billion or 22.2 percent during the year (against LE 10.0 billion or 20.4 percent),reaching LE 71.9 billion at end of June 2011. The follow-up of the developments in reserve money in the reporting yearshows that 68.0 percent of the increase was concentrated in the second half of theyear (January/June 2011), namely, the period of January 25 Revolution and itsaftermath. During January/June 2011, reserve money scaled up by LE 32.6 billion or14.9 percent. Rising by LE 25.9 billion or 16.9 percent, currency in circulationoutside the CBE made the largest impact during the said period, thus accounting for74.3 percent of its total increase during the whole year. This was ascribed to the largeamounts of banknote issued by the CBE in response to the mounting withdrawals byindividuals of their deposits at banks, on the back of the circumstances andaftereffects of January 25 Revolution. The pickup in currency in circulation outside the CBE was due to the increasein the balance of banknote issue by LE 33.9 billion or 23.2 percent during thereporting year (against a rise of only LE 18.3 billion or 14.3 percent in the previousFY) to reach LE 180.1 billion at end of June 2011. Banknote Issue* (LE mn)At End of June Balance of Change during the Year Banknote Issue Value %2007 93499 14246 18.02008 112705 19206 20.52009 127912 15207 13.52010 146220 18308 14.32011 180118 33898 23.2*Including subsidiary coins issued by the Ministry of Finance. As for the components of the issue cover, the value of gold increased by LE 4.0billion, as a result of its revaluation on 30 June 2011, to register LE 16.3 billion.Likewise, Egyptian government bonds rose by LE 9.1 billion to LE 131.6 billion. Inaddition, about LE 12.6 billion worth of foreign currencies and LE 8.2 billion worthof foreign notes were added to the issue cover. Accordingly, the structure of the coverat end of June 2011 was as follows: 73.2 percent as government bonds, 9.1 percent asgold, 13.2 percent as foreign currencies, and 4.5 percent as foreign notes.
5 Central Bank of Egypt – Annual Report 2010/2011 The breakdown of the currency in circulation outside the CBE bydenomination showed that despite the slight decrease in the relative importance oflarge denominations (LE 200, LE 100 and LE 50) as a percentage of total currency incirculation, they remained at a high level (90.5 percent against 92.1 percent at the endof June 2010). This was largely due to the climbing relative importance of the LE 200notes from 31.5 percent to 37.2 percent. By contrast, the relative importance of theLE 100 and LE 50 notes declined from 60.6 percent to 53.3 percent. This mirroredthe increasing value of transactions associated with higher prices. Currency in Circulation By Denomination* (LE mn) June 2010 June 2011 Change During the FYDenominations Relative Relative Value Importance Value Importance 2009/2010 2010/2011Total 144253 100 179096 100.0 14.2 24.2Banknote inCirculation 143947 99.8 178772 99.8 14.3 24.2PT 25 184 0.1 161 0.1 16.3 (12.5)PT 50 292 0.2 302 0.2 (4.9) 3.5LE 1 843 0.6 907 0.5 9.5 7.6LE 5 1495 1.0 2654 1.5 18.9 77.5LE 10 2844 2.0 2886 1.6 (2.3) 1.5LE 20 5480 3.8 9672 5.4 (13.0) 76.5LE 50 18704 13.0 22246 12.4 (18.3) 18.9LE 100 68641 47.6 73269 40.9 12.8 6.7LE 200 ** 45464 31.5 66675 37.2 49.0 46.7Subsidiary Coins 306 0.2 324 0.2 6.6 5.9* Representing the difference between banknote issue and cash at the CBE.** The LE 200 note has been in circulation since May 2007. The increase in the counterpart assets of reserve money in the reporting yearwas attributable to the pickup in net domestic assets and the fall in net foreign assets.Net domestic assets made a positive contribution to reserve money growth (44.8percentage points), which was held back by the negative contribution of net foreignassets (21.2 points). During FY 2010/2011, net domestic assets at the CBE went up by LE 90.9billion, against a rise of only LE 9.5 billion a year earlier, to reach LE 103.8 billion atend of June 2011. The increase came as a result of the rise in the CBE’s net claims onthe government by LE 21.9 billion (due to the pickup in its claims on the governmentby LE 39.3 billion or 26.2 percent, and in its deposits at the CBE by LE 17.4 billionor 24.9 percent). Moreover, the net balancing items had an expansionary effect onreserve money, as it went up by LE 97.9 billion shifting from a negative balance to apositive one. This was mainly ascribed to the LE 99.4 billion decline in the depositsaccepted by the CBE under the open market operations (used by the CBE to absorb
6Central Bank of Egypt – Annual Report 2010/2011excess liquidity). Furthermore, the CBE conducted Repo operations to inject liquidityfor banks as of March 2011, because of the changes in their liquidity position in lightof the higher foreign currency sales of the CBE to banks. The balance of Repooperations registered LE 16.7 billion at the end of June 2011. The CBEs net claims on banks decreased by LE 28.9 billion, as an outcome ofthe decline in its claims on banks by LE 26.4 billion. The decline in CBE claims tobanks was, in turn, caused by its lower foreign currency deposits at these banks andthe rise in banks’ foreign currency deposits with the Central Bank by LE 2.5 billionworth. Net foreign assets at the CBE rolled back by LE 43.0 billion worth or 22.6percent, against a rise of LE 18.5 billion worth or 10.8 percent, posting LE 147.2billion worth at the end of June 2011. The decline was mainly attributed to the dropof LE 42.3 billion worth or 21.3 percent in foreign assets at the CBE during the year(against a rise of LE 25.6 billion worth or 14.8 percent a year earlier), to reach LE156.3 billion worth at end of June 2011. On the other hand, foreign liabilities at theCBE augmented by the equivalent of LE 0.7 billion or 9.1 percent during the year(against a pickup of LE 7.0 billion worth) to stand at LE 9.1 billion worth at end ofJune 2011.1/3- Payment Systems and Information Technology (IT) The CBE’s efforts to develop the payment systems and information technologyhave been in progress, to bolster the soundness and stability of the financial system,reduce credit risks, expedite payment settlements, and ensure their reliability andconfidentiality. The existence of a national payment system was instrumental to thefinancial stability in Egypt, especially during the 25th of January Revolution, leadingas such to the stability of the banking system. In this respect, the following actionswere taken in FY 2010/2011:Payment Systems • Continuing to use the RTGS as a mode of interbank funds transfer and liquidity management operations, and management of banks legal reserve requirements at the CBE. The average monthly transactions settled under the RTGS system are one billion Egyptian pounds. • Managing the disbursement of pensions via ATM debit cards, with the joint efforts of the National Organization for Social Insurance (NOSI), CBE and banks working in this project. Interestingly, while NOSI branches were closed in the wake of the revolution, 90% of pensioners managed to disburse their pensions via their cards and through banks’ ATM terminals.
7 Central Bank of Egypt – Annual Report 2010/2011 • On the 1st of June 2010, the Direct Credit service in the national ACH became officially operative by the Egyptian Banks Company (EBC). The number of monthly transactions processed through this facility is about 200 thousand, and a gradual increase is expected. Moreover, preparations for the launch of the Direct Debit system are under way. It is planned that a pilot operation of this service will start in the first half of 2012. Enlarging the electronic payments base, these services will help speed up money transfers among individuals, and in turn, increase the national product. • Within the project of disbursing salaries of government employees by electronic cards, more than one million bank cards were distributed for salaries, and one million bank cards for pensions, in addition to other one million and five hundred thousand cards for pensioners, to be disbursed from the outlets of the National Organization for Social Insurance. • The CBE, in cooperation with the Ministry of Finance, has been working to shift to an electronic payment of government obligations, through banks within the ACH operations. The project aims at improving the efficiency of government procedures and tightening control over government payments. This process is expected to come on stream in the first half of 2012. • Currently, the CBE is preparing to join the ACH of the COMESA countries. Recognizing their importance for the national security of Egypt, the project aims at promoting trade with COMESA countries. In this context, the internal rules and procedures of work at the CBE are under study. In addition, signing the project-related agreements with COMESA and the Central Bank of Mauritius is currently under way.Information Technology • The CBE is in the process of developing the database of banking sector units, by setting up a data warehouse conforming to the international standards. The warehouse is designed to help the CBE sectors to have access to accurate and transparent reports, to be able to monitor the performance of the banking sector units and make informed decisions. • The establishment of a permanent Disaster Recovery (DR) site for the CBE is on track, to be functional in emergencies as an alternative to the main center at El-Gomhoria building. This is intended to ensure the continuity of IT services, in a timely and accurate manner, taking into account that the DR site should meet the international standards. The site is to be located in the CBE building in Tanta and a study was approved for this purpose. The CBE in cooperation with the project consultant are preparing the REP for the site preparation, providing that another RFP will be issued for IT equipments.
8Central Bank of Egypt – Annual Report 2010/2011 • Given the mounting risks associated with the internet banking services, the CBE embarked on a project that mandates the banks providing the services to identify and assess the weaknesses and vulnerabilities of their data networks that serve the internet banking systems and the website. Banks are also required to review the design of information security systems, and conduct security assessments with specialized companies. During this project, banks are required to conduct Vulnerability Assessment, remediate the vulnerabilities, conduct a penetration testing and submit the final results to the CBE. So far, all banks have delivered the required reports to the CBE for analyzing the data contained, and for issuing a final report with CBE recommendations. The report is expected to be released very soon. • The electronic “Auction Portal System” was introduced to automate the procedures of bidding for Treasury bill and bond auctions, and the CBE’s certificates of deposits (CDs). By virtue of this system, primary and secondary dealers can bid online, according to specific regulations, via the secure and private data network (Extranet) whereby banks and the CBE are inter- connected. • According to the plan of developing the IT systems that serve the Printing House, assistance has been provided to the Printing House to migrate their IT applications to be compatible with the other modernized systems in place at the CBE. Recognizing that upgrading the IT infrastructure at the Printing House is a prerequisite for developing the above -mentioned systems, the CBE has proceeded with studying the upgrading of the infrastructure of the IT & Communication systems serving the Printing House. • Under the plan of developing the CBE branches and modernizing their IT applications, the unification of the Bank’s accounting system is under consideration, to be generalized in all branches (Alexandria, Mohandessin & Port Said). For this purpose, preliminary steps have been taken, starting with Alexandria branch and ending with Port Said branch as scheduled. • Kasr El Nile Project: IT sector has participated in the design & supervision of the IT infrastructure that serves the building.
9 Central Bank of Egypt – Annual Report 2010/20111/3/1- RTGS and SWIFT Local Services Data on local banking transfers under the RTGS system in FY 2010/2011,applied as of mid-March 2009, showed an increase in the number and value of theexecuted messages, registering 1248.7 thousand messages at a value of LE 15879.7billion (against 1191.4 thousand messages and LE 13274.7 billion a year earlier). It isworth mentioning that these transactions include banks and clients transfers,operations of treasury bills, and Misr for Central Clearing, Depository and Registry(MCDR), in addition to corridor operations and deposits for monetary policypurposes. RTGS and SWIFT Local Services in Local CurrencyFY Change Number of Messages Value of Transfers Number Value (Unit) (LE mn)2007/2008 700668 3092401 175432 8122032008/2009 897205 5294357 196537 22019562009/2010 1191374 13274677 294169 79803202010/2011 1248692 15879701 57318 2605024 According to the statistics of the CBE Automated Clearing House, included inthe RTGS since its launch, the number of exchanged cheques increased in thereporting year to 13012 thousand (from 12994 thousand a year earlier). Likewise,their total value edged up to LE 626.8 billion from LE 584.5 billion. As a result, theaverage value per cheque inched up to LE 48.2 thousand from LE 45.0 thousand. CBE Automated Clearing House ActivityFY Number of Cheques Value of Cheques Change (thousand) (LE mn) Number Value2007/2008 11724 483113 11.9 35.42008/2009 12062 548038 2.9 13.42009/2010 12994 584546 7.7 6.72010/2011 13012 626757 0.1 7.2 Transactions executed in foreign currencies under the Fin-Copy system, viaSWIFT, showed an increase in terms of number and value. Executed transactionsreached 15.1 thousand in number, at a value of US$ 88.1 billion (against 12.2thousand at a value of US$ 70.0 billion in the previous FY).
10Central Bank of Egypt – Annual Report 2010/2011 SWIFT Local Activity in US DollarDuring FY Value of Change Number of Transfers Number Value Messages (Unit) (US$ mn)2007/2008 13925 105587 1855 265902008/2009 12365 83019 (1560) (22567)2009/2010 12204 70008 (161) (13011)2010/2011 15066 88052 2862 180441/4– Domestic Liquidity and Counterpart Assets Domestic Liquidity went up by LE 91.9 billion or 10.0 percent in 2010/2011(against LE 86.2 billion and 10.4 percent a year earlier), ending the year at LE 1009.4billion. The rise was due to the growth in net domestic assets, meanwhile net foreignassets dropped. The former increased by 13.2 percent adding to domestic liquiditygrowth. Part of the liquidity was used by banks to purchase treasury bills in theamount of LE 74.0 billion. On the other hand, net foreign assets decreased by 3.2percent. The pickup in domestic liquidity was reflected in the acceleration of moneysupply and quasi-money. Money supply augmented by LE 34.7 billion or 16.2percent (against LE 31.0 billion and 17.0 percent in the previous FY) reaching LE248.7 billion at end of June 2011. Most of the rise in the reporting year came on theback of the increase in currency in circulation outside the banking system by LE 32.7billion or 24.2 percent (against LE 17.1 billion and 14.4 percent) posting LE 167.9billion at end of June 2011. Notably, around three quarters of the rise (74.2 percent)occurred in the second half of the reporting year, in which the currency in circulationgrew by LE 24.3 billion or 16.9 percent. This can be explained by the increase in thebanknotes issued by CBE to compensate the sudden withdrawals of deposits bycustomers, in the wake of the circumstances and consequences of the 25th Januaryrevolution. Growth Rate of Domestic Liquidity by Component % 20 Money Supply Quasi-money 18 Domestic Liquidity 16 14 12 10 8 6 4 2 0 2007/2008 2008/2009 2009/2010 2010/2011
11 Central Bank of Egypt – Annual Report 2010/2011 LE demand deposits at banks rose by only LE 2.0 billion or 2.5 percent (againstLE 14.0 billion and 21.6 percent) to LE 80.8 billion at end of June 2011. The increasereflected the rise of LE 4.2 billion in the deposits of the private sector. By contrast,deposits of the public business sector decreased by LE 2.2 billion. Quasi-money accelerated by LE 57.2 billion or 8.1 percent (against LE 55.2billion and 8.5 percent in the previous FY) to stand at LE 760.7 billion at end of June2011. The pickup in LE time and saving deposits and in foreign currency depositswas behind that rise. The former increased by LE 38.4 billion or 7.0 percent to LE583.7 billion, representing 76.7 percent of quasi-money and 57.8 percent of totalliquidity at end of June. Domestic Liquidity Components End of June 2011 Local Currency Time & Saving Deposits 57.8% Foreign Currency Demand Deposits 4.1% Foreign Currency Time & Saving Money Supply Deposits Quasi-money 24.6% 13.5% 75.4% Noticeably, the surge in LE time and saving deposits of the household sector byLE 52.1 billion exceeded the overall increase recorded in this type of deposits. Theincrease in these deposits could have been larger, but for the decline in the deposits ofthe private and public business sectors (down by LE 12.5 billion and LE 1.2 billion,respectively). It is to be noted that in the second half of the year, LE time and savingdeposits retreated by LE 8.7 billion or 1.5 percent. The decline was particularly in thedeposits of the private business sector (LE 24.5 billion) and in those of the publicbusiness sector (LE 2.2 billion). However, the decline was held back by the LE 18.0billion rise in the deposits of the household sector. Foreign currency deposits by all sectors increased by LE 18.8 billion or 11.9percent (against a retreat equivalent to LE 9.1 billion or 5.4 percent) to reach LE177.0 billion or 23.3 percent of total quasi-money at end of June 2011. The increasewas entirely achieved in the second half of the year, in which deposits scaled up bythe equivalent of LE 18.9 billion or 12.0 percent.
12Central Bank of Egypt – Annual Report 2010/2011 Against these developments, foreign currency deposits/total deposits(dollarization ratio) inched up from 20.21 percent at end of June 2010 to 21.03percent at end of June 2011. This reflected the propensity for saving in foreigncurrencies, especially given the uncertainty about the LE fluctuations due to theevents in Egypt following the 25th January revolution. However, this trend issomewhat limited, noting that LE time and saving deposits of the household sectorstill accounted for the bulk (almost 65.8 percent) of total quasi-money at end of June2011. Contribution of Counterpart Assets to Domestic Liquidity Growth RateIn the year ending June 2008 2009 2010 2011Domestic Liquidity Growth Rate (%) 15.7 8.4 10.4 10.0Net Foreign Assets (%) 12.8 (6.5) 3.4 (3.2)Net Domestic Assets (%) 2.9 14.9 7.0 13.2 Domestic Credit rose by LE 117.5 billion or 15.2 percent in the reporting year(against LE 79.9 billion or 11.5 percent a year earlier) ending the year at LE 892.8billion. About three quarters of the increase (74.6%) was realized in the second halfof the year, as domestic credit moved up by 10.9 percent or LE 87.7 billion, of which82.8 percent was directed to the government sector. Domestic Credit by Sector (End of June) LE bn Household Sector 1000 Private Business Sector 900 Public Business Sector 800 Gov. Sector (Net) 700 600 500 400 300 200 100 0 2006 2007 2008 2009 2010 2011 Receiving around 94.6 percent of the rise in domestic credit, the share of thegovernment (including public economic authorities) increased/surged by LE 111.2billion or 34.1 percent (against LE 53.0 billion or 19.4 percent) posting some LE437.3 billion or 49.0 percent of total credit at end of June 2011. Such an increasereflects the rise in banks’ holdings of government securities by LE 102.4 billion, andin loans to the government by LE 30.7 billion, on the one hand and the pickup in itsdeposits by LE 21.9 billion, on the other hand.
13 Central Bank of Egypt – Annual Report 2010/2011 Credit disbursed to the household sector climbed by LE 6.4 billion or 6.9 percent(against LE 8.2 billion and 9.7 percent) bringing its indebtedness to LE 99.2 billion or11.1 percent of total domestic credit at end of June 2011. The share of public businesssector also picked up by LE 3.0 billion or 10.0 percent (against a decline of LE 3.2billion or 9.5 percent in the previous year, due to the settlement of non-performingloans) ending the year at LE 33.0 billion. Credit to the private business sector rolledback by LE 3.1 billion or 1.0 percent (against an increase of LE 21.9 billion or 7.2percent) lowering its debts to banks to LE 323.2 billion or 36.2 percent of total creditat end of June 2011. Relative Structure of Domestic Credit (End of June 2011) 11.1 49.0 36.2 3.7 Gov. Sector (Net) Public Business Sector Private Business Sector Household Sector Net foreign assets at the banking system (denominated in local currency)declined by LE 28.9 billion or 10.2 percent (compared to a surge of LE 28.3 billion or11.1 percent), ending the year at LE 253.5 billion. Noticeably, the decline occurred inthe second half of the year, where net foreign assets fell by LE 51.8 billion. Yet, therise of LE 22.8 billion in the first half of the year had somewhat mitigated such adecline, which came as a result of (i) the drop in net foreign assets at CBE by LE 43.0billion (due to the LE 42.3 billion fall in its foreign assets, and the LE 0.7 billion risein its foreign liabilities) and (ii) the build up of net foreign assets at banks by LE 14.1billion. The decrease in the CBE’s net foreign assets is traced to the necessary financethe Central Bank had to provide to meet part of the foreign capital repatriation, in theaftermath of the Egyptian revolution.
14Central Bank of Egypt – Annual Report 2010/2011 Foreign Asse ts & Liabilities of the Banking Syste m at End of June LE bn Foreign Assets 400 Foreign Liabilities 300 200 100 0 2007 2008 2009 2010 2011 Net balancing items exerted an expansionary effect on domestic liquidity of LE3.3 billion. This was brought about by the increase in capital accounts by LE 24.3billion, coupled with a decrease in inter-bank net credit and debit positions by LE15.2 billion, and in net unclassified assets and liabilities by LE 5.8 billion.1/5- Supervision Sector Being the regulator of banks in Egypt, the CBE seeks to ensure the soundnessof banks’ financial positions and evaluate their performance from the perspective ofrisk-based supervision. In addition, it ascertains banks’ compliance with theestablished regulatory standards, including the minimum reserve requirement andliquidity ratios, the maximum limits of a bank’s exposure to a single customer alongwith his related parties, and exposures abroad, as well as the asset-liability matchingin terms of maturity and currency. This is in addition to a number of qualitativestandards that ensure the soundness of banks’ performance and the safety ofdepositors’ funds, including governance rules; information systems efficiency rules;and eligibility and competency criteria for officials and managers of key sectors atbanks. The implications of the recent international financial crises bore out that theinstructions and reform policies adopted by the CBE to restructure banks, raise theircapital and strengthen their risk management systems were instrumental in containingthe effects of these crises. Moreover, the CBE had thoroughly monitored the financialcrises in many countries, especially in the euro zone, so as to be capable of makingimmediate decisions - when necessary - to counteract the spillovers in due time.
15 Central Bank of Egypt – Annual Report 2010/2011 Hereunder are the decisions taken by the CBE over the last quarter of FY2010/2011 and the period that followed: 1. Providing banks with Quantitative Impact Studies (QIS) under Pillar II regarding liquidity, concentration risks, and to launch pilot testing before issuing related supervisory instructions. 2. Allowing banks –in response to the extraordinary events in the Egyptian stock market– to reclassify financial assets held for trading from January 1st till the end of June 2011. 3. Enhancing the bank’s concentration risk management through issuing a regulation that sets exposure limits to countries, financial institutions (banks) and financial groups abroad. 4. Requiring banks to open an account under the name of "Zewail City for Science and Technology" to accept donations for this project, and another account to raise donations for the eradication of slums. Received donations shall be transferred to the two accounts created by the CBE for the same purpose. The CBE issued a number of instructions during FY 2010/2011, which aremainly: 1. Underpinning and supporting the banking sector to help it face the current event or current crisis through issuing a regulation that: a. Offer special treatment to retail and corporate loans in light of the current crisis. b. Postpone the deduction of additional impairment on the excess of banks’ investments in non-financial companies over 40% of the company’s issued capital. 2. Directing banks to decrease the concentration of loans and advances in the form of overdrafts. 3. Extending cash cover exemptions on all meat, poultry and sugar imports – by merchants (for trading purposes) or by government entities – from the 50 percent minimum cash cover requirement till end of December 2011.
16Central Bank of Egypt – Annual Report 2010/2011 4. Setting limits on transfers abroad and cash withdrawals by individuals, as well as requiring banks to submit weekly statements on loan balances, client deposits, and the two liquidity ratios and daily statements on cash withdrawals/deposits, and inward/outward external transfers. 5. Postponing the consideration of requests from banks in Libya – submitted on behalf of their customers – to liquidate their letters of guarantee issued for investment projects, until the political landscape improves in Libya. Seeking to enhance governance rules in the banking system, the CBEs Boardof Directors approved - on its session of 6 April 2004 –competency criteria forchairmen, board members and executive managers of banks, to make sure that theyare qualified for their posts. Competency criteria were modified on 24 November2009, where a new criterion was introduced, prohibiting any official tosimultaneously combine between two positions as a senior manager in a bank and amember of the board of directors of another bank. The new criterion was applicableto future nominations, with the exception of those banks entirely owned by a bank. Itintended to prevent any conflict of interests, in compliance with good governancepractices. In addition, interviews are made with the chairmen, deputy chairmen,managing directors, executive board members of banks and executive directors toensure their eligibility for the positions they are nominated for, with a particularattention being paid to candidates for risk- and compliance-related positions. As for foreign nominees at banks (board members and executive directors), acriterion was set, whereby the regulatory authority of the parent bank, or the last bankthe nominee has worked in (as the case may be) is to be consulted about thatnominee, to identify his/her eligibility for the vacant position. In this context, theregister of banks witnessed the addition of five chairmen, five vice-chairmen, threemanaging directors, four executive board members, twenty six non-executive boardmembers, two specialized members, a regional manager for a foreign bank branch, aregional deputy manager for another foreign bank, seven chief executive officers forrepresentation offices in Egypt, one general manager and one executive director in abank, and two executive directors at risk, compliance, credit, investment, treasury andinternal inspection departments. In light of the study conducted on some of the banks statutes relating to theperiodicity and location of board meetings of banks, the CBE Board of Directorsagreed, on its session dated 20 June 2009, to allow board meetings to be held outsideEgypt only once during the fiscal year on exceptional basis. On the other hand, amendments to certain articles of the statute of elevenbanks, and the addition of 86 new branches of 24 banks were recorded in the registerof banks.
17 Central Bank of Egypt – Annual Report 2010/2011 In line with the policy of the CBE that promotes the growth and geographicalexpansion of banks by opening small branches, a number of standards and regulationswere proposed and are currently raised to the senior management for approval afterstudying the experiences of several countries, such as the United States, Japan, Chinaand Saudi Arabia, to choose the most optimal and appropriate one for the Egyptianmarket. The said branches shall provide a number of specific services. These areexclusively the following: • Conducting withdrawal/deposit operations, and currency conversion trans- actions via ATMs. • Receiving and sending requests to the concerned departments in the bank to complete their procedures. • Offering installment credit for the purchase of durable goods. • Marketing and promoting bank products. A benchmark of LE 10 million of a banks core capital was set for each smallbranch. The working hours of each branch shall be determined according to therequirements of its location. Staff head count of each branch shall not exceed threequalified persons. The CBE is currently in the process of updating the rules of examining thedocuments required from the houses of expertise (that are qualified for participatingin the evaluation of guarantees provided to banks) to be listed in the register ofhouses of expertise at the CBE (63 houses of expertise were listed so far). This step isbound to raise the efficiency and effectiveness of the credit decisions made by banksto prevent the recurrence of the problem of nonperforming loans. Moreover, theauditors authorized to audit the financial statements of banks shall be registered in aspecial register, in conformity with specific criteria that ensure a satisfactory degreeof efficiency and expertise. 30 new auditors were recorded during the reporting year. Recently, banks have been eager to provide e-banking services to keep pacewith the technological progress in this field. Such services are either traditional orinnovative (effected via electronic networks) and had been regulated earlier by therules issued by the CBE Board of Directors on 28 February 2002. Later, on 2February 2010, the CBE Board of Directors approved the regulations governing theoperation of payment orders via mobile phones in Egypt. Furthermore, the CBE hasproceeded with updating the rules of internet banking, so as to reduce the risksinherent in e-banking services. It is worth mentioning that six banks were licensed, during the reporting year,to introduce electronic bill payment service via the ATM and branches, incooperation with Fawry Company for Banking and Payment Technology Services.
18Central Bank of Egypt – Annual Report 2010/2011 The CBE allowed banks to participate in the establishment of the differenttypes of mutual funds, to cater for risk-averse investors who have cash money butlack the necessary experience, know-how, or time to invest in such tools that yieldgood returns. Nine banks were given approval to start procedures for establishing 11new mutual funds. In order to encourage individuals to save, registered banks were allowed toissue saving systems of three years or more, with some privileges, to be able to raisetheir market interest rates above the short-term interest rates. Also, banks werepermitted, during this year, to issue new saving vessels and to make adjustments tothe existing ones, with the aim of increasing the volume of medium- and long-termsavings, to help banks finance production and industrial enterprises. To organize dealing in the forex market in Egypt and maximize savingsreceived from workers abroad, off-site supervisions are exercised on forex dealers,and money transfer companies in Egypt, in accordance with the Law governing theCentral Bank, Banking Sector and Money Market. In this respect, it is worthy to note that while the report is being prepared, threenew companies, and 24 branches were registered as currency exchangers, thusbringing their total number to 448 nationwide. Moving to tourism services, the CBE – pursuant to the above-mentioned Law –has licensed shops within customs areas at airports to sell in foreign currencies aswell as Egyptian pounds, to cover part of the State’s needs of foreign currencies andencourage tourism. As such, nine shops in free zones were granted such a license,bringing their total number to 79 shops at the end of the preparation period of thereport. As part of the ongoing efforts made by the General Department for Credit RiskPooling to enhance the efficiency and transparency of the credit registration system,the following steps were taken: • An extensive meeting was held on 15 July 2010, attended by bank officials, to discuss the data received by the department. The aim of the meeting was to pinpoint the problems and difficulties facing banks when sending data, and the precautionary actions to be taken in this respect, to ensure that informed credit granting decisions be made. • The provision of more detailed information on customers of judicial procedures and settlements was considered. Also considered was separating the debt settlement customers from those of rescheduling debt when notifying banks of the positions of these customers, to set regulatory standards and rules, and make modifications in line with the changes and conditions of the banking sector.