AFRICAN DEVELOPMENT BANK

Transcription

1 AFRICAN DEVELOPMENT BANK Public Disclosure Authorized Public Disclosure Authorized EGYPT ECONOMIC GOVERNANCE AND ENERGY SUPPORT PROGRAM III (EGESP III) APPRAISAL REPORT RDGN/COEG January 2018

2 TABLE OF CONTENTS CURRENCY EQUIVALENTS FISCAL YEAR... I WEIGHTS AND MEASURES... I ACRONYMS AND ABBREVIATIONS... II PROGRAM INFORMATION IV LOAN INFORMATION... IV PROGRAM EXECUTIVE SUMMARY... VI RESULTS-BASED LOGICAL FRAMEWORK... VIII I INTRODUCTION: THE PROPOSAL... 1 II UPDATE ON COUNTRY ELIGIBILITY... 1 III YEAR 2017 PROGRAM PROGRAM GOAL AND PURPOSE PROGRAM COMPONENTS PROGRAM OUTPUTS AND EXPECTED RESULTS PROGRESS ON TRIGGERS OUTLINED IN THE PREVIOUS OPERATION POLICY DIALOGUE LOAN CONDITIONS APPLICATION OF GOOD PRACTICE PRINCIPLES ON CONDITIONALITY FINANCING NEEDS AND ARRANGEMENTS IV OPERATION IMPLEMENTATION BENEFICIARIES OF THE PROGRAM IMPLEMENTATION, MONITORING AND EVALUATION FINANCIAL MANAGEMENT, DISBURSEMENT AND REPORTING ARRANGEMENTS V LEGAL DOCUMENTATION AND AUTHORITY LEGAL DOCUMENTATION: CONDITIONS ASSOCIATED WITH THE BANK S INTERVENTION COMPLIANCE WITH BANK GROUP POLICIES VI RISKS MANAGEMENT VII RECOMMENDATION APPENDIX I: LETTER OF DEVELOPMENT POLICY... I APPENDIX II: IMF PRESS RELEASE ARTICLE IV AND EFF 2 ND REVIEW... II APPENDIX III: EGYPT EGESP PRIOR ACTIONS... XII APPENDIX IV: LINKAGE OF EGESP WITH HIGH FIVES... XV APPENDIX V: SOCIAL IMPACT OF THE RECENT MACROECONOMIC POLICIES IN EGYPT... XVI

3 LIST OF TABLES Table 1: Selected Macroeconomic Indicators... 2 Table 2(a): Progress on Targets from the Results-Based Logical Framework... 6 Table 2 (b): Progress towards achievement of Outcome and Impact Indicators... 7 Table 3: Prior Actions and Required Evidence for FY 2017/18: EGESP III Table 5: EGESP Risk and Mitigation Measures... 18

4 CURRENCY EQUIVALENTS (As of December 2017) 1 UA = EGP UA = USD UA = EUR FISCAL YEAR July 1 June 30 WEIGHTS AND MEASURES 1metric tonne = 2204 pounds (lbs) 1 kilogramme (kg) = lbs 1 metre (m) = 3.28 feet (ft) 1 millimetre (mm) = inch ( ) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = acres i

5 AfDB ASA AU CAPMAS CBE CFRA COEG CPPR CSO CSP CPIA DFID DO DPs DSA ECA EDA EEA EEHC EGAS ESW EU FDI FM FRA FY GAFI GBS GCI GDP GIFMIS GIZ GoE HDI HRH IADB IDA IMF IOP IPPs KPI LE MDGs MENA TF MENA MIC TAF MMSCFD MoIIC MoF ACRONYMS AND ABBREVIATIONS African Development Bank Accountability State Authority Accounting Unit Central Agency for Public Mobilization and Statistics Central Bank of Egypt Country Fiduciary Risk Assessment AfDB Country Office-Egypt Country Portfolio Performance Review Civil Society Organization Country Strategy Paper Country Policy and Institutional Assessment Department for International Development Development Objective Development partners Debt Sustainability Analysis Egyptian Competition Authority Enterprise Development Agency (former Social Fund for Development) Exposure Exchange Agreement Egyptian Electricity Holding Company Egyptian Natural Gas Holding Company Economic and Sector Work European Union Foreign Direct Investment Financial Management Financial Regulatory Authority (former EFSA) Fiscal Year General Authority for Investment and Free Zones General Budget Support Global Competiveness Index Gross Domestic Product Government Integrated Financial Management Information Systems Deutsche Gesellschaft für Internationale Zusammenarbeit Government of Egypt Human Development Index Human Resources for Health Inter-American Development Bank Industrial Development Authority International Monetary Fund Indicative Operational Program Independent Power Producers Key Performance Indicator Egyptian Pound Millennium Development Goals Middle East and North Africa Transition Fund Middle East and North Africa Middle Income Country Technical Assistance Million Standard Cubic Feet per Day Ministry of Investment and International Cooperation Ministry of Finance ii

6 MTEF MTFF MTR OECD PBO PCR PFM PPPs PSD PSDS RBM RE SDS SME SoE SSN TA TYS UA UAE UCS USD VAT WB WBGI WDI WEF Medium Term Expenditure Framework Medium Term Fiscal Framework Mid-Term Review Organization for Economic Cooperation and Development Program Based Operation Project Completion Report Public Financial Management Public Private Partnerships Private Sector Development Private Sector Development Strategy Results-Based Management Renewable Energy Sustainable Development Strategy Small and Medium Enterprises State-Owned Enterprise Social Safety Nets Technical Assistance Ten Year Strategy Bank Group Unit of Account United Arab Emirates Using Country Systems United States Dollar Value-added Tax World Bank World Bank Governance Indicators World Development Indicators World Economic Forum iii

7 PROGRAM INFORMATION INSTRUMENT PBO DESIGN TYPE Client s information BORROWER: EXECUTING AGENCY: PROGRAM BASED OPERATION PROGRAMMATIC OPERATION LOAN INFORMATION ARAB REPUBLIC OF EGYPT MINISTRY OF INVESTMENT AND INTERNATIONAL COOPERATION Financing plan for 2015, 2016, and 2017 Source Amount (2015) Amount (2016) Amount (2017) ADB Loan USD million USD million USD million WORLD BANK USD 1, million USD 1, million USD 1, million TOTAL FINANCING USD 1, million USD 1, million 1,650 million ADB key financing information ADB Loan Currency 2 Loan Type Interest Rate 3 Base Rate 4 Funding Cost Margin 5 United States Dollars (USD) Fully Flexible Loan Base Rate +Funding Cost Margin+ Lending Margin + Maturity Premium Floating Base Rate based on 6-month USD Libor Refer to footnote Lending Margin 80 basis points (0.80%) Maturity Premium 6 0 basis points Front End Fee 7 25 basis points (0.25%) Commitment Fee 8 25 basis points (0.25%) Tenor 20 years inclusive of Grace Period of 5 years Grace period Average Loan Maturity 9 Payment Dates 10 5 years years Refer to footnote 1 USD 150 million of this amount is provided through a loan guarantee arrangement supported by the United Kingdom. 2 The borrower may convert the Loan Currency for both undisbursed and disbursed amounts in full or part to another approved lending currency of the Bank (transaction fees are payable). 3 The interest rate will be floored at zero. 4 6-Month USD Libor which resets each 1st February and 1st August. A free option to fix the Base Rate is available. In addition to the free option to fix the Base Rate, the borrower may reconvert the fix rate to floating or re-fix it on part or full disbursed amount (transaction fees are payable). The borrower may cap or set both cap and floor (i.e., collar) on the Base Rate to be applied on part or full disbursed amount (transaction fees are payable). 5 The six months adjusted average of the difference between: (i) the refinancing rate of the Bank as to the borrowings linked to the Floating Base Rate and allocated to all its floating interest loans denominated in the Loan Currency and (ii) the Floating Base Rate for each semester ending on 30 June and on 31 December. This spread shall apply to the Floating Base Rate which resets on 1 February and on 1 August. The Funding Cost Margin shall be determined twice per year on 1 January for the semester ending on 31 December and on 1 July for the semester ending on 30 June. 6 The Maturity Premium is based on the Average Loan Maturity, which is defined as the weighted average time to repay a loan, calculated as the average number of years until each principal repayment amount of the loan is due, weighted by the principal repayment amounts. Loans with an Average Loan Maturity less than or equal to years will incur no (Nil) Maturity Premium; an Average Loan Maturity greater than years and up to 15 years will incur 10 bps (0.10%) Maturity Premium; an Average Loan Maturity greater than 15 years and up to 17 years will incur 20 bps (0.20%) Maturity Premium. 7 A front end fee of twenty-five (25) basis points will be charged on the approved loan amount. 8 A commitment fee of twenty-five (25) basis points per annum will be charged on undisbursed loan balances. The commitment fee starts to accrue 60 days after loan agreement signature date. 9 Refer to footnote February 1 and August 1 are standard repayment dates. However, any combination of the 1st and 15th of any month (excluding 1st January) is allowed. iv

8 Timeframe - Main Milestones Program Pre-Appraisal June 2017 Program Appraisal October 2017 Program Approval January 2018 Loan Effectiveness February 2018 Disbursement Closing Date 31 December 2018 Completion 31 st January, 2019 v

9 Paragraph 2017/18 Program overview 2017/18 Country Context and Overview Lessons Learnt PROGRAM EXECUTIVE SUMMARY Topics to Cover Program name: Egypt Economic Governance and Energy Support Program III (EGESP III). This operation is the third and final phase in a programmatic series of three consecutive Program Based Operations (PBO) covering the period Program Goal and Objective: In line with the first phase of the program approved by the Board of Directors on the 15 th of December 2015, the goal of the EGESP III is to support the implementation of the government s medium-term development agenda aimed at building a strong foundation for inclusive and self-reliant economic growth. Specifically, it will promote inclusive and resilient growth through: fiscal consolidation; improved governance, efficiency and private sector engagement in the energy sector; and improved business environment. Expected results in 2017/18: (i) enhanced fiscal consolidation through expanded and efficient tax base and improved revenue collection (services and sales tax increased from 5.1% of GDP 2014/15 to 6.7% of GDP by 2017/18), improved efficiency of public expenditure, particularly through reduced wage bill (8.1% of GDP 2015 to 7.4 % of GDP by 2017/18), and enhanced fiscal transparency; (ii) enhanced energy sector security (tripling of operating reserve by 2018 from 11% in 2014/15) and private sector investment in oil and gas sectors (USD 15 billion between 2015 and 2018); (iii) enhanced competitiveness of private sector and financial inclusion, through a reduction in average number of days to comply with industrial licensing requirement (from 634 days to 160 days by 2018); an increase in the number of licensed microfinance providers from 26 in 2015 to 150 in 2018; and increase in % of loans issued to women from 26% in 2015 to 50% in Program Cost: The Bank planned a total of USD 1.5 billion for the three year programmatic operation. The first two phases each amounting to USD 500 million were fully disbursed in January 2016 and March The program amount for the third and final phase is USD 500 million. Egypt s government has made important progress in improving governance and maintaining the structural reform agenda under the three-year International Monetary Fund program. Reflecting a challenging fiscal year, GDP grew by 4.1% in FY2016/17, compared to 4.3% in FY2015/16. Starting from FY2017/18, broad-based growth should take hold and accelerate to 4.8%. Egypt s fiscal deficit fell from 12.5% in FY2015/16 to 10.9% of GDP in FY2016/17, its lowest level in the last five years, and is projected at 9% of GDP in FY2017/18. Over the same period, the primary balance, which strips out interest payments, fell from -3.5% to - 1.8% of GDP and should become positive in FY2017/18 (+0.24%). The country has reformed subsidies, introduced value-added and new taxes, and curtailed growth in public sector wages to both increase revenue and reduce expenditures. Investor confidence has increased since the government liberalized the exchange rate and secured the USD 12 billion IMF loan in November As a result, portfolio and foreign direct investment inflows significantly increased. Improved competitiveness has boosted the country s exports to the rest of the World. Net international reserves doubled between June 2016 and October 2017.In addition, for the first time since 2011, unemployment rates recorded a decrease from 12.5% in 2016 to 11.98% in However, the currency depreciation contributed to increases in inflation and the level of debt. Despite a tight monetary policy, inflation surged to 23.3% (year-on-year percentage change) in June 2017 to reach 31.9% in August The Government has expanded its social protection programs in order to mitigate these effects and support social welfare. The main lessons learnt from the implementation of the first and second phases of the operation include: Harmonisation and close collaboration with the World Bank from conception, implementation and monitoring stages of each PBO phase, has provided for a coherent and consistent dialogue around the Governments reform agenda. This was strongly supported by Government- through Ministry of Investment and International Cooperation. The phased approached implicit in the programmatic PBO has enabled the Bank to maintain continuous policy dialogue with the authorities, thereby ensuring smooth implementation of reforms in a phased way that ensures impact and buy-in from the population. Government ownership: Strong government ownership of the reform program has been critical to the success of the operation. The Government has demonstrated extremely strong commitment to the program, hence facilitating implementation. In many cases, outcomes exceeded targets. Complementary TA intervention by various DPs (e.g. industrial licensing reforms) was critical to the achievement of the PBO outcome targets. vi

10 Conditions for Continuous Support Policy dialogue and linked technical assistance The Government of Egypt (GoE) remains committed to poverty reduction, inclusive growth and protection of poor and vulnerable groups as demonstrated through its implementation of the Sustainable Development Strategy (Vision 2030) and the 2014/15 to 2018/19 Macroeconomic Framework and Strategy. GoE hs successfully embarked on a comprehensive structural reform agenda to consolidate its public finances, improve the energy sector and the business environment. New investments and licensing laws have been designed to attract more foreign direct investment. The floatation of the Egyptian Pound has helped to eliminate the parallel exchange rate market and increase foreign exchange availability. The country has demonstrated its commitment to better transparency and governance. Egypt has just presented its vision for investment compacts to create jobs and close the infrastructure gap, with early private sector engagement and political backing from the G20 within the next three years. Following the Staff- Level Agreement with the IMF on a three-year USD 12 billion Extended Fund Facility (EFF) in August 2016, Egypt received the first instalment of USD 4 billion tranche in July 2017 and will receive an instalment of USD 2 billion following the 2 nd review that took place in November The World Bank has already disbursed the first two tranches of USD 1 billion each for this joint development policy financing, and its Board of Directors approved the third and last USD 1.15 billion tranche on December 5, With improved political stability and government commitment to reforms, Egypt s prospects for stronger growth, higher employment, and greater macroeconomic stability have strengthened. These reforms and initiatives provide appropriate conditions for continuous support. Policy dialogue has focussed on: (i) Fiscal consolidation focusing on revenue enhancement efforts and improved expenditure efficiency to contain the fiscal deficit; (ii) Promote improved governance and efficiency of the energy sector as well as sustainable growth through use of renewable energy; and (iii) Improving the business enabling environment focusing on improvements to the investment framework, industrial licensing reform, and financial inclusion; and (iv) Social protection focusing on the need to protect the poor through well-targeted safety nets and careful design of the subsidy reform. Dialogue was maintained throughout program implementation, with the Egypt Country office playing a key facilitation role. The Bank did not provide direct Technical Assistance (TA) but the components it supported benefitted from TA provided by other DPs. vii

11 RESULTS-BASED LOGICAL FRAMEWORK Country and project name: Egypt: Economic Governance and Energy Support Program (EGESP) - Phase III Purpose of the project: To promote inclusive and resilient growth through fiscal consolidation; improved governance, efficiency and private sector engagement in the energy sector; and improved business environment. RESULTS CHAIN PERFORMANCE INDICATORS MOV RISKS/MITIGATION Indicator (including CSI*) Baseline Target MEASURES IMPACT OUTCOMES OUTPUTS Inclusive and resilient economic growth Outcome 1 Fiscal consolidation and budget credibility enhanced. Outcome 2 Improved energy security and greater role for the private sector Outcome 3 Competitiveness of the private sector and financial inclusion enhanced Real GDP growth 4.2% (2014/15) 4.7% (2017/18) IMF, Poverty rate 26% (2014) 23% (2018) MoF, Global gender gap index (overall score) Total tax revenue of goods and services as a % of GDP Reduced central government wages and salaries as a % of GDP (2014) (2018) 5.1% (FY2014/15) 6.7% of GDP (2017/18) IMF/MoF 8.1% (2015) 7.4% (2017/18) Fiscal deficit/gdp 13.1% (FY2013/14) 9.3% (2017/18) % of budget allocated for social expenditure 16.9% (FY2015/16) 18.4% (2017/18) Operating Reserve 11 11% (2014) 30% (2017/18) EEHC New private investments in upstream oil and gas sector Increase in the number of anti-competitive practices prevented/eliminated Average number of days to comply with industrial licensing requirements Number of licensed microfinance providers % of loans issued to women by licensed microfinance providers I. Component Advancing Fiscal Consolidation 1.1 Revenue enhancement and improved revenue collection. 1.2 Improved expenditure efficiency and reduced fiscal risk of the payroll on the budget. (i) Unification of the top income tax rate at 22.5% for all economic actors in Egypt; (i) Freezing of special bonuses and rewards for all employees in 2015/16 (ii) Automation of the wage bill USD 2.4 billion (2014) Cumulative investments of USD 15 billion between Min. of Petrol 9 ( ) 11 ( ) GCI Report of WEF 634 days (2015) 160 days (2018) Gov. Reports 26 (2015) 150 NGOs and 2 Companies (2018) FRA 26% (2015) 50%(2018) FRA (i) Differential income tax rates for different economic actors in Egypt. (i) Special bonuses and rewards for all employees existed in the 2014/15 budget; (ii) Automation of the wage bill percentage of salaries processed through e-payroll reached 26% of total in 2014/15 (i) Presidential decree amending the tax law unifying the top income tax rate at 22.5% for all economic actors in Egypt issued. (2015/16) (i) Presidential decree endorsing the 2015/16 Budget with a binding instruction to all budgetary entities to freeze special bonuses and rewards for all their employees in 2015/16 and delink the variable portion of the salaries from the basic salary component. (ii) Report on wage bill confirming e- payroll covers 70% by 2016/2017 and 100% by 2017/18 MoF MoF Risk #1: Economic risks due to vulnerability to external and domestic shocks. Mitigation: Government reform program contains bold revenue enhancement and expenditure efficiency measures to mitigate this risk and strengthen fiscal consolidation. Continuous dialogue with GoE on macroeconomic management under the proposed program will further mitigate the risk. Risk #2: Security risks: A moderate likelihood of intensified regional conflict, especially in countries bordering Egypt. Mitigation: The GoE has intensified efforts in combating terrorism. Risk #3: Fiduciary risks: The recent Bank s CFRA for Egypt rates Egypt fiduciary risk as substantial with positive outlook, (see Technical Annex 1 on CFRA for details). Fiduciary risk if not mitigated would derail program implementation, and achievement of expected program objectives. Mitigation:. The measures being implemented under this program, including the setup of PFM 11 A measure of available operating capacity over and above the capacity needed to meet normal peak demand levels. viii

12 1.3 Enhanced Budget Transparency, and strengthened controls over use of public resources (i) Institutionalizing the publication of Citizen Budget, (ii) Establishment of a PFM Improvement Unit at MoF with the following mandates: (i) setting up an internal audit function; (ii) monitoring SOE fiscal risks including their contingent liabilities; (iii) enhancing government accounting and financial control. Component II: Ensuring Sustainable Energy Supply 2.1 Gradual liberalization of the gas sector 2.2 Improved sustainability of the energy sector through subsidy reform Legal framework for the liberalisation and regulation of the gas sector. Reduction of energy subsidies as a percentage of GDP by gradual increase in electricity tariff III. Enhancing the Business Environment 3.1 Streamlined and transparent industrial licensing regime New industrial licensing regime operationalised (i) Citizen Budget no required (2014/15) (ii) No PFM unit and no professional internal audit and appropriate monitoring of fiscal risks for SOEs No legal and regulatory framework in place (i) Energy subsidies as percentage of GDP was 6.6% in FY 14 (ii) First year increase in electricity tariff for 2014/15 effected (2014). (iii) no fuel price indexation policy in place (i) Old licensing regime, unaligned to international best practice and creating complex and lengthy licencing processes (2015) (ii) Limited access to information on industrial licencing requirements (2015) (iii) Weak grievance handling mechanism (2015) (iv)two stage approval process for industrial licencing (2015) (i) Decree Institutionalizing the systematic and timely publication of Citizen Budget issued by MoF (2015). (ii) PFM Improvement Unit is set up and operationalized by Ministerial Decree (2016). (iii)internal audit unit established and staffed by Ministerial Decree (2017) (iv)sovereign-guarantees Committee chaired by the Minister of Finance established by Ministerial Decree (2017) (v)publication of a section in the Budget Statement for 2017/2018 on fiscal risks. (i)a Gas law that provides for open access to the gas infrastructure and establishment of an independent gas sector regulator submitted to the Parliament (2016). (ii)executive regulations for the Gas law submitted to State Council (2017) (iii) The Minister of Petroleum and Mineral Resources nominates members of the Board of Directors of the Gas Regulator (2017) (iv) The Ministry of Petroleum and Mineral Resources establishes the new independent Gas Sector Regulator. (i) Energy subsidies as percentage of GDP reduced to 3.3% (FY16). (ii)cabinet decree mandating the second, third, and fourth annual increases in electricity tariff for 2015/16, 2016/17 and 2017/18 issued in 2015, 2016 and 2017 respectively. (iii)fuel price indexation policy agreed by MoF and MOPMR and submitted for PM approval (i)executive regulations for the industrial licences law issued by Ministerial Decree (2017) (ii) Requirements relating to establishment, operation and termination of industrial activities accessible on-line (2017) (iii)grievances committee established and operational (2017) (iv)simplified industrial licencing process (2017) MoF Ministry of Petroleu m and Mineral Resource s Ministry of Electricit y IDA Reports improvement Unit and internal audit function and various ongoing technical assistance and institutional support projects aimed to strengthen PFM will further mitigate this risk. Risk #4: Risks of policy delays or reversal: i.e VAT, wage reform, subsidy reform, and electricity tariff reform, if delayed or reversed due to possible negative social impact, could derail fiscal consolidation, widen imbalances, and set back progress already made. Mitigation: Ownership by, and commitment of, the GoE to reforms will mitigate this risk. Moreover, the fiscal consolidation measures were designed in such a way that its impact will be neutral on the low income bracket, the poorest of the poor and the vulnerable. Risk #5: Energy subsidy bounce risk: Despite of large new investments in upstream oil and gas, there is still a supply-demand gap in gas that has to be filled through LNG imports. This exposes the budget to the volatility of the international LNG market and related currency exchange risk, which could have adverse impacts on the subsidy level. Mitigation: The new investments in the upstream hydrocarbon have started to yield results with Egypt s production of natural gas increasing from 4400 MMSCFD in FY 2016 to 5100 MMSCFD at present. Furthermore, with the commencement ix

13 3.2 Enhanced competition and improved investment regime 3.3 Improve access to credit for MSMEs and women entrepreneurs. New competition framework and SME investment regime put in place. Framework for micro finance products put in place. On-line secured lending and mobile money transactions facilitated (i) Old SME investment regime in place (2015) (ii)lack of transparency on criteria to access investment incentives (2015) (iii)lack of transparency in licensing and permits procedures (2015 No framework for micro finance products (microleasing, insurance and mobile money) No on-line secured lending registry in place (2015) (i) Revised Companies Act submitted for parliament approval (2017); (ii)inventory if investment incentives an eligibility criteria published online by GAFI (2017) (iii)all licencing and permit procedures published on-line by GAFI (2017) (i)leasing and factoring draft law approved by cabinet (2017) (ii)directives on micro-insurance issued (2017) (iii)regulation for mobile money issued (2017) Contract for establishment of on-line secured lending registry awarded by FRA (2017) Gov. Reports FRA Reports FRA Reports of gas production from the new Zohr field in 2018, Egypt will gradually achieve selfsufficiency of gas. Risk # 6. Social Riskincreased poverty in short-term. Mitigation: Expansion of social protection programs Funding: ADB Loan: USD 500 million in FY 2017/18; World Bank: USD 1.15 billion in FY 2017/18. x

14 REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN FOR THE THIRD PHASE OF EGYPT S ECONOMIC GOVERNANCE AND ENERGY SUPPORT PROGRAM (EGESP III) I INTRODUCTION: THE PROPOSAL 1.1 Management submits the following proposal and recommendation for an AfDB loan of USD 500 million to the Arab Republic of Egypt to finance the third and final phase of the Economic Governance and Energy Support Program (EGESP III). The EGESP was approved by the Board on the 15 th of December 2015, designed as a programmatic intervention comprising three consecutive general budget support (GBS) operations over the period 2015/ /18 for a total amount of USD 1.5 billion. The resources of the first two phases of the program were disbursed in January 2016 and March 2017 respectively. The EGESP takes into account the need for the Bank to support high, sustainable and inclusive growth in Egypt by providing predictable financing to support the Government s pursuit of its reform efforts, while ensuring impactful interventions for the Bank and close coordination with other development partners. The diversity of the sectors covered, namely fiscal consolidation, business climate and energy justifies the use of a general budget support instrument. 1.2 In line with the original program, the goal of the EGESP III is to support the implementation of GoE s medium-term development agenda aimed at building a strong foundation for accelerated, inclusive and self-reliant economic growth through: fiscal consolidation; improved governance, sustainable energy supply; and improved business environment that is conductive to private sector development. The specific sub-objectives for the third phase of the operation are to consolidate the gains and further implementation of the reforms initiated under the previous phases. This final phase, for a total amount of USD 500 million, will be disbursed in a single tranche against the achievement of a set of prior actions for 2017 that were specified as indicative triggers in the appraisal report of EGESP II (see sections 3.4 and 3.6 for details). II UPDATE ON COUNTRY ELIGIBILITY 2.1 Country s continued commitment to poverty reduction The Government of Egypt is taking firm action to address the issues of social equity, job creation and improved social service delivery, as outlined in its Sustainable Development Strategy (Vision 2030). The 2014 Constitution emphasizes citizens right to live a decent life, and includes spending targets in social insurance, health care and education amounting to 7% of GDP. Egypt faces several social challenges, notably poverty, unemployment and wide regional disparities. According to 2016 national census 12, almost a third (27.8%) of the population is below the poverty line. Acknowledging the short term negative social consequence of the reform program, Government put in place an array of measures to protect the poor and the vulnerable, including exempting the lowest income quartile from the subsidy reform and implementing a well-targeted social protection program using part of the fiscal space generated through the reform program. Accordingly, social expenditures as percentage of GDP have increased over the past 3 years. (see Results Measurement Framework and appendix for details) 2.2 Continued political stability: The completed political transition has fostered stability and economic recovery. The ratification of the new Constitution (2014), Presidential elections (2014) and the effective functioning of the new parliament (2016) constitute the three major milestones achieved from the political roadmap prepared in July The Worldwide Governance Indicators have noted improvements in three out of five indicators (governance effectiveness, rule of law and political stability) between The next presidential elections are scheduled to take place between May and June Macroeconomic and fiscal analysis: Despite a challenging year 2016/17, Egypt is on track to improve its tax system so as to increase fiscal revenues, enhance its business 12 CAPMAS Data,

15 environment and restore economic growth. As confidence builds, exports and private investment increase, and economic growth Table 1: Selected Macroeconomic Indicators is expected to accelerate from Indicators 2014/ / / /18 4.1% in FY 2016/17 to 4.8% in (proj) FY2017/18. Key drivers of the recent growth performance were Real GDP Growth (percentage change) Foreign Direct Investment (net, in 4.4 6, , , manufacturing, construction, retail trade, transport and communication, which suggests broad-based growth. The IMF billions of US$) Inflation (percentage change) Gross Reserves (percentage of GDP) Total Public debt (percentage of GDP) Source: Data from the Ministry of Finance, November 2017 expressed satisfaction following the completion, in October, 2017, of the second review of Egypt s economic reform program under the Extended Fund Facility (EFF) (see appendix II). 2.4 Egypt has made good progress in its fiscal consolidation plan which aims at cutting the budget deficit from 10.9% of GDP in FY 2016/17 to around 9% in FY2017/18 13, by reducing expenditures and increasing revenues. The main deficit-reducing measures are the increase of the VAT rate, continued reforms of energy subsidies and control of the wage bill. Specifically, tax revenues are on the rise due to the introduction of VAT at a rate of 13% in September 2016 (increased by 1 percentage point in FY 2017/2018), the widening of the tax base, and higher taxes on domestic salaries and industrial and commercial profits. The depreciation of the currency also helped increase taxes on goods and services. Regarding public expenditures, energy subsidies have been reduced to 3.31% of GDP in FY2016/17 from 6% in FY2014/2015, and the public wage bill has been successfully contained, dropping to 6.5% GDP from 8.1% over the same period. However, domestic debt interest payments remain high, as well as the social expenditures in favor of the poor. 2.5 Egypt s debt remains relatively high in FY2016/17, with debt service costs amounting to 8.8% of GDP for domestic debt and 0.28% for external debt. The stock of foreign-currency denominated debt has sharply increased from 17.3% of GDP at third quarter of 2016 to 41.2% a year later. In FY2016/17, Egypt attracted USD 8 billion of foreign direct investment compared to USD 4.4 billion in FY2013/14. In addition, Egypt attracted USD 16 billion of foreign portfolio investments in domestic treasury bills and bonds in FY 2016/17.. The country has also negotiated billions of dollars of loans from development partners to revive the economy. Overall, the reduction in domestic debt - from 84% of GDP in 2015/16 to 76% of GDP in 2016/17 - was offset by the foreign debt increase, from 13% to 22% of GDP over the same period. In addition, the monetary tightening with higher interest rates will raise the debt service costs in the 2017/18 budget. However, since the country is committed to setting government debt on a downward trajectory, the IMF expects the gross debt to decline from 98.4% of GDP in 2016/17 to about 88% in 2017/18 and to 78% in 2018/19.The IMF debt sustainability analysis of 2017 concludes that the debt level is sustainable, but with significant risks. 2.6 Monetary policy remains tight in an effort to support the Egyptian Pound (EGP) and reduce inflation. The Central Bank of Egypt s overnight lending rate was held unchanged at 19.75% on 24 August 2017 after two rounds of hikes in May and July However, in an attempt to reduce the money supply and constrain inflation, the CBE increased the reserve ratio from 10 to 14% on 3 October Moving the exchange rate to a floating regime has helped increase exports and capital inflows, and reduce import demand, which are part of the policy response to weak growth. Moreover, the foreign exchange market has normalized, and the parallel market for foreign currency has disappeared. The focus of monetary policy is now to bring down inflation, which reached 23.3% at the end of FY2016/2017 and then declined to 31.9% in August 2017, mainly due to the sharp depreciation of the pound and the impact of energy and tax reforms. 13 Source: Ministry of Finance, November 2017, see technical annex 2. 2

16 2.7 Fiduciary risk assessment: A full country fiduciary risk assessment (CFRA) was undertaken in June 2015, and subsequent reviews during appraisal of phases II and III have confirmed improvements in a number of areas, such as budget transparency, internal controls and procurement although some important shortcomings persist. According to the CFRA, overall fiduciary risk remains substantial. A public financial management (PFM) unit has been established within the Ministry of Finance to lead some key PFM reforms. The internal control environment was also bolstered with the recent establishment of the internal audit unit and the sovereign-guarantees committee. The International Budget Partnership recognized that, as of 31 December 2016, MoF made five of eight key budget documents publicly available online in a timeframe consistent with international standards. This reflects a net increase over the findings of the Open Budget Survey of Since that assessment, MoF has published the Executive s Budget Proposal, the Citizens Budget and the Pre-Budget Statement in a timely manner, but produced the Mid-Year Review and Year-End Report for internal use only. The Accountability State Authority s (ASA) role has been strengthened through the 2014 Constitution in order to enhance transparency, but the publication of audit reports produced by ASA is yet to be implemented. The revised public procurement legislation and regulatory framework is under review by parliament. Continued progress will be required. 2.8 Harmonization: Coordination and harmonisation on budget support have been strong. EGESP was developed jointly with the World Bank. A joint reform matrix, which was drafted by the Government with inputs from, and support of, the two institutions was used. Harmonization with the World Bank has been maintained in terms of monitoring of performance and the preparation of EGESP III. Specifically, during the Bank s pre-appraisal and appraisal missions for EGESP III, the team held a number of meetings with counterparts in the Egypt office of the World Bank, including the country director, to harmonize the position of the two institutions regarding performance in meeting the triggers. Coordination and harmonisation among multilateral agencies providing budget support is assured by MoIIC. For FY2017/18, bilateral (G7) development partners planning to provide budget support include France, Germany and the UK. The GBS being prepared by France (Agence Française de Developpement) focuses on energy sector reforms and is fully aligned with the policy matrix of EGESP. MoIIC is responsible for monitoring and coordinating reporting on progress on the policy actions contained in the joint matrix. III YEAR 2017 PROGRAM 3.1 Program Goal and Purpose The goal of EGESP III is to support the implementation of the government s mediumterm development agenda aimed at building a strong foundation for inclusive and self-reliant economic growth, while leveraging on the achievements of EGESP I and II (see table 2a). Consistent with this goal, EGESP III aims specifically to: (i) advance fiscal consolidation by deepening reforms that would further enhance government revenues, rationalize or improve efficiency of its expenditures (notably the wage bill) and improve fiscal transparency and management; (ii) enhance the sustainability of energy supply by deepening reforms to further improve governance in the power and gas sectors, reforming subsidies and rationalizing tariffs; and (iii) improve the business environment by deepening reforms in the areas of investment regime and facilitation, industrial licensing, competition and financial inclusion. In addition to the expected improvement in economic performance, through various measures supported under the three components, the program will help create fiscal space, which will make it possible to increase social expenditures and improve social protection. Poverty reduction and enhanced inclusion are therefore embedded in the program design. 3.2 Program Components To ensure steady progress and sustainability of reforms, the components of EGESP III remain the same as in EGESP I and II, though the specific prior actions differ. Consequently, EGESP III s package of reforms is organised around three components, namely: (i) Enhancing fiscal 3

17 consolidation; (ii) Ensuring sustainable energy supply; and (iii) Enhancing the business environment. The three components are complementary and mutually reinforcing in addressing structural constraints to inclusive growth and job creation. For instance, component 1 will create fiscal space for investments to enhance energy security and improve the enabling environment for private sector development (hence job creation), while measures proposed under component 2 will support attainment of the fiscal consolidation objective and also improve energy efficiency for private sector development - a key determinant of competitiveness. An improved business environment, and related increase in investments, is likely to positively impact growth and tax revenue collection, and hence improve fiscal performance. Component 1: Enhancing Fiscal Consolidation Context: Years of economic instability, delayed reforms, low revenue, rising wages, subsidy and interest payments led to double-digit budget deficits reaching close to 13% of GDP in 2012/13. In 2014, the new Government embarked on an ambitious fiscal consolidation program focussing on revenue enhancement, subsidy reform, containing the wage bill and strengthening transparency and accountability in PFM. Implementation has been progressing at a firm pace and expected results are becoming apparent EGESP II supported the following prior actions: (i) the introduction of a fully-fledged value-added tax (VAT) conforming to international standards to replace the sales tax; (ii) the introduction of tax dispute settlement legislation which aims at streamlining the procedures in this important area; (iii) measures to advance the automation of wages and salaries for government employees;-and (iv) the establishment and operationalization of a Public Finance Improvement Unit with mandate to: (a) monitor fiscal risks of SOEs, including their contingent liabilities; (b) set-up an Internal Audit function; and (c) Enhance Government Accounting and Financial Control EGESP III will support further actions to reinforce fiscal consolidation. These include: further measures to contain the wage bill through: (i) issuance of a wage bill report outlining a plan to achieve 100% automation of the wage bill by 2017/18; (ii) establishment of an internal audit unit with adequate staffing, and procedures aligned with international standards; (iii) establishment of a sovereign guarantee committee chaired by the Minister of Finance; and (iv) budget statement for FY 2017/2018 which includes a section on fiscal risks. Component 2: Ensuring Sustainable Energy Supply Context: Inadequate sector governance, legal, regulatory and institutional frameworks, as well as inadequate supply and price regime, have been key constraints to energy security, sector sustainability and private sector engagement in the energy sector in Egypt. Demand-supply gap in the oil sub-sector was 9.1 million tons/year in FY 2013/14, and in the power sub-sector was 6050 MW in August Energy subsidies represented a third of government revenues, a fifth of government expenditure, 6.6% of GDP and seven times the health budget in FY 2013/14. This sector therefore became a core focus of the government s reform program in 2014 with radical steps being implemented to redress the situation EGESP II supported the following prior actions: (i) submission to parliament of a new Gas Law that provides for: (a) enabling third party access to gas infrastructure, and (b) the establishment of an independent gas sector regulator; (ii) drafting of the gas network code, gas transmission tariff methodology and licence templates in anticipation of the new gas law; (iii) implementation of the third annual electricity tariff increase as part of the five-year tariff reform plan outlined in the Prime Ministerial Decree No. 1257/2014; and (iv) approval by the Supreme Energy Council of the Energy Strategy 2035, which includes a policy for financing variations in actual fuel cost compared to budget estimates. 4

18 3.2.7 EGESP III will support policy actions to further strengthen energy security. These include: (i) submission by the Cabinet of the Executive Regulations of the Gas Law to the State Council for review; (ii) establishment of a new Gas Sector Regulator pursuant to the provisions of the newly approved Gas Law; (iii) nomination of the members of the Board of Directors of the Gas Regulator by the Minister of Petroleum; (iv) implementation of the fourth annual electricity tariff increase as part of the five-year tariff reform plan outlined in the Prime Ministerial Decree No. 1257/2014; and (v) submission to the Prime Minister of a proposal for a policy on fuel price indexation approved jointly by the Ministry of Finance and the Ministry of Petroleum and Mineral Resources. Component 3: Enhancing the Business Environment Context: Boosting private sector led growth is at the core of the Government s strategy to create jobs (especially for the youth and women) and attract investments. Some of the key challenges to the private sector are related to the business environment (time and number of licenses required to start a business, weak governance, non-conducive regulation, and infrastructural gaps) as well as skills gap. A notable constraint to private sector development, especially MSMEs, is the issue of access to finance, especially long-term investment finance EGESP II supported the following prior actions: i) issuance of permanent microfinance licences to at least 150 NGOs and two companies; (ii) compilation of microfinance statistics and production of the first set of half-year microfinance activity reports; (iii) approval of an Industrial licensing reform implementation plan, consistent with the reform principles laid-down in the Prime Ministerial Decree; (iv) approval by the Cabinet, and submission to Parliament, of the industrial licensing law; and (v) approval by Cabinet, and submission to Parliament, of the law on individual owned companies, which aims to boost SME growth EGESP III will support policy actions that will deepen reforms to enhance the business environment and financial inclusion. These include: (i) approval by Cabinet of leasing and factoring draft law; (ii) issuance of directives on micro-insurance and licensing of at least 3 insurance companies; (iii) award of contract by the Financial Regulatory Authority (FRA) for the establishment of online secured lending register; (iv) issuance of executive regulations to enable the use of mobile money transactions for microfinance NGOs; (v) issuance of executive regulations for the industrial license law; (vi) compilation and publication of all requirements related to establishment, operation and termination of industrial activities on-line; (vii) establishment and operationalization of Grievances Committee, provided for under the Industrial Licenses law; (viii) commencement of implementation of industrial licensing reform; (ix) approval by Cabinet, and submission to Parliament, of the revised Companies Act; (x) effective registration of single person companies by the General Authority for Investment and Free Zones (GAFI); (xi) publication of a complete inventory of available investment incentives and eligibility criteria; and (xii) publication of all licensing and permits procedures and requirements for all activities and sectors. 3.3 Program Outputs and Expected Results Since Government embarked on its comprehensive reform program, good results have been achieved in the policy areas targeted by EGESP-I and II. Some of the outcome targets have been achieved and even surpassed well within the targeted timeframe, including targets set for reductions of the wage bill and improvements of the business enabling environment. Table 2 (a) and (b) below present the status of progress towards the achievement of program outputs and outcomes, respectively. 5

19 Output Unification of the top income tax rate at 22.5% for all economic actors in Egypt. Freezing of special bonuses and rewards for all employees in 2015/16 Automation of the Wage Bill Institutionalizing the publication of Citizen Budget. Establishment of a PFM Improvement Unit at MoF with the following mandates: (i) setting up an internal audit function; (ii) monitoring SOE fiscal risks including their contingent liabilities; (iii) enhancing government accounting and financial control. Legal framework for the liberalization and regulation of the gas sector. Gradual increase in electricity tariff to reform subsidy New industrial licensing regime operationalised SME investment regime and incentive framework for investments modernised. Microfinance framework developed and operationalized and Online secured lending and mobile money transactions facilitated Table 2(a): Progress on Targets from the Results-Based Logical Framework Achievements Component 1: Enhancing Fiscal Consolidation The Presidential decree amending the tax law unifying the top income tax rate at 22.5% for all economic actors in Egypt was issued and published in the Official Gazette on the 20 th of August The Law (No. 96 of 2015) amended some of the provisions of the Income Tax Law No 91 of 2005 and Decision Law No 44 of Presidential decree Law No 32 of 2015 endorsing the 2015/16 Budget that has a binding instruction to all budgetary entities to freeze special bonuses and rewards for all their employees in 2015/16 fiscal year was issued on the 2 nd of July The Law provided, amongst others, that in compliance with the Civil Service Law issued by Law No 18 of 2015, all entities included in the Budget shall be prohibited from issuing any financial decision to increase the bonus and incentives systems or any other approved and applicable financial benefits in the administrative unit, unless a decision has been issued by a Prime Minister s decree, based on review by the Minister of Planning, Follow-up projects and Administrative Reform and the approval of the Minister of Finance. In addition, the variable portion of civil servant salaries was delinked from their basic salary component. The Ministry of Finance decree (no. 123/2017) issued in January 2017, instructs all government entities to utilize electronic means of payment. As of 2016/17 70% of the wage bill had been fully automated, and Government is on track to meeting its objective of 100% coverage by 2017/18. The Ministry of Finance issued a decree (No. 503/2015) institutionalizing the publication of Citizens Budget in November The decree mandates the timing of publication and the budget information to be disclosed in the Citizen Budget. This has led to some improvement in budget transparency with five of the eight major budget documents, including Citizen Budget, Executive Budget Proposal and the Pre-Budget Statement now being available online in a timeframe consistent with international standards. A PFM Improvement Unit has been established on 29 June 2016 through Decree n 247/2016 to lead key PFM Unit including the gradual build-up of a professional internal audit function. Furthermore, the Ministry of Finance decree (no.290/2017) was issued in October 2017 establishing a functionally independent and risk-based internal audit dedicated unit. A Sovereign-guarantees Committee chaired by the Minister of Finance was established through Decree n 201/2017 to develop policies for issuing sovereign guarantees and evaluating periodically the financial stability of the recipients of the guarantees. Staff from MoF relevant sectors attended training on International Public Sector Accounting Standards (IPSAS) in preparation for a better alignment of public accounts with the IPSAS cash basis standards. Component 2: Ensuring Sustainable Energy Supply A new Gas Law No. 196/2017 for regulation of the activities of the gas market was enacted on 1 Aug The Law provides for the introduction of fair and cost reflective gas tariffs, open access to the gas infrastructure, and establishment of an independent gas sector regulator to gradually open up the gas market and introduce competition. Pursuant to the provisions of the Law, the CEO of the newly established Gas Sector Regulator has been appointed by the Prime Minister. The executive regulations of the Gas Law have been submitted for cabinet review prior to final approval by the Prime Minister. The fourth annual increase in electricity tariff for FY 2017/18 was effected on 6 July 2017 as part of a five-year tariff reform plan outlined in the Prime Minister s Decree No. 1257/2014 to reform electricity subsidy. The plan was subsequently amended during Cabinet session no. 79 dated 22 June 2017 to extend it for three more years until FY 2021/2022. Component 3: Enhancing the Business Environment Following approval of the Industrial Licensing Law, the related Executive Regulation was issued on 13 August 2017, drastically reducing the waiting time for the issuance of industrial licenses. The Industrial Development Authority (IDA) has set up a Committee which undertook a series of consultations with key stakeholders on the proposed technical requirements. A Grievance Committee has been established in 2017 following wide ranging consultations. The Chairman of IDA has issued Decree 829 cancelling the two-stage preliminary approval and final approval of licenses. To improve the efficiency of the licensing processes, IDA is working towards automation which is expected to be fully operational by February Government has now decided that improvements to the framework for individual owned companies will be dealt with through amendments to the Companies Act. The revised Companies Act has been approved by Cabinet and submitted to Parliament. In the meantime, Investment law no. 72 was also approved by Parliament on 30 th June Enterprise Development Agency (EDA) referred to as the MSME Development Agency was also established by Prime Ministerial Decree on 25 April EDA is working on bringing the numerous MSME services delivered by a multiplicity of entities under one roof for more effective coordination. Cabinet approved the Leasing and factoring draft law. Directives on Micro-Insurance issued by FRA and Regulation on the use of mobile money issued by the Central Bank. 6

20 Table 2 (b): Progress towards achievement of Outcome and Impact Indicators Indicator Target Current status Comments Impact Indicators Real GDP growth (4.2% in 2014/15) 4.7% in 2017/18 4.1% in 2016/17 Broad base economic growth is taking hold. Poverty rate (26% in 2014) 23% in % in 2014/15 and 27.8% in 15/2016 (source: CAPMAS) The poverty rate has gone up since the baseline (26% in 2014/15), and with the recent surge in inflation it is expected to reach over 30% of the population. Global gender gap index (overall score) ( in 2014) Outcome Indicators Outcome 1: Fiscal consolidation and budget credibility enhanced. Total tax revenue of goods and 6.7% of GDP in services as a % of GDP (5.1% 2017/18 FY2014/15) Reduce central government wages and salaries as a % of GDP (8.2% in in (2016) Following a change in the index, the score was downgraded by the World Economic Forum in 2016 from in 2014 to in In 2016, it stands at % of GDP in 2016/17 Good progress achieved and target expected to be surpassed as Ministry of Finance budgeting revenue of 7% GDP for 2017/18 7.4% in 2017/18 6.5% 2016/17 budget Target has already been surpassed one year in advance by almost 1% of GDP. (source: Ministry of Finance) Fiscal deficit/gdp (11.5% in 2014/15) 9% in 2017/ % 2016/17 budget % of budget allocated for social expenditure (16.9% in 2014/15) 13% in 2017/ % in 2016/17 budget. Budget projection for 2017/18 targeting deficit of 9%- indications of being ontrack to meet target. (source: Min of Finance) Expenditures allocated to Food subsidies, grants and social benefits have increased in real terms. Outcome 2: Improved energy security and greater role for the private sector Operating Reserve (11% in 2014) 30% in % (2017) EEHC New private investments in upstream oil and gas sector (USD 2.4 billion in 2014) Cumulative investments of USD 15 billion between 2015 and USD 8.1 billion (FY 2016/17) Ministry of Petroleum. Outcome 3: Competitiveness of the private sector and financial inclusion enhanced Average number of days to comply with industrial licensing requirements Number of Licensed Microfinance Providers (26 in FY2015) Percent of Loans issued to women by licensed Microfinance providers 26% in FY days (FY2018) 7 days for low risk industries; 30 days for high risk industries 150 NGOs and NGOs and 3 Companies in FY2016 Companies. 50% in FY % (2017) Source: FRA 3.4 Progress on Triggers Outlined in the Previous Operation Based on the new industry law, licensing for high risk industries will be guaranteed within a max. period of 30 days. Source: FRA The Bank s appraisal team, in collaboration with the World Bank team, undertook an assessment of the progress made by the authorities towards fulfilling the agreed triggers, which now become the prior actions for EGESP III. There has been considerable progress on the set of EGESP II triggers (now prior actions for EGESP III) outlined in the SAR for EGESP II. Progress on triggers for Component 1 of EGESP, Enhancing Fiscal Consolidation, are summarized below: Objective 1.1 Enhancing Government Revenue: Trigger #1.1.1: The Ministry of Finance issues a decree that introduces a harmonized and simplified tax regime for micro and small businesses, based on turnover. Progress: GoE is working to produce a strategy/ draft law that will provide an overarching framework for micro, small and medium-sized enterprises (MSMEs), with two main objectives: (i) providing incentive to firms operating in the informal sector to formalize;

21 and (ii) providing an enabling environment for firms to grow. Rather than prepare a separate decree, the harmonised and simplified tax regime will constitute part of the overarching law. The implementation has therefore been delayed as consultations on the overarching law are on-going. This approach is considered to provide for a more comprehensive and coordinated approach to the improvement of the business environment and subsequent taxation regime, and part of a bigger area of reform. Other significant policy actions implemented in 2017 to boost government revenues, included the new taxation system for free zones 14 contained in the investment law which was adopted in The law clearly specifies the tax regime for free zones enabling more efficient implementation. Furthermore, the Government has completed its review of all Government service fees. The new decree, which is being considered by the budget committee, is expected to generate an additional 0.2% of GDP in revenue Objective 1.2 Containing the Wage Bill: Trigger #1.2.1: The cabinet approves a mediumterm plan/rule that sets a cap on the number of new recruits in the public sector relative to the number of retirees. Progress: The civil service law was adopted by parliament in October Key features of the new law include: gradually shifting to a more merit-based hiring process, controlling the size of the civil service that currently represents one public servant for 13.2 citizens. The law provides incentives for early retirement which would raise this ratio to a more efficient level of 1 civil servant for every 26 citizens by 2020, and 1 for every 40 citizens by 2030; and implementing a new modern performance evaluation system for civil servants. The law introduced a new wage system which, among other things, de-links the basic and the variable pay, which used to account for most of the annual growth of the wage bill under the previous law, basically by turning the variable pay to a lump-sum amount (i.e. fixed in nominal terms); instead of a percentage of the basic pay. Furthermore, a complete hiring freeze in the public sector is being enforced, pending the completion of an ongoing study on existing competences and gaps within the civil service. In the meantime, staffing needs are being covered through internal placements managed at the central level. With about 197,000 employees retiring annually, the authorities expect the public sector size to shrink gradually over coming years. Finally important progress is being made in the automation of the payroll payment, which reached 70.55% in FY16/17 and is targeted to reach 100% in FY17/18, covering 2,645 accounting units. The automation of the payroll payment is an important part of the government s commitment to fiscal and PFM reforms; on January 15th 2017, PM decree No.123/2017 was issued obliging all central administration units, local governments, public services authorities, economic authorities and other government entities to utilise electronic means of payment within 3 months of its issuance Objective 1.3 Enhanced Budget Transparency and Strengthened controls over use of public resources: Trigger #1.3.1 (i): The Ministry of Finance expands the Internal Audit Function to a dedicated Unit with adequate staffing, budget and procedures aligned with international standards. Progress: (i) The Ministry of Finance Ministerial Decree No. 290/2017 has been issued establishing a functionally independent and risk-based dedicated internal audit unit. The reporting line, mandate and procedures of this unit, as defined by the Decree, are aligned with international standards. The Unit has been staffed with members of the internal audit team that was constituted under the interim arrangement, who successfully completed IA training. Basic procedures have been developed in the form of an interim Internal Audit Charter, which has yet to be formally adopted by the Ministry. An internal audit annual plan has been drafted to guide the conduct of the first audit missions. Meanwhile, the MoF finalized a strategic planning exercise in 2017, which prepares the ground for effective internal audit work. Business processes of different entities and sectors affiliated to the Ministry of Finance were identified and documented along with measurable objectives and deliverables that can be used to measure their performance. 14 Free zones are located within the national territory, but are considered to be outside Egypt s customs boundaries, granting firms doing business within them more freedom on transactions and exchanges. Companies producing largely for export (normally 80 percent or more of total production) may be established in free zones and operate in foreign currency. Free zones are open to investment by foreign or domestic investors. Companies operating in free zones are exempted from sales taxes or taxes and fees on capital assets and intermediate goods. 8

22 3.4.6 Trigger #1.3.1 (ii): The Ministry of Finance expands the Economic Authorities and SOEs Fiscal Risk Monitoring Function to a dedicated Unit with adequate manuals and standard reports, which identifies, monitors, and facilitates the management of contingent liabilities and sovereign guaranteed liabilities. Progress (ii) A team to cover Economic Authorities and SOEs Fiscal Risk Monitoring was formed within the PFM unit in Since its formation, the monitoring and management of contingent liabilities and sovereign guaranteed liabilities has significantly improved. A bi-annual risk monitor is produced by the team and the 2017/18 budget statement contains a section on risks to the implementation of the budget. Furthermore, a Sovereign Guarantee Committee was established by Ministry of Finance Ministerial Decree Number 201/2017 on 31 July The committee, chaired by the Minister of Finance, is entrusted with developing policies for issuing sovereign guarantees, reviewing the applications for issuing such guarantees, and evaluating periodically the financial stability of the recipients of the guarantees. Progress on triggers for Component 2: Ensuring Sustainable Energy Supply Objective 2.1 Improving Energy Governance: Trigger #2.1.1: The Ministry of Petroleum and Mineral Resources issues the executive regulations implementing the new gas law enacted 1. Aug Progress: The executive regulations have been drafted and undergone consultations with relevant stakeholders prior to submission to the Cabinet. Subsequently they were submitted to the State Council prior to final approval by the Prime Minister. The Gas Law gives a maximum of six months after the passing of the law for the executive regulations to be issued Trigger #2.1.2: The Ministry of Petroleum and Mineral Resources establishes a new independent gas sector regulator pursuant to the new gas law. Progress: The Gas Regulator has been established by provision of Article (2) of the Gas Law. The CEO of the Gas Regulator has been appointed by the Prime Minister pursuant to the Law Trigger #2.1.3: The Ministry of Petroleum and Mineral Resources nominates the independent transmission system operator in compliance with the requirements set by the gas sector regulator. Progress: According to the Gas Law, the transmission system operator must be licenced by the Gas Regulator, which can only happen after the Executive Regulations of the Gas law have been issued. The delay in issuing the Regulation has therefore affected the nomination of the transmission system operator Objective 2.2: Reforming Energy Subsidies Trigger #2.2.1: The Minister of Electricity and Renewable Energy issues a decree for implementing the fourth annual electricity tariff adjustment as part of a five-year tariff reform plan outlined in the Prime Minister s Decree No. 1257/2014 to reform electricity subsidy, and as amended in June 2017 to extend the plan for three more years until FY 2021/2022. Progress: The fourth annual tariff increase was implemented at the start of July 2017 as planned. It is to be noted, however, that the flotation of the Egyptian pound in November 2016 has significantly increased the level of subsidies in EGP terms (given the higher cost of imported gas and fuels that are priced in US dollars). Accordingly, the electricity subsidy was estimated in October 2017 at around EGP 82 billion (around 2.5% GDP) compared to EGP 30 billion that was originally budgeted in FY 2016/17. This necessitated that the fourth-year annual tariff adjustment increase the tariff levels above those originally planned. Furthermore, to achieve cost reflectivity and targeted subsidies level (as % of GDP), the tariff reform program has been extended for three more years until FY 2021/ Trigger #2.2.2: The Cabinet approves and implements the policy for allocating financing variations in actual fuel costs, corresponding to medium term expenditure estimates. Progress: The Ministries of Finance and Petroleum have jointly developed a policy on fuel price indexation, which has been submitted to the Prime Minister for approval. 9

23 Progress on triggers for Component 3: Enhancing the Business Environment Objective 3.1 Enhancing Financial Inclusion: Trigger #3.1.1: Micro-leasing Executive Regulations issued by FRA. Progress: In order to broaden financial inclusion and diversify financial services, micro-leasing is to be launched in Egypt. A new unified law for factoring and leasing has been drafted FRA that would regulate, among other things, micro leasing. The law was approved by the Cabinet on August 23 rd 2017, and submitted to the State Council and currently awaits to be sent to the Parliament for enactment. Once the new law is enacted, FRA will finalize the related regulatory framework (Directives and Board Decisions) Trigger #3.1.2: Directives on Micro-Insurance issued by FRA. Progress: Recent sector analysis and consultations have been initiated by the FRA to design a micro-insurance framework. To this end, and with the objective of enhancing financial inclusion through providing financial products that cater for all the needs, FRA issued Directive 902/ 2016 on Micro-Insurance in November In addition, FRA hosted a number of relevant awareness events, including two workshops and a conference, which included showcasing three successful micro-insurance experiences of companies from Jordan, Morocco and Ghana. The conference was attended by representatives of 20 insurance companies, 21 insurance brokerage companies and 26 NGOs: the NGOs seen as representing possible distribution channels for micro-insurance policies. On the basis of this new legal framework, FRA has issued, since March 2017, three licenses for insurance companies, allowing them to commercialize micro insurance products Trigger #3.1.3: On-line Secured Lending Register established by FRA. Progress: The Law on on-line secured lending was passed in November 2015, and the Executive Regulations were issued in December 2016, the On-line Secured Lending Registry is yet to be established. However, FRA has made substantial progress in procuring the online register developer/operator. The contract to develop the on-line secured lending registry was awarded to the firm I-Score, on the 2 nd of September Based on the contract, the online registry should be fully operational in March Trigger #3.1.4: Amend existing regulations to enable the use of mobile money transactions for FRA-licensed NGOs. Progress: The relevant regulation was issued in December 2016 by the Central Bank of Egypt (CBE). FRA collaborates with the CBE in reviewing the regulation to ensure it caters for companies and NGOs licensed to provide microfinance. Currently a committee composed of CBE, FRA, the National Telecommunications Regulatory Authority (NTRA), Egyptian Microfinance Federation and telecom operators is preparing technical requirements for the mobile money providers. Once these requirements are elaborated, FRA will refine them for the purpose of microfinance activities and use them to authorize NGOs to provide mobile money services on the basis of their compliance to these technical requirements. Meanwhile, FRA has made use of this development to reach an agreement with a number of licensed NGOs to allow mobile money payments by their clients Objective 3.2 Reforming Industrial Licensing: Trigger #3.2.1: Issuance of the Executive Regulations of the Industrial Licensing Law. Progress: The Industrial Licensing Act, which was submitted to Parliament in October 2016, was approved on the 26 th of March The Executive Regulations were issued by Ministerial Decree No. 1082/2017 on 13 August Under the new law, licenses are issued following a risk-based approach, with the government notifying enterprises facing low safety, environmental and health risks; and improving the overall system for issuing industrial licenses for all enterprises. The Act aims to cut waiting times for industrial licenses and guarantee that investors will receive licences if their facilities meet health, safety and environmental standards/regulations. The waiting period for industrial licences is reduced to a maximum of 7 days for low risk industries (representing 80% of all industries); maximum of 30 days for high risk industries (representing 20% of all industries). Since the issuance of the new law 1,800 licences have been granted to low risk industries within 7 days average waiting time. 10

24 Trigger #3.2.2: Licensing Pre-requisite Committee, provided for under the Industrial Licensing Law, compiles and publishes all requirements related to establishment, operation and termination of industrial activities. Progress: The Minister of Trade and Industry has issued decree No of 2017 concerning the formation of the industrial licensing pre-requisites committee (Health, Safety, Security and Environment). Consultations with key stakeholders on the proposed technical requirements were held. All requirements related to the establishment, operation and termination of industrial activities have been published on-line Trigger #3.2.3: Grievances Committee, provided for under the Industrial Licensing Law, established and operational. Progress: Following issuance of the Executive Regulation on Industrial Licensing, the Grievance Committee was established in December Trigger #3.2.4: The Government has started implementation of the Industrial Licensing Reform by simplifying at least one regulatory area in a manner that significantly reduces compliance requirements. Progress: The Minister of Trade and Industry has issued Decree 829 cancelling the two- stage preliminary approval and final approval for the industrial activities inside and outside the Industrial Zones. To improve the efficiency of the licensing processes, IDA is working towards automation. In this regard, a contract for the implementation of automation has already been awarded. It is envisaged that: (a) issuance of operating licenses; (b) issuance of construction permits; and (c) issuance of licenses on land allocation will be fully automated by end February Objective 3.3 Improving Investment Regime and Facilitation: Trigger #3.3.1: Executive Regulation for the law on individual owned (single person) companies issued by the Minister of Trade and Industry. Progress: The provision for the establishment of sole-proprietorships (including granting of limited liability protection) will no longer be covered through a separate new Act, but have instead been included among the amendments to the Companies Law, The revised Companies Act has been approved by Cabinet and submitted to Parliament. The goal of the amendments is to increase the protection of small shareholders and increase governance and transparency across companies. These amendments are expected to improve Egypt s ranking in the Doing Business Report particularly, in the minority protection and access to finance categories. Meanwhile, Investment law no. 72 was also enacted by Parliament on 30 th June 2017 and the Executive Regulation approved in October Many of the incentives initially envisaged under the Individual owned companies law have been covered under the Investment Law. MSME Development Authority (replacing former Social Fund for Development) was also established by Prime Ministerial Decree on 25 April The Authority is working on bringing the numerous MSME services delivered by a multiplicity of entities under one roof for more effective coordination. The progress achieved with regards to the companies act provides for a more comprehensive approach to improving the business environment Trigger #3.3.2: The General Authority for Investment and Free Zones (GAFI) effectively registers single-persons companies. Progress: The investment law no 72, approved by parliament on 30 th July 2017, mandates GAFI to register individual owned companies. GAFI has been implementing the law since its approval. On 18 th July, the automation system was launched, making the registration process much easier and more efficient. Measures geared towards modernising the institutional framework for attracting investments include the establishment of a Supreme Council for Investment; establishment of a special unit within the Ministry of Investment and International Cooperation to monitor Egypt s Doing Business rankings and propose recommendations to improve them; and the creation of an Investment Map to facilitate easy access to information on investment opportunities for all investors. Egypt has also taken steps to streamline procedures for investment processes and procedures through measures such as the establishment of Investor Service Centres to serve as one-stop shops for investments; creation of an integrated system for investor conflict resolution; and the activation of a new land allocation system for investment. 11

25 Trigger #3.3.3: The General Authority for Investment and Free Zones (GAFI) publishes a complete inventory of available investment incentives and eligibility criteria. Progress: GAFI has published a complete inventory of available investment incentives and eligibility criteria on its website. The inventory of available investment incentives and eligibility criteria will be updated once the Investment Law is brought into effect Trigger #3.3.4: The General Authority for Investment and Free Zones (GAFI) publishes all licensing and permits procedures and requirements for all activities and sectors. Progress: GAFI has published all licensing and permits procedures and requirements for 11 activities and sectors. The publication of the licensing permits procedures will be updated once the Investment Law is brought into effect. 3.5 Policy Dialogue The Bank has maintained strong policy dialogue with GoE and development partners in order to ensure that the outcomes of the EGESP, and its different phases, support the policy reform objectives of the authorities. On-going policy dialogue linked to EGESP III will continue to focus on: (i) Fiscal consolidation, particularly revenue enhancement efforts and improved expenditure efficiency to contain the fiscal deficit; (ii) Social protection, focusing on the need to protect the poor through well-targeted safety nets and careful design of the subsidy reform; (iii) Promote improved governance and efficiency of the energy sector, as well as sustainable growth through use of renewable energy and (iv) modalities to improve the business enabling environment focusing on amendments to the investment law, industrial licensing reform and financial inclusion. 3.6 Loan Conditions Prior Actions for 2017/18: Policy measures/actions identified in EGESP II as indicative triggers for phase III of the operation,, which were finally agreed on with the Government as the prior actions for EGESP III are summarized in Table 3 below. Triggers Defined under EGESP II Table 3: Prior Actions and Required Evidence for FY 2017/18: EGESP III Component 1: Advancing Fiscal Consolidation 1.1 The Cabinet approves a medium-term plan/rule that rationalizes the number of new recruits in the public sector relative to the number of retirees (trigger). Prior Action Retained under EGESP III/ Status Evidence Required Evidence Received? (Yes/No) The Ministry of Finance of the Borrower issues a wage bill report on key reforms and development of wages which outlines a plan for Government to achieve 70% wage bill to be automated in 16/17 with a target of reaching 100% in 2017/18. Reason for change: The civil service law introduced a hiring freeze on all new civil service recruitments. This will remain in place until end October, by when a study is expected to be completed recommending future recruitments. Automation of the wage bill is considered as a critical reform towards ensuring more efficient management of wages, cleaning and reducing the size of the wage bill. Wage Bill Report published by MOF detailing progress on key reforms and action plan for achieving 100% wage bill automation within the coming fiscal year 2017/18. YES 1.2 The Ministry of Finance: (i) Internal Audit Unit established with adequate staffing, budget and procedures aligned with international standards; and (ii) expands the Economic Authorities (i) Internal Audit Unit established with adequate staffing, budget and procedures aligned with international standards The audit unit was established in October 2017, the Ministry of Finance appointed staff to the unit in December (i) Copy of Ministry of Finance Ministerial Decree No. 290/2017 establishing the internal audit dedicated unit with adequate reporting line and mandate aligned with international standards; YES 12

26 and SOEs fiscal risk monitoring function to a dedicated unit with adequate manuals and standard reports, which identifies, monitors, and facilitates the management of contingent liabilities and sovereign guaranteed liabilities (trigger). Component 2: Ensuring Sustainable Energy Supply 2.1 (a)the Ministry of Petroleum and Mineral Resources issues the executive regulations implementing the new gas law pursuant to approval of the law by parliament (b) The Ministry of Petroleum and Mineral Resources establishes a new independent gas sector regulator pursuant to the new gas law. (c) The Ministry of Petroleum and Mineral Resources nominates the independent transmission system operator in compliance with the requirements set by the gas sector regulator (trigger) 2.2 (a)the Minister of Electricity and Renewable Energy issues a decree for implementing the fourth annual electricity tariff adjustment as part of a five year tariff reform plan outlined in the Prime Minister s Decree No. 1257/2014 to reform electricity subsidy. (b) The Ministry of Finance and the Ministry of Petroleum and Mineral Resources approve a joint policy proposal for periodic fuel price indexation and submit it to the Prime Minister. (trigger) (ii) Establishment of a sovereign guarantee committee by the Minister of Finance entrusted to develop policies for issuing sovereign guarantees, and evaluate periodically the financial stability of the recipients of guarantees; (iii) Ministry of Finance publishes a section in the budget statement on risks to implementation of the budget. An SOE Team has been established under the PFM unit. Good progress has been made by the team on monitoring fiscal risk, standard reports such as a biannual risk monitor is produced. The budget statement for 2017/18 contains a fiscal risk section. In addition a sovereign guarantee committee chaired by the MoF has been established (a) The Cabinet submits the consulted draft of the Gas Law Executive Regulations to the State Council. Reason of change: Issuance of the executive regulations is delayed due to delays in the issuance of the Gas Law (enacted 1 Aug 2017). The draft executive regulations has been prepared. The consultation process requires submission to the Cabinet, then to the State Council prior to their final approval by the Prime Minister. Given that the State Council is outside the control of the government, the trigger has been modified to just request submission of the executive regulations to the State Council. The Gas Law gives a maximum of six months after the passing of the law for the executive regulations to be issued. (b) The Ministry of Petroleum and Mineral Resources establishes a new independent gas sector regulator pursuant to the new gas law. (c) The Minister of Petroleum and Mineral Resources nominates the board members of the Gas Regulator. According to the Gas Law, the transmission system operator must be licenced by the Gas Regulator, which can only happen after the executive regulations of the law have been issued. Given the delays, it has been replaced with another indicator which provides for expediting the institutional formation of the new gas regulator. (a) The Minister of Electricity and Renewable Energy issues a decree for implementing the fourth annual electricity tariff adjustment as part of a five year tariff reform plan outlined in the Prime Minister s Decree No. 1257/2014 to reform electricity subsidy, as subsequently amended during Cabinet session no. 79 dated 22 June 2017 to extend the plan for three more years until FY 2021/2022. (b) The Ministry of Finance and the Ministry of Petroleum and Mineral Resources approve a joint policy proposal for periodic fuel price indexation and submit it to the Prime Minister. Copy of Ministerial decree confirming appointment of IAU staff. (ii) The Ministry of Finance Ministerial Decree Number 201/2017 has been issued on 31 July 2017 establishing a Sovereign Guarantees Committee chaired by the Minister of Finance; (iii) Copy of the Budget Statement 2018/19- section on risks to the implementation of the budget. (a) Copy of the submission letter from Cabinet to the State Council along with the draft Gas Law executive regulations. (b) Copy of GoE Gazette confirming approval of the Gas Law, which provides for the establishment of an independent gas regulator. (c) Copy of the memorandum from the Minister of Petroleum nominating the board members of the Gas Regulator. (a) i) Copy of the Ministerial decree on the implementation of the fourth annual electricity tariff increase. ii) Copy of the Cabinet letter dated 5 July 2017 approving three-year extension of the reform plan. (b) Copy of the letter signed by the Ministry of Finance and Ministry of Petroleum transmitting the approved policy proposal to the prime minister. YES YES 13

27 Component 3: Enhancing the Business Environment 3.1 (a) Issuance of the executive regulations of the Industrial Licensing Law; (b) Licensing Prerequisites Committee, provided for under the Industrial Licensing Law, compiled and published all requirements related to establishment, operation and termination of industrial activities; (c) Grievances Committee, provided for under the draft industrial licensing law, established and operational; and (d) The government has started implementation of the industrial licensing reform by simplifying at least one regulatory area in a manner that significantly reduces compliance requirements (trigger). 3.2 (a) Executive Regulations for the law on individual owned companies issued by the Minister of Trade and Industry; (b) The General Authority for Investment and Free Zones (GAFI) effectively registers single-person companies; (c) The General Authority for Investment and Free Zones publishes a complete inventory of available investment incentives and eligibility criteria; and (d) The General Authority for Investment and Free Zones publishes all licensing and permits procedures and requirements for all activities and sectors (trigger). (a) Issuance of the executive regulations of the Industrial Licensing Law (b) Licensing Prerequisites Committee, provided for under the Industrial Licensing Law, compiles and publishes all requirements related to the establishment, operation and termination of industrial activities on IDA website; (c) Grievances Committee, provided for under the draft industrial licensing law, established and operational. (d) The government has started implementation of the industrial licensing reform by cancelling the two stage process for approval of industrial licenses consisting of preliminary approval and final approval of industrial licenses. Slightly modified for more precision (a) Revised Companies Act approved by Cabinet and submitted to Parliament : Improvements to the framework for individual owned companies will now be dealt with through amendments to the Companies Act. (b) The General Authority for Investment and Free Zones (GAFI): (i) effectively registers single-person companies; (ii) publishes a complete inventory of available investment incentives and eligibility criteria; and (iii) publishes all licensing and permits procedures and requirements for all activities and sectors (a) Executive Regulation, together with a copy of the Ministerial Decree No. 1082/2017 promulgating the Executive Regulation. (b) Link to the IDA portal/website showing publication of all licensing requirements related to the establishment, operation and termination of industrial activities. (c) Copy of Decree 520 issued by the Chairman of IDA authorising the establishment of the Grievance Committee. (d) Copy of Decree issued by the Chairman of IDA cancelling the two stage approval process of industrial licenses consisting of preliminary approval and final approval of licenses. (a) Letter confirming submission to Parliament of the revised Company Act, together with a copy of the revised Company Act showing improvements to the framework for individual owned companies. (b) Letter from GAFI (i) confirming the number of individual owned companies registered since passage of the Investment Law, with the list attached; and (ii-iii) letter including the weblinks to the website publications. YES YES 14

28 3.3 (a) Micro-leasing regulation issued by FRA; (b) Directive on microinsurance issued by FRA; (c) Online secured lending register established by FRA; and (d) Amend existing regulation to enable the use of mobile money transactions for FRA-licensed NGOs (trigger). (a) Cabinet approves the Leasing and factoring draft law. (b) Directives on Micro-Insurance issued by FRA and at least 3 insurance companies licensed to commercialize micro insurance services. (c ) Award of the contract by FRA to a company in charge of establishing the on-line Secured Lending Register (d) Executive regulations issued to enable the use of mobile money transactions for microfinance NGOs. (a) Letter from FRA reflecting on the cabinet approval of the Draft law on leasing and factoring. (b)letter from FRA transmitting the published Directives in the official gazette and listing at least 3 insurance companies licensed to commercialize microinsurance services. (c) Letter from MoIIC confirming that the contract between FRA and the Company in charge of establishing the on-line Secured Lending Register has been signed. (d) Published CBE regulation authorizing the use of mobile money transactions for microfinance NGOs. YES-(d) YES 3.7 Application of Good Practice Principles on Conditionality The design of EGESP is in line with good practice principles on conditionality. The EGESP was designed in line with GoE s reform program and in harmonization with the World Bank s program. The reform policy matrix of the operation is fully owned by GoE and the policies are designed to support the implementation of the GoE development agenda, which aims at building a strong foundation for inclusive and self-reliant economic growth through fiscal consolidation; improved governance, efficiency and private sector engagement in the energy sector; and improved business environment. The EGESP contains a number of prior actions in critical areas of different elements of the government program. 3.8 Financing Needs and Arrangements The Government s financing gap is projected by the Ministry of Finance 15 to be EGP 458 billion, including EGP 371 billion of fiscal deficit, equivalent to roughly USD 23 billion or 9% of GDP in 2017/18. The Government intends to finance this gap through domestic and international borrowing. One third (35%) of Egypt s financing needs for FY2017/18 will be covered through international borrowing. International Financial Institutions (IFIs) are expected to contribute EGP 83.1 billion, of which the AfDB, the World Bank and the IMF will have respective contributions of EGP 8.75 billion (USD 0.5 billion), EGP 17.5 billion (USD 1 billion) and EGP 56.8 billion (USD 3.25 billion). The G-7, who will contribute to meeting Egypt s financing needs in FY2017/18, will disburse EGP 8.75 billion (USD 0.5 billion). AfDB s USD 500 million budget support to Egypt in FY2017/18 will account for around 2.4% of the projected budget deficit, 0.08% of total financial needs and 0.21% of GDP. (see technical annex 2 for additional detail and data) IV OPERATION IMPLEMENTATION 4.1 Beneficiaries of the Program The beneficiaries from the program remain the same as in EGESP I-II. The direct beneficiaries are the MoF and ministries and public entities in charge of the energy sector (e.g. EEHC, EGAS, sector regulators, etc.), and the Egyptian people, particularly the most vulnerable, who will benefit from fiscal consolidation, as resultant fiscal space is directed to fund pro-poor expenditures and social services delivery. The private sector has also benefited, and will continue to benefit, from 15 Source: Ministry of Finance November 2017 data 15

29 reliable and affordable electricity, improved industrial licensing and investment regimes, improved access to finance, especially by SMEs including women-owned enterprises, as well as from more transparent and efficient PFM system. The people of Egypt will also benefit from improved operational efficiency and competitiveness in the energy sector that will result in positive impacts on the security, reliability and pricing of energy supply Given the far-reaching nature of the reforms undertaken by GoE, it was expected that there would be a risk of unintended negative effects on vulnerable segments of the population. Indeed, households have been heavily impacted in the short-term by the increasing inflation rates and the reform of subsidies, increasing vulnerability and poverty levels. In response, the Government has further enhanced social protection for the poor and vulnerable, and taken measures to shield the middle class from the increasing cost of living. In the 2017/8 Budget, an additional EGP 85 billion has been allocated to support the Social Protection programs in order to mitigate the repercussions of the reform program. It is critical that the momentum is sustained as poverty continues to rise, estimated by CAPMAS at 27.8% in 2015/16 compared to 26.3% in 2012/13. (see appendix V and Technical annex 8 for more analysis) 4.2 Implementation, Monitoring and Evaluation Implementation Institutional Framework: The Ministry of Investment and International Cooperation (MOIIC) remains responsible for the overall coordination of the program while the Ministry of Finance (MOF), in collaboration with the Ministry of Electricity and Renewable Energy, Ministry of Petroleum and Mineral Resources and other relevant agencies, are the implementing agency. The MOF and the other sector ministries have the means and the competent human resources to implement the program Monitoring and Evaluation Arrangements: The revised Policy Matrix (see Appendix III), agreed between the Egyptian authorities, the African Development Bank and World Bank, as well as the quantitative and qualitative indicators defined in the Results-Based logical Framework, will constitute the framework for monitoring and evaluation of EGESP III. The MoIIC will continue to be responsible for collecting data and coordinating, monitoring and evaluation, and will make information available to the Bank and the World Bank. The Bank will monitor the implementation of the Program through regular supervision in coordination with the World Bank, and close followup to assess progress achieved based on the indicators and triggers for year-three of the Policy Matrix. COEG will continue to play a critical role in follow-up of implementation and monitoring of program results and impact and, in particular, constant policy dialogue with Government and regular consultations with the World Bank and other DPs. This operation is the third and final phase of a three-year programmatic series. Following its completion, a Program Completion Report (PCR) will be prepared to evaluate progress against the Results-Based Logical Framework and to draw lessons for follow-up operations. In addition, IDEV is carrying out a general evaluation of the PBOs and has selected Egypt s Phase I to be included in their evaluation. This evaluation started in November Financial Management, Disbursement and Reporting Arrangements A renewed emphasis on PFM reforms has been noted in recent years, although some weaknesses remain, as outlined in section 2.7. In addition, improvements were noted in the Treasury Single Account coverage and the payment process automation through the newly introduced electronic payment system. By December , all the bank accounts of the accounting units at CBE will be closed and they will be directly linked to the Central Accounting Unit at MoF. However, some improvements are still required such as (i) accelerating the reform on the medium-term and programmatic budgeting; and (ii) extending the rollout of the Government Financial Management Information Systems (GFMIS), thereby reducing manual intervention in government accounting and reporting. In line with its fiduciary strategy, the Bank will continue the policy dialogue and provision of technical assistance to support implementation of PFM reforms in the some of the areas listed above. In addition, the measures being implemented under this program, including the establishment 16

30 of the internal audit unit aimed to strengthen public financial management will further mitigate the fiduciary risk, which remains substantial Budgeting: The proceeds of the loan will contribute to covering the budget gap estimated at 9% GDP for FY 2017/2018. The loan proceeds will be properly accounted for in the Government accounts and will appear on a related separate line in the budget execution monthly reports and the final accounts that will be analysed by the Bank Treasury management, funds flow and disbursement method: This third-phase proposed operation involves a single-tranche disbursement of USD 500 million in FY 2017/2018 following the effectiveness of the Program and fulfilment of disbursement conditions. The proceeds of the loan will be deposited into the dollar denominated account opened at the Central Bank of Egypt (CBE) by the Ministry of Finance that received the proceeds of the loans during the first and second phases of the program. An amount equivalent to the loan proceeds, in Egyptian Pounds, will be credited to the Treasury Single Account of the Government. The Ministry of Finance will confirm in writing to the Bank that the amount deposited in the foreign currency account has been credited to the Treasury Single Account of the Government within 30 days of Bank disbursement External Audit: In line with the Bank Policy on PBOs, the external audit arrangement will follow the country systems. The Egyptian ASA will be required to conduct a flow of funds audit to confirm the timing, correct conversion of the funds (from dollars into Egyptian Pounds), and transfer into the Government Treasury Single Account. The audit will be performed in accordance with Audit Terms of Reference approved by the Bank and the audit report will be submitted to the Bank within six months after the end of the financial year during which the disbursement occurs. 4.4 Procurement: The procurement arrangements for the budget support operation will be undertaken in accordance with country systems set by the Law N. 89/1998 ( The Law ) (as amended or replaced), promulgating the law on the Organization of tenders and Bids 16, and the Decree 1367/1998 issued by the MOF promulgating the Executive Regulation 17 ( ER ) 18 (as amended or replaced). The review of the recommendations of the 2015 Country Fiduciary Risk Assessment during the mission found that the new procurement legislation and regulatory amendments framework under review by the Parliament is generally consistent with international standards and best practices relating to procurement. However, there will be a need to support the implementation of this regulatory framework, through capacity building across Government. The Bank will monitor progress on the implementation of mitigation measures for these risks. V LEGAL DOCUMENTATION AND AUTHORITY 5.1 Legal Documentation: The Loan Agreement between the African Development Bank and the Arab Republic of Egypt. 5.2 Conditions Associated with the Bank s Intervention Conditions Precedent to Entry into Force of the Loan Agreement: The entry into force of the Loan Agreement shall be subject to the fulfilment by the Borrower of the provisions of Section of the General Conditions Applicable to Loan and Guarantee Agreements of the Bank Prior Actions: Before the proposed operation is presented to the Board, GoE shall have provided evidence, satisfactory in form and substance to the Bank, that the prior actions for EGESP- III outlined in Table 3 have been fully met. 16 As amended until As amended until Others Additional legal texts such as decrees and legal opinions from the state council are regularly issued to complement this framework 17

31 5.2.3 Conditions precedent to disbursement of the funds of EGESP-III: Disbursement of the loan amount of USD500 million shall be conditional upon the entry into force of the Loan Agreement, the transmission to the Bank of the details of a foreign currency account with the Central Bank of Egypt for purposes of receiving the proceeds of the Loan. 5.3 Compliance with Bank Group Policies EGESP III complies with all applicable Bank Group policies and guidelines. The key Bank Group Guidelines and other documentation/policies applied to this Program are the following: (i) Bank Policy on Program-Based Operations (2012, 2013, and 2014), (ii) the Bank Group Ten-Year Strategy ( ) and the High-5s, especially the priority areas of lighting up and powering Africa (including the New Deal on Energy), industrializing Africa, and improving the quality of life of Africans; 19 (iii) the Governance Strategic Framework and Action Plan , (iv) the Energy Sector Policy of the Bank Group (2012), the Private Sector Development Strategy, , and (v) Guidelines on Product and Pricing for MICs (2009). VI RISKS MANAGEMENT 6.1 The risks and mitigation measures of the program are presented in table 5 below and are also summarized in the logical framework: Risk Economic risks due to vulnerability to external and domestic shocks. With the economy still in the early stages of recovery and its fragile external reserves position, Egypt remains particularly vulnerable to adverse shocks. For example global financial market volatility and slowdown in global trade would affect expected inflows, including official support, foreign direct investment, as well as tourism and Suez Canal revenues. Security risks: A moderate likelihood of intensified regional conflict, especially in countries bordering Egypt.. Fiduciary risks: The recent Bank s CFRA for Egypt indicates a positive trajectory of GoE s PFM reform, and that some subsystems such as budget preparation, ex-ante controls over expenditures and external audit present moderate residual risks (See Technical Annex III for details). However, Fiduciary risk if not mitigated would derail program implementation, and achievement of expected program objectives. Risks of policy delays or reversal: Some of the bold revenue enhancement and expenditure efficiency measures contained in the government program (e.g. VAT, wage reform, subsidy reform, and electricity tariff rationalization), if delayed or reversed due to possible negative social impact, could derail fiscal consolidation, widen imbalances, and set back progress already made. Energy subsidy bounce risk: Despite of large new investments in upstream oil and gas, there is still a supply-demand gap in gas that has to be filled through LNG imports. This exposes the budget to the volatility of the international LNG market and related currency exchange risk, which could have adverse impacts on the subsidy level. Social Risk: Soaring inflation averaging 30% in 2017, threatens to widen poverty and affect the middle class, can lead to a precarious situation Table 5: EGESP Risk and Mitigation Measures Mitigation measures Government reform program contains bold revenue enhancement and expenditure efficiency measures to mitigate this risk and strengthen fiscal consolidation. Continuous dialogue with GoE on macroeconomic management under the proposed program will further mitigate the risk. The GoE has also intensified efforts to combat terrorism. As indicated, some sub-systems of the country fiduciary framework are residually moderate. The measures being implemented under this program (I-III), including the setup of PFM improvement Unit and internal audit unit and various ongoing technical assistance and institutional support projects aimed to strengthen public financial management will further mitigate this risk. The reform program is home grown and its implantation is on track. Ownership by, and commitment of, the GoE to reforms will mitigate this risk. Moreover, the fiscal consolidation measures were designed in such a way that its impact will be neutral on the low income bracket, the poorest of the poor and the vulnerable. The government is also implementing a social protection program with the assistance of World Bank loan (USD400 million). The new investments in the upstream hydrocarbon have started to yield results with Egypt s production of natural gas increasing from 4400 MMSCFD in FY 2016 to 5100 MMSCFD at present. Furthermore, with the commencement of gas production from the new Zohr field in 2018, Egypt will gradually achieve self-sufficiency of gas. In addition to expanding the social safety net program, the GoE has also approved an additional allocation of 85 billion EGP to mitigate the risks emanating from the increased cost of living. 19 See Appendix 5 for details on the linkage of EGESP with High-5s and Flagship Program. 18

32 VII RECOMMENDATION Management recommends that the Board of Directors approve an AfDB loan not exceeding USD500 million to the Arab Republic of Egypt for the fiscal year 2017/18 for the purposes, and subject to the conditions, stipulated in this report. Management invites the Board to note that this operation is the third and last phase of a 3-year programmatic series, covering the fiscal years 2015/ /18. 19

33 APPENDIX I: LETTER OF DEVELOPMENT POLICY I

34 II

35 III

36 IV

37 V

38 VI

39 VII

40 VIII

41 IX