Central Bank of Egypt

Transcription

1 Central Bank of Egypt Annual Report 2016/2017

2 Board Members Mr. Tarek Amer Governor and Chairman of the Board Mr. Gamal Mohamed Negm Deputy Governor Ms. Lobna Helal Deputy Governor Mr. Sherif Samy Chairman of EFSA Mr. Ahmed Ashraf Kouchouk Representative of the Ministry of Finance Mr. Kamal Abu Elkhair Financial and Economic Expert Dr. Laila Ahmed Al Khawaga Economic Expert Mr. Yahia Dakrouri Legal Expert

3 I Preface I have the pleasure to present the Annual Report of the Central Bank of Egypt (CBE) for FY 2016/2017. The Report highlights and analyzes major domestic economic developments, in the areas of economic growth, inflation, state budget, balance of payments, and foreign trade. It also sheds light on CBE's activities, along with the main monetary, credit and banking developments. Over the course of FY 2016/2017, the CBE decided on November 3, 2016 to liberalize the LE exchange rate, so banks are at liberty to quote and trade at any exchange rate. The decision was intended to restore FX trading to formal banking channels and eliminate the parallel market under the framework of the Economic Reform Program that enables the Egyptian economy to address the existing challenges, unleash its potentials, and achieve growth and employment rates in a way that is commensurate with Egypt's capabilities and utilizes the full range of its human, natural, and material resources. The economic performance indicators proved, during the reporting year and until the publishing of this Report, that the decision of the exchange rate liberalization helped in raising the growth rates, quelling distortions, achieving equilibrium, and getting the economy on the right track. This is illustrated as follows: Real GDP growth (at factor cost) increased to 3.6 percent in the reporting year (from 2.3 percent in FY 2015/2016). Real GDP growth at market prices reached 4.2 percent in the year under review, against 4.3 percent in the year of comparison. During the preparation of the Report, real GDP growth (at factor cost) picked up to 5.2 percent in Q1 of FY 2017/2018 (from 1.7 percent during the same quarter a year earlier). Concurrently, unemployment fell to 12.0 percent of the total labor force in Q4 of the reporting year (April/June), from 12.5 percent in the corresponding quarter of the previous FY. It continued to decline reaching 11.9 percent and 11.3 percent during Q1 and Q2 of FY 2017/2018, respectively. Regarding the monetary policy, the CBE proactively adopted a tightening monetary policy to contain the inflationary pressures resulting from the liberalization of the exchange rate; the restructuring of fuel subsidies; and applying the value added tax (VAT). In this context, the MPC raised the CBE s key interest rates by 700 bps during the period from 3 November 2016 to 6 July Moreover, some adjustments were made to the operational structure of implementing the monetary policy to include deposit acceptance operations with longer maturities. The average liquidity absorbed by the CBE reached LE billion at end of June 2017, which further increased to LE billion at end of December Furthermore, the CBE raised the required reserve

4 II ratio for banks at the CBE from 10.0% to 14.0%. In addition, the MPC decided in its meetings held on the 17 th of August, 28 th of September, 16 th of November, and the 28 th of December 2017 to keep the key interest rates at the CBE unchanged. As a result of adopting a tightening monetary policy, inflation rates noticeably declined. The annual headline and core inflation rates retreated for the sixth consecutive month to record 17.1 percent, and 14.4 percent, respectively, in January 2018, after peaking in July 2017 at 33.0 percent, and 35.3 percent, in order. Consequently, the MPC decided in its meeting held on the 15 th of February 2018 to lower the key interest rates by 100 bps. It is to be noted in this respect that the CBE announced for the first time in May 2017 that it is targeting an inflation rate of 13 percent (+/-3%) in Q4 of 2018 and single-digit rates thereafter. Foreign flows to the banking system have increased, as banks' resources of foreign currencies since the liberalization of the exchange rate till the end of December 2017 registered US$ 60.0 billion. In this regard, it should be noted that restrictions on foreign currency cash withdrawals and deposits were lifted and banks were allowed to execute customers transfer requests without any maximum limits. Financial positions in foreign currencies at the CBE and banks have improved. In this context, net foreign assets at the banking system reversed to a positive balance, recording LE 61.1 billion worth at end of June 2017 (from a negative balance of LE 87.4 billion worth at end of June 2016), and further improved reaching LE billion worth at end of December 2017, the highest record since October The CBE managed to rebuild its net international reserves (NIRs) as they hiked by US$ 13.8 billion or 78.4 percent in FY 2016/2017, to US$ 31.3 billion, covering as such 6.6 months of merchandise imports at end of June At end of February 2018, the NIRs further improved to US$ 42.5 billion (covering 8.6 months of merchandise imports), to record thereby their best historical levels at the CBE. This reflects the confidence in the Egyptian economic performance and banking system and helps meet the state's financial dues. The BoP ran an overall surplus of US$ 13.7 billion in FY 2016/2017 (of which, US$ 12.2 billion were recorded in November/June 2016/2017, immediately after the liberalization of the exchange rate), against an overall deficit of US$ 2.8 billion in the previous FY. The capital and financial account recorded a net inflow of US$ 29.0 billion (against US$ 21.2 billion), while the current account deficit retreated by 21.5 percent to US$ 15.6 billion (against US$ 19.8

5 III billion). At the time of preparing the Report, the BoP unfolded an overall surplus of US$ 5.1 billion in July/Sept. 2017/2018 (against US$ 1.9 billion in the same period a year earlier). This was due to the fact that the current account deficit declined to register only US$ 1.6 billion (against US$ 4.8 billion), and the capital and financial account recorded a net inflow of US$ 6.2 billion (against US$ 7.2 billion). According to the initial indicators issued by the Ministry of Finance, the preliminary final accounts of FY 2016/2017 revealed that the overall deficit as a percentage of GDP declined to 10.9 percent during the year under review, from 12.5 percent a year earlier. The primary deficit as a percentage of GDP also decreased to 1.8 percent from 3.5 percent. The domestic public debt retreated to 91.1 percent at end of June 2017, from 96.7 percent at end of June Likewise, the gross domestic debt of the government moved down to 77.4 percent from 84.4 percent. The IMF and many other international rating agencies have lauded the outcomes of the Economic Reform Program and the indicators achieved so far by the Egyptian economy. Some of these agencies have raised Egypt's outlook from "stable" to "positive" and lauded the success of the pound liberalization. Moreover, the Ministry of Finance successfully issued euro bonds worth US$ 4 billion in 5, 10 and 30 year tranches, which attests to the growing confidence of foreign investors in the Egyptian economy. The purchase requests exceeded US$ 12 billion at good yields in the first few hours after the issuance despite the volatility of the international stock markets (at the time of floating the bonds), which resulted in higher yields on US bonds to hit their highest levels in 4 years. Finally, I would like to thank the dedicated staff of the CBE and the banking system for their tireless work. May God guide our steps to the right path and help us serve our dear country for its progress and prosperity. Governor of the Central Bank of Egypt Tarek Hassan Amer

6 Contents of the Annual Report Main Indicators of the Performance of Egyptian Economic Sectors Executive Summary A - B I - V Chapter 1 Central Bank of Egypt 1/1 Monetary Policy 1 1/2 Reserve Money 4 1/3 Payment Systems and Information Technology (IT) 7 1/3/1 RTGS and SWIFT Local Services 8 1/4 Domestic Liquidity and Counterpart Assets 10 1/5 Supervision Sector 14 1/6 Management of the Foreign Exchange Market and International Reserves 17 1/6/1 Foreign Exchange and Dollar Interbank Markets 17 1/6/2 Management of International Reserves 18 1/7 Domestic Public Debt and External Debt 18 1/7/1 Domestic Public Debt 18 1/7/1/1 Debt of the Government (Net) 19 1/7/1/2 Net Debt of Public Economic Authorities 20 1/7/1/3 Net Debt of NIB 20 1/7/1/4 Intra-debt 20 1/7/2 External Debt 21 1/8 Human Resources Development (HRD) 24 1/8/1 Activity of EBI 24 1/8/2 CBE Staff Programs 26 Chapter 2 Banking Developments 2/1 Financial Position 27 2/2 Deposits 29 2/3 Lending Activity 30 2/4 Cash Flows 32 2/5 Bank Performance Indicators 34

7 Chapter 3 Macroeconomic Developments 3/1 Gross Domestic Product (GDP) 39 3/1/1 Labor Force, Employment and Unemployment 42 3/2 Inflation 43 3/3 Public Finance 47 Budget Sector 3/4 Balance of Payments and Foreign Trade 51 3/4/1 Balance of Payments 51 3/4/1/1 Current Account 52 3/4/1/2 Capital and Financial Account 57 3/4/2 Foreign Trade 59 3/4/2/1 Merchandise and Sectoral Distribution of Exports by Degree of Processing 59 3/4/2/2 Merchandise and Sectoral Distribution of Imports by Degree of Use 61 3/4/2/3 Foreign Trade by Geographical Distribution 63 3/4/2/4 Foreign Trade by Main Commodity and Merchandise Balances 66 3/5 Non-Banking Financial Services Sector 69 3/5/1 Stock Market 69 Annex Statistical Section

8 A Main Indicators of the Performance of Egyptian Economic Sectors Real Sector FY 2015/ /2017 Real GDP growth rate at factor cost (%), of which : The share of the private sector (percentage point) Real GDP growth rate at market prices (%), of which: Share of private consumption (percentage point) Share of public consumption (percentage point) Share of capital formation (percentage point) Share of net external demand (exports of goods and services minus imports of goods and services) (percentage point) CPI inflation (urban) (%) PPI inflation (%) Financial & Monetary Sector Domestic liquidity growth rate M 2 (%) Domestic liquidity growth rate M 2 (%) (excluding the impact of change in exchange rate) Growth rate of time and saving deposits in local currency (%) Growth rate of foreign currency deposits (%) Growth rate of foreign currency deposits (%) (excluding the impact of change in exchange rate) Foreign currency deposits/ Total deposits (dollarization rate) (%) Foreign currency deposits/ Total deposits (dollarization rate) (%) (excluding the impact of change in exchange rate) Net claims on the government /Total credit (%) Private business sector credit/ Total credit (%) Household sector credit/ Total credit (%) Public business sector credit/ Total credit (%) Change in net claims on the government/change in total credit (%) Change in private business sector credit/change in total credit (%) Change in household sector credit/ Change in total credit (%) Change in public business sector credit/ Change in total credit (%) Net international reserves (US$ mn) at end of the period NIR in months of merchandise imports Due to the liberalization of exchange rate on 3 Nov

9 B Main Indicators of the Performance of Egyptian Economic Sectors (cont.) FY 2015/ /2017 Banks Financial Soundness Indicators (FSIs), of which: Capital adequacy ratio (%)* Non-performing loans/total loans (%) Loan provisions/ Non-performing loans (%) Return on average assets** (%) Return on average equities** (%) * External Sector Trade Balance/GDP (%) Services Balance/GDP (%) FDI in Egypt (net)/gdp (%) Net transfers/ GDP (%) External Debt External debt/gdp (end of June) (%) Short-term external debt/total external debt (end of June) (%) External debt service/exports of goods and services (%) Budget Sector + Revenues/GDP (%) Expenditures/GDP (%) Total wages/total public revenues (%) Primary Surplus (+)/deficit (-)/GDP (%) Overall Surplus (+)/deficit (-)/GDP (%) Gross domestic public debt/gdp (%) Including the capital conservation buffer. ** According to the latest audited financial statements for FY 2016 and FY The fiscal year ends on June 30 for public sector banks and on December 31 for other banks. + Source: Ministry of Finance ++ Affected by the liberalization of exchange rate on 3 Nov

10 I Executive Summary The Annual Report for FY 2016/2017 displays the CBE s activity and the main monetary, credit and banking developments at the domestic level. It also sheds light on major economic developments, with particular emphasis on economic growth, inflation, state budget, balance of payments, external trade, and key decisions of the CBE's Board of Directors. Real GDP growth at factor cost rose to 3.6 percent in FY 2016/2017 (from 2.3 percent a year earlier). On the supply side, the growth in the reporting year reflects the higher contributions of the sectors of tourism, extractions, manufacturing, realestate, and communications. On the demand side, GDP growth at market price (4.2 percent) came from domestic demand that added 5.5 percentage points (3.7 points for final consumption and 1.8 point for capital formation), thereby remaining the main driver of growth; whereas external demand registered a negative 1.3 percentage point. Investments (at current prices) totaled LE billion in the reporting year, up by 12.2 percent, compared with LE billion a year earlier. As for monetary policy and exchange rate management, the CBE continued to pursue price stability, being the ultimate objective of the monetary policy, by working to bring inflation to such appropriate and stable levels, so as to help build confidence, stimulate investments and spur economic growth to targeted levels. In FY 2016/2017, the Monetary Policy Committee (MPC) held seven meetings, leading eventually to a rise in key policy rates by 500 bps. Specifically, the overnight deposit and lending rates were raised from percent and percent, respectively, to percent and percent. The rate of the CBE's main operations and the discount rate were also raised from percent to percent each. This rise was consistent with the CBE's decision on November 3, 2016, to embark on several measures to adjust the foreign currency trading policy through liberalizing the exchange rates to give banks the liberty to quote and trade at any exchange rate. The decision was intended to restore FX trading to formal banking channels and eliminate the parallel market. Regarding the main monetary and credit developments in FY 2016/17, reserve money amounted to LE billion at end of June 2017, up by LE 99.5 billion or 20.8 percent in the reporting year (against a retreat of LE 7.8 billion and 1.6 percent in the preceding FY). Domestic liquidity reached LE billion at end of June 2017 (or 84.1 percent of GDP for FY 2016/17), with an increase of LE billion or 39.3 percent in the reporting year (or LE billion or 22.5 percent, excluding the effect of the exchange rate liberalization on November 3, 2016), compared to LE billion and 18.6 percent in the previous FY.

11 II As regards banking developments, the CBE's BoD approved in its sessions on 7 April and 13 July 2016 the application of the capital conservation buffer to ensure that banks can cover losses that may arise in periods of economic stress or financial crises, with the aim of conserving the capital base of Egyptian banks. Banks are required to adhere to these regulations starting from either the 1 st of January or the 1 st of July 2016 (depending on the beginning of the fiscal year in each bank), in order to meet the required total ratio of 2.5 percent in January/July Additionally, the CBE's BoD approved on 13 July 2016, the regulations of liquidity risk management, and the application thereof started from July 2016 according to a set timetable. The financial position of banks operating in Egypt (excluding the CBE) soared by LE billion or 55.3 percent in FY 2016/17 (against LE billion and 29.4 percent in the previous FY), reaching LE billion at end of June 2017 (127.4 percent of GDP in FY 2016/17 ). On the liabilities side, deposits accounted for more than two thirds of the rise, registering a pickup of LE billion (or rising by LE billion after excluding the effect of exchange rate liberalization). On the assets side, the increase mainly reflected the surge in both lending and discount balances by LE billion (or by LE billion after excluding the effect of exchange rate liberalization); and banks' deposits at the CBE by LE billion. Moving to banks' financial soundness indicators, the capital adequacy ratio at banks, including the capital conservation buffer, reached 14.5 percent (against an established mandatory minimum ratio of percent). For banks, Tier 1 capital, including the capital conservation buffer, reached 11.4 percent (versus a mandatory minimum ratio of 7.25 percent as of the first of January 2017). Common equity stood at 8.5 percent (against a mandatory minimum ratio of 4.5 percent as of the 1 st of January 2015). Return on average assets and equities of the banking system amounted to 2 percent and 30.9 percent, respectively, and net interest margin 4.6 percent for FY 2016 (the latest certified financial statements). The ratio of non- performing loans and facilities to total loans and facilities reached 5.5 percent. Loans and facilities provisions/ non- performing loans and facilities registered 99.1 percent. As regards the payment systems and information technology (IT), the CBE has finished the preparation of the system of Small and Medium Sized Enterprises Initiative that aims to provide medium and small sized enterprises with the necessary finance for purchasing the equipment required for industrial purposes. Tests required for this system are underway for the purpose of completing the procedures needed for its actual operation. This is in addition to a number of developments and accomplishments that are tackled in detail in this Report.

12 III As for the performance of EGX, noticeable increases were seen in most price indices. Its benchmark index (EGX 30) increased during the year by 93.0 percent to points at end of June Also, EGX 20 Capped rose by 76.7 percent to points. In addition, EGX 50 EWI index that encompasses the largest 50 companies in terms of liquidity and activity registered a rise of 64.8 percent to points at end of June Likewise, EGX 70 and EGX 100 increased by 85.0 percent and percent, in order, to stand at points and points at end of June The NILEX index, which reflects the activity of small and medium enterprises listed on the Nile Stock Exchange, recorded a decline of 19.2 percent to points at end of June As for the forex market, the decision taken by the CBE on 3 November 2016 to adjust the foreign currency trading policy was a key step towards restoring confidence in the Egyptian economy; overcoming the shortage of foreign currency and building foreign currency reserves. This is besides supporting exports and tourism, enhancing the competitiveness of Egypt in international markets, and helping attract foreign investment which had a positive impact on the balance of payments. At end of June 2017, the weighted average of the US dollar interbank rate amounted to LE (compared with LE at end of June 2016), with a 51.5 percent fall in the value of the Egyptian pound in FY 2016/2017. The weighted average of the US dollar reached LE at end of December 2017, with an increase of 2.0 percent in the value of the Egyptian pound during July/Dec. of FY 2017/2018. The decision of the exchange rate liberalization on Nov 3, 2016 had positively affected the market's resources of foreign currency. Specifically, since the liberalization decision till the end of June 2017, banks' foreign currency resources reached US$ 34.0 billion (of which US$ 22.5 billion were customers' sales and US$ 11.5 billion were investment inflows). The CBE's foreign currency resources amounted to US$ 53.8 billion, and its foreign currency uses reached US$ 33.3 billion during the same period. Net international reserves (NIR) with the CBE scaled up by US$ 13.8 billion or 78.4 percent in FY 2016/2017, to end the year at US$ 31.3 billion, covering 6.6 months of merchandise imports. Moreover, at the time of preparing this Report, NIRs surged to US$ 42.5 billion, covering 8.6 months of merchandise imports at end of February 2018.

13 IV Egypt's transactions with the external world during FY 2016/2017 unfolded an overall BOP surplus of about US$ 13.7 billion (of which US$ 12.2 billion were realized in November/June 2016/2017 after the decision of the exchange rate liberalization), against an overall deficit of US$ 2.8 billion a year earlier. The capital and financial account recorded a net inflow of US$ 29.0 billion (against US$ 21.2 billion), while the current account deficit retreated by 21.5 percent to only US$ 15.6 billion (against US$ 19.8 billion). The decline of the current account deficit resulted from the fact that: (i) the trade deficit declined by 8.4 percent to only US$ 35.4 billion (against US$ 38.7 billion), (ii) the services surplus rose by 4.3 percent to US$ 6.8 billion (against US$ 6.5 billion), and (iii) net unrequited current transfers rose by 4.1 percent to US$ 17.5 billion (against US$ 16.8 billion), mainly due to the rise in remittances of Egyptians working abroad by 2.2 percent. The investment income balance deficit also narrowed by 1.1 percent to US$ 4.4 billion (from US$ 4.5 billion). The capital and financial account unfolded a net inflow of US$ 29.0 billion (against US$ 21.2 billion). This came on account of the increase in the net inflow of foreign direct investment (FDI) in Egypt, to record US$ 7.9 billion (against US$ 6.9 billion). Another factor at work was that portfolio investments in Egypt surged, recording a net inflow of US$ 16.0 billion (against a net outflow of US$ 1.3 billion). Turning to the fiscal policy, total revenues registered LE billion (19.0 percent of GDP), up by LE billion or 34.1 percent, according to the actual preliminary data of the fiscal operations of the state budget (administrative system, local administration, and service authorities) for FY 2016/2017. Total expenditures also increased by LE billion or 26.2 percent to LE billion (29.7 percent of GDP). Accordingly, the cash deficit posted LE billion or 10.7 percent of GDP. By adding the net acquisition of financial assets (LE 6.8 billion) to the cash deficit, the overall deficit rises by LE 40.0 billion (relative to the previous fiscal year), to stand at LE billion. Although the overall deficit rose as an absolute figure, its ratio to GDP fell to 10.9 percent (from 12.5 percent). Additionally, the primary deficit as a percentage of GDP declined to 1.8 percent (from 3.5 percent). Gross domestic public debt amounted to LE billion at end of June 2017 (against LE billion at end of June 2016). Its ratio to GDP declined to 91.1 percent down from 96.7 percent. The debt balance consists of the sum of net government debt, public economic authorities' debt and that of the National Investment Bank (NIB), minus the intra-debt of public economic authorities and the government to NIB. Government debt (domestic and external) grew by 28.9 percent during FY 2016/2017, to reach LE billion or 92.2 percent of GDP at end of June 2017.

14 V The outstanding external debt (public and private - all maturities) denominated in US dollar rose by US$ 23.3 billion or 41.7 percent at end of June 2016, to reach US$ 79.0 billion at end of June The rise in debt stock was an outcome of the increase in the net disbursements of loans & facilities by US$ 23.6 billion; and the depreciation of most currencies of borrowing versus the US dollar by US$ 0.3 billion. External debt service amounted to US$ 7.3 billion during FY 2016/2017 (principal repayments made up US$ 6.1 billion and interest payments US$ 1.2 billion). According to external debt indicators, the ratio of external debt to GDP posted 33.6 percent (against 16.6 percent). The ratio of debt service to exports of goods and services reached 19.1 percent (against 14.6 percent). However, these ratios are still within safe limits, according to the IMF and World Bank classification. The indicators of external debt in Egypt, relative to peer regional country groups, showed that external debt as a percentage of GDP ranged between 18.1 percent and 61.9 percent (Egypt 33.6 percent), and the indicator of debt service/exports of goods and services ranged between 28.6 percent and 51.4 percent (Egypt 19.1 percent).

15 Chapter 1: Central Bank of Egypt 1/1 Monetary Policy 1/2 Reserve Money 1/3 Payment Systems and Information Technology (IT) 1/3/1 RTGS and SWIFT Local Services 1/4 Domestic Liquidity and Counterpart Assets 1/5 Supervision Sector 1/6 Management of the Foreign Exchange Market and International Reserves 1/6/1 Foreign Exchange and Dollar Interbank Markets 1/6/2 Management of International Reserves 1/7 Domestic Public Debt and External Debt 1/7/1 Domestic Public Debt 1/7/1/1 Debt of the Government (Net) 1/7/1/2 Net Debt of Public Economic Authorities 1/7/1/3 Net Debt of NIB 1/7/1/4 Intra-debt 1/7/2 External Debt 1/8 Human Resources Development (HRD) 1/8/1 Activity of EBI 1/8/2 CBE Staff Programs

16 1 Chapter 1 Central Bank of Egypt 1/1- Monetary Policy As the ultimate objective of the monetary policy is price stability, the CBE strives to bring inflation to an appropriate and stable level conductive to building confidence, stimulating investment and achieving the targeted economic growth. The overnight interbank interest rate is considered the operational target of the monetary policy, whereby a framework based on the corridor system is applied, within which the ceiling is the overnight interest rate on lending from the Central Bank, and the floor is the overnight deposit interest rate at the Bank. Hereunder are the monetary policy decisions taken in FY 2016/2017: The MPC's decisions in its seven periodic meetings during the reporting year were consistent with the inflation developments and the MPC's inflationary pressure forecasts. To elaborate, in its first and second meetings (dated 28 July and 22 September 2016), the Committee decided to keep the overnight deposit and lending rates unchanged at percent and percent, respectively. The CBE's main operations (repos or deposits auctions, depending on market liquidity conditions) and the CBE's discount rate were also kept unchanged at percent each. Out of its keenness to shore up confidence in the Egyptian economy and achieve monetary stability by targeting lower levels of inflation, the CBE decided on November 3, 2016 to embark on several measures to adjust the foreign currency trading policy through liberalizing the exchange rates. According to this decision, banks are at liberty to quote and trade at any exchange rate. The decision was intended to restore FX trading to formal banking channels and eliminate the parallel market. The decision came in line with a broader package of reforms that will ensure macroeconomic stability through fiscal consolidation as announced by the government. This can be achieved by completing the subsidy reform program, rationalizing government spending, reducing imports especially random imports, increasing exports, and encouraging domestic investment which is now being firmly implemented. By doing so, the government aims - through the fiscal and monetary package of reforms- to empower the Egyptian economy to face the current economic challenges, unleash its potentials, and achieve the aspired growth and employment rates in a way that is commensurate with Egypt's capabilities and utilizes the full range of its human, natural and material resources.

17 2 In this regard, the CBE has taken the following decisions: 1. Giving banks operating in Egypt the liberty to quote and trade at any exchange rate through reactivating the interbank mechanism. 2. Raising the overnight deposit and lending rates by 300 basis points to percent and percent, respectively. The rate of the CBE's main operations and the discount rate were also raised by 300 bps to percent each. The MPC decided in its four periodic meetings held on 17 November 2016, 29 December 2016, 16 February 2017 and 30 March 2017 to keep the overnight deposit and lending rates unchanged at percent and percent, in order. Also, the CBE's main operations and the CBE's discount rate were also kept unchanged at percent, each. The CBE raised the interest rates in November 2016 (by 3 percent) and restructured the deposits acceptance operations for absorbing short-term excess liquidity to include longer-term maturities. This in turn led to a noticeable drop in monthly inflation rates. However, this drop was not sufficient to achieve the inflation target over the medium- term, as the CBE is targeting an annual inflation rate of 13 percent (+/- 3 %) in Q Thus, the MPC decided in its last periodic meeting of FY 2016/2017 (dated 21 May, 2017) to raise the overnight deposit and lending rates by 200 basis points, to percent and percent, respectively. Also, the CBE's main operations and the CBE's discount rate were raised by 200 basis points, to percent, each. In order to alleviate the adverse effects arising from the rise in both fuel & electricity prices and VAT, the MPC decided in its first periodic meeting of FY 2017/2018 on 6 July, 2017 (at the time of preparing this Report) to increase the overnight deposit rate, overnight lending rate and the CBE's main operation by 200 basis points to percent, percent and percent, respectively. The discount rate was also raised by 200 basis points, to percent. However, the afore-mentioned rates were kept unchanged in the following meeting dated 17 August, 2017 (while the Report at hand was under preparation). The following are the key developments that took place during FY 2016/17:- First: Interest Rates: The MPC's decisions during the year under review affected both the overnight interbank interest rates and the interest rates on LE loans and deposits at banks, as shown below:

18 3 1- Overnight Interbank Interest Rates The MPC's decisions taken during FY 2016/2017 were reflected in the overnight interbank interest rates. Hence, the overnight interbank interest rates were kept unchanged in Q1, raised in Q2 by 300 basis points, then kept unchanged in Q3, and raised in Q4 by 200 basis points. As the CBE has adopted a tightening monetary policy to absorb excess liquidity at the banking sector through conducting deposit acceptance operations with longer maturities, the weighted average of the overnight interbank interest rate moved close to the corridor ceiling rate, as illustrated in the following chart: 2- Interest Rates on LE Loans and Deposits The MPC's decisions taken in the reporting year affected the interest rates in the money market as shown in the following table: Weighted Average Interest Rate (%) Month June 2016 June 2017 Deposits More than one month and up to three months More than three months and up to six months More than six months and up to one year Loans* For one year or less * The interest rate on corporate loans after the application of Domestic Money Monitoring System (DMMS).

19 4 Second: Open Market Operations During FY 2016/2017, the average liquidity absorbed by the CBE via its monetary policy instruments markedly increased to LE billion at end of June 2017 (compared with LE billion at end of June 2016), with an increase of LE 300 billion. This was primarily driven by the higher government spending on various activities and by the spike in net foreign exchange purchases which resulted in a surge in net international reserves at the CBE following the economic reform measures in the reporting year. In order to increase the effectiveness of liquidity management given the high volume of excess liquidity at the banking system, some adjustments were made to the current operational structure of the monetary policy, to include longer-term deposit acceptance operations. Hence, an operational structure for operations with maturities ranging between 28, 56, 112, and 210 days was implemented. The balance of deposits averaged LE billion or 97 percent of total liquidity absorbed by the CBE at the end of June /2- Reserve Money Reserve money reached LE billion at end of June 2017, up by LE 99.5 billion or 20.8 percent during FY 2016/2017 (against a decline of LE 7.8 billion or 1.6 percent a year earlier). The increase in reserve money in the reporting year was reflected in the increase in the currency in circulation outside the CBE by LE 83.6 billion or 22.7 percent, to reach LE billion or 78.3 percent of reserve money at end of June Add to this the rise in banks' local currency deposits at the CBE by LE 15.9 billion or 14.5 percent, to reach LE billion at end of June Reserve Money and Counterpart Assets* (LE mn) Balances at Change During the FY + (-) End of 2015/ /2017 June 2017 Value Value A- Reserve Money (7800) Currency in circulation outside CBE Banks' local currency deposits at CBE (62791) B- Counterpart Assets (7800) Net Foreign Assets 3690 (70141) Foreign Assets Foreign Liabilities Net Domestic Assets Net Claims on Government Net Claims on Banks Net Balancing Items (119131) (135794) * Derived from the CBE s balance sheet.

20 5 The pickup of the currency in circulation outside the CBE (the first component of reserve money) was a reflection of the rise in issued banknote by LE 83.7 billion or 22.7 percent, to stand at LE billion at end of June Components of the note issue cover ran as follows: foreign currencies made up LE billion worth or 89.6 percent at the end of June 2017 and gold LE 46.9 billion worth or 10.4 percent. Banknote Issue* (LE mn) Change during the Year At End of June Balance of Banknote Issue Value % * Including subsidiary coins issued by the Ministry of Finance. The breakdown of the currency in circulation outside the CBE showed a continued rise in the relative importance of the LE 200 note, reaching 55.1 percent at end of June 2017 (against 52.6 percent at end of June 2016). Meanwhile, other denominations declined or remained stable. Denominations Currency in Circulation By Denomination* Value (LE mn) June 2016 June 2017 Change During FY + (-) Relative Importance Value Relative Importance 2015/ /2017 Total Banknote in Circulation PT PT LE LE LE (11.5) 24.0 LE (9.5) 11.1 LE (5.2) (2.4) LE LE Subsidiary Coins * Representing the difference between banknote issue and cash at the CBE.

21 6 Banks local currency deposits at the CBE (the second component of reserve money) increased by LE 15.9 billion or 14.5 percent during the year (against a decrease of LE 62.8 billion or 36.4 percent in the year of comparison), to stand at LE billion at end of June The rise in reserve money in the reporting year was attributed to the increase in both net domestic assets by LE 50.9 billion, and in net foreign assets by LE 48.6 billion worth. This can be seen as follows: 1- Net Domestic Assets Net domestic assets surged by LE 50.9 billion during FY 2016/2017 (against LE 62.3 billion), to stand at LE billion at end of June The surge was a result of the following developments: Net Claims on the Government The CBE s net claims on the government augmented by LE 89.2 billion or 14.4 percent (against LE 95.5 billion or 18.2 percent a year earlier), to register LE billion at end of June Such a rise was a result of the higher claims on the government by LE billion, and the higher government deposits at the CBE by LE 25.9 billion. Net Claims on Banks The CBE s net claims on banks increased by LE 97.5 billion, as a result of the rise in its claims thereon by LE billion, and the pickup in banks' foreign currency deposits at the CBE by LE 68.9 billion worth. Net Balancing Items The net balancing items had a contractionary effect on reserve money, as their negative balance increased by LE billion, due partly to the rise in the balance of deposits accepted at the CBE under the open market operations (by LE billion), and partly to the increase in other assets and liabilities (net) by LE billion. 2- Net Foreign Assets Net foreign assets at the CBE picked up by LE 48.6 billion worth (or by LE 21.2 billion worth after excluding the effects of exchange rate liberalization on the 3 rd of November 2016), against a retreat of LE 70.1 billion in the corresponding period, bringing their balance to LE 3.7 billion worth. The increase was a combined result of the rise in both foreign assets at the CBE by LE billion worth, to reach LE billion worth; and foreign liabilities at the CBE by LE billion worth, to register LE billion worth at end of June 2017.

22 7 1/3 - Payment Systems and Information Technology (IT) The payment systems and information technology sector witnessed a number of achievements during FY 2016/2017, the most important of which are the following: The establishment of a permanent Disaster Recovery (DR) site for the CBE, to be functional in emergencies as a substitute for the main Information Center in El- Gomhoreya Building. This is intended to guarantee the continuity of the service. It is scheduled to be completed in Q2 of FY 2017/2018. As four major banks; namely the National Bank of Egypt, Banque Misr, Banque du Caire and Alex Bank, along with their branches in governorates, are entrusted, under an agreement with the CBE, with exercising government finance activities (e.g., payment of cheques drawn on the CBE - receipts on behalf of the CBE), signatures of governmental authorities' representatives, as well as other authorized signatories, were uploaded on the electronic systems of these banks. In Q1 of FY 2017/2018, the system was run using the new mechanism, while the old one was disabled. The CBE joined the Regional Payment and Settlement System (REPSS) run by the COMESA Clearing House. This system aims at executing transactions between African commercial banks of the COMESA member states. The REPSS system is supervised by the COMESA Clearing House. It aims at enhancing and promoting intra-trade between COMESA countries, and facilitating money transfer operations among member states. Moreover, the CBE currently works on developing the internal systems so as to enhance and develop the electronic linking system among the Egyptian commercial banks within the framework of launching the next phase that reduces the time period for implementing REPSS payments. The CBE is working on expanding financial inclusion by enhancing access to simple banking services. An example of these services is the mobile wallet, whose users exceeded five and half million persons up till now. The CBE aims at widening access to this service for all society segments, especially the smallvalue transactions. At present, some final amendments to the rules regulating this service are being made. Progress has been made in establishing a system of central securities depository for government-issued securities (CSD), a collateral management system (CMS), an auction system, and an electronic trading platform for government securities, in cooperation with the European Bank for Reconstruction and Development and the African Development Bank. The project is expected to be finished by the end of 2017.

23 8 The CBE is upgrading the current version of RTGS in Egyptian pound. Related softwares are being modified and upgraded, as a step towards the actual implementation of the project. The SWIFT software will be changed from Turbo to Alliance system. Proposals of specialized companies in this regard are currently examined. The CBE has tightened control over import operations through automating Form 4, for commodity imports, and linking it with both the Customs Authority and banks via an electronic system that is consistent with the CBE s information security standards. The electronic version of the Form shall be available at the Customs Authority. The said Authority will enter the actual assessment of any released consignment as well as the commodity classification of its items. The CBE has completed the preparation of the system of the SMEs financing initiative, which aims at funding new machinery and equipment for industrial purposes. The testing procedures are completed before the actual operation. 1/3/1- RTGS and SWIFT Local Services Local bank transfers in Egyptian pound under the RTGS showed an increase in the number of executed messages to thousand in FY 2016/2017 (from thousand a year earlier). Their value also increased to LE billion (from LE billion). Notably, such transactions included transfers of banks and clients and transactions of treasury bills, Misr for Central Clearing, and the National Debit Switch, in addition to corridor operations and deposits for monetary policy purposes. FY Number of Messages (Unit) RTGS and SWIFT Local Services (In Local Currency) Value of Transfers (LE bn) Change during the Year + (-) Number Value 2013/ (195648) / (13491) / / According to the statistics of the CBE Automated Clearing House that applies the RTGS system, the number of exchanged papers decreased to thousand (from thousand). Meanwhile, their value increased to LE 1249 billion (from LE 1047 billion). As a result, the average value per paper moved up to LE thousand (from LE 77.6 thousand).

24 9 FY CBE Automated Clearing House Activity Number of Papers (Thousand) Value of Papers (LE bn) Change Rate + (-) Number 2013/ (2.9) 8.4 Value 2014/ / / (7.8) 19.2 Transactions executed in foreign currencies under the Fin-Copy system, via SWIFT, revealed an increase in their number and a decline in their value. Specifically, their number amounted to 8.4 thousand, at a value of US$ 6.9 billion, against 3.4 thousand, at a value of US$ 9.3 billion a year earlier. SWIFT Local Services (in US Dollar) Number of Messages Value of Transfers Change during the Year + (-) FY (Unit) (US$ mn) Number Value 2013/ (5043) (26055) 2014/ (871) 2015/ (2083) / (2341)

25 10 1/4- Domestic Liquidity and Counterpart Assets In FY 2016/2017, domestic liquidity grew by LE billion or 39.3 percent (or by LE billion or 22.5 percent excluding the effect of the exchange rate liberalization on the 3 rd of November 2016), against LE billion or 18.6 percent a year earlier. This brought total domestic liquidity to LE billion (down to LE billion when excluding the effect of the exchange rate liberalization) representing 84.1 percent of the GDP for FY 2016/2017. Such a rise was a dual effect of the increase in both net domestic assets and net foreign assets. The former made a positive contribution of 32.2 percentage points to domestic liquidity growth, and the latter made a positive contribution of 7.1 points. (%) Domestic Liquidity Growth by Components During FY / / / /2017 Net Domestic Assets Net Foreign Assets Domestic Liquidity Growth Rate The pickup in domestic liquidity was reflected in the growth in its two components, i.e., money supply and quasi-money. Money supply (currency in circulation outside the banking system and local currency demand deposits) scaled up by LE billion or 23.5 percent (against LE 73.9 billion or 14.8 percent in the year of comparison), reaching LE billion (24.2 percent of total domestic liquidity) at end of June The rise in money supply was attributable to the rise in both currency in circulation outside the banking system and local currency demand deposits. The former picked up by LE 72.2 billion or 20.8 percent (against LE 54.2 billion and 18.5 percent), scoring LE billion at end of June In parallel, local currency demand deposits increased by LE 62.3 billion or 27.6 percent during the reporting year (against LE 19.7 billion or 9.6 percent in the previous FY), reaching LE billion at the end of June This rise reflected mainly the increase in the deposits of the household sector by LE 36.1 billion, of the private business sector by LE 23.0 billion, and of the public business sector by LE 3.5 billion.

26 11 Quasi-money (time and saving deposits in local currency plus demand and time and saving deposits in foreign currencies) augmented by LE billion or 45.3 percent in the reporting year (against LE billion or 20.1 percent a year earlier), posting LE billion or 75.8 percent of total domestic liquidity at end of June The rise reflected the growth in both LE time and saving deposits and foreign currency deposits. LE time and saving deposits surged by LE billion or 26.6 percent (against LE billion and 19.4 percent), to LE billion or 68.6 percent of total quasi-money at end of June The increase resulted from the surge in the deposits of the household sector by LE billion. However, the rise was curbed by the retreat in those of the private business sector by LE 4.6 billion. Foreign currency deposits (demand and time & saving) went up by LE billion worth or percent (or by LE 17.1 billion worth or 5.3 percent when excluding the effects of change in exchange rate on the 3 rd of November 2016), against LE 60.8 billion worth or 23.1 percent, posting LE billion worth and constituting 31.4 percent of total quasi-money at end of June All sectors contributed to the said rise: the deposits of the household sector grew by LE billion worth, of the private business sector by LE 93.5 billion worth, and of the public business sector by LE 20.4 billion worth. Against these developments, the ratio of foreign currency deposits/total deposits (dollarization rate) increased to 27.8 percent at end of June 2017 (or to 15.9 percent when excluding the effect of exchange rate liberalization on the 3 rd of November), against 18.5 percent at end of June Domestic Liquidity Components End of June 2017 Demand deposits in local currency 9.9% Quasi-money 75.8% Money supply 24.2% Currency in circulation outside the banking system 14.3% Concerning the counterpart assets of domestic liquidity, net domestic assets recorded a rise of LE billion or 30.9 percent in the reporting year, against LE billion or 27.3 percent, to stand at LE billion at end of June 2017.

27 12 The rise in net domestic assets reflected the pickup in domestic credit extended by banks during the year by LE billion or 26.5 percent (against LE billion and 24.4 percent), to LE billion at end of June Net balancing items had an expansionary effect on domestic liquidity of LE 24.1 billion. During FY Change in Domestic Credit Value (LE mn) 2015/ /2017 Growth Rate % Value Growth Rate % - Net claims on the government and public economic authorities Claims on public business sector * Claims on private business sector Claims on household sector Total Change * Including public companies that are subject or not to Law No. 203 for the year The government received about more than half of the increase in domestic credit, as net credit to the government surged by LE billion or 19.6 percent, to register LE billion or 63.6 percent of total credit at end of June Such an increase reflected the rise in banks' holdings of government securities by LE billion. However such an increase was mitigated by the increase in government deposits by LE billion, on the one hand, and the retreat in loans to the government by LE 27.6 billion. Credit to the private business sector stepped up by LE billion or 47.7 percent (against LE 56.0 billion and 12.5 percent), to LE billion or 23.9 percent of total credit at end of June Likewise, credit to the public business sector scaled up by LE 55.6 billion or 59.8 percent (against LE 29.8 billion and 47.2 percent), to post LE billion. Credit to the household sector climbed by LE 30.5 billion or 14.7 percent (against LE 32.6 billion and 18.6 percent), to LE billion or 7.7 percent of total domestic credit at the end of June Net balancing items (the sum of capital accounts, interbank net credit and debit positions and those between banks and the CBE, and net unclassified assets and liabilities) had an expansionary effect of about LE 24.1 billion on domestic liquidity. This was due to the rise in net unclassified assets and liabilities by LE billion and the LE 65.7 billion increase in the interbank net debit and credit positions and those between banks and the CBE. Add to this the increase of capital accounts by LE billion.

28 13 Net foreign assets at the banking system augmented by LE billion worth in the reporting year (or by LE 83.4 billion worth when excluding the exchange rate liberalization effect on the 3 rd of November 2016), compared to a decline of LE billion worth a year earlier, to stand at LE 61.1 billion worth at the end of June The increase came on the back of the rise in net foreign assets at banks and the CBE as follows: The increase in net foreign assets at banks by LE 99.9 billion worth (or LE 62.2 billion worth when excluding the exchange rate liberalization effect on the 3 rd of November 2016), to post LE 57.4 billion worth at the end of June 2017 (against negative LE 42.5 billion worth at the end of June 2016). The increase in net foreign assets at the CBE by LE 48.6 billion worth, to stand at LE 3.7 billion worth at the end of June 2017 (against negative LE 44.9 billion worth at the end of June 2016). (LE bn) Foreign Assets & Liabilities at the Banking System at End of June Foreign Assets Foreign Liabilities

29 14 1/5- Supervision Sector The CBE conducts supervision over banks operating in Egypt to ensure their sound financial positions and evaluate their performance from the perspective of risk based supervision. In addition, it ascertains banks compliance with the CBE established regulatory standards, including the minimum reserve requirement and liquidity ratios, the maximum limits of a bank s concentration of investments with a single customer, along with his related parties, and investments abroad, as well as the asset-liability matching in terms of maturity and currency. This is in addition to a number of qualitative standards that ensure alongside the above the soundness of banks performance and the safety of depositors funds. Among these standards are governance rules; information systems efficiency rules; and ''Fit and proper'' criteria for officials and managers of key sectors at banks. The CBE has prepared and implemented the Banking Sector Reform Program, through which banks have been restructured, their capital has been raised and their risk management has been strengthened. It is worth mentioning that the said Program was fruitful mainly as regards Basel II implementation as the CBE's BoD has approved in its session dated December 18, 2012 the regulations of the minimum capital adequacy requirement. In line with Basel Committee's proposal to introduce a ''leverage ratio'' to act as a supplementary measure to the risk-based capital adequacy requirements (in line with the timeline for applying Basel III accords), the CBE's BoD approved in its session held on 7 July 2015 the leverage ratio regulations. Under these regulations, banks are required to meet the Basel III leverage ratio; first as an indicative ratio starting from the end of September 2015 till 2017, then as a mandatory ratio as of To enhance the link between a bank s risk profile and its internal risk management and capital adequacy assessment, the CBE started applying the second pillar of Basel II requirements based on two main pivots, as follows: a- In its meeting held on the 2 nd of March 2016, the CBE's BoD approved the regulations of the internal capital adequacy assessment process (ICAAP), required to be conducted by banks in accordance with each bank's risk profile, to address all types of risks (including the risks that were not tackled in the first pillar). b- The CBE has taken several measures to apply the supervisory review and evaluation process (SREP). The key purpose of SREP is to ensure that banks maintain adequate capital to ensure a sound coverage of their risks, as well as to encourage them to develop and use appropriate risk-management techniques to monitor, manage, measure and address all the risks they are vulnerable to.

30 15 Out of its keenness to apply the international best practices, especially Basel III requirements, the CBE's BoD approved in its two sessions dated 7 April and 13 July 2016 the implementation of the capital conservation buffer and the issuance of the supervisory regulations pertaining to liquidity risk management, respectively, as follows: 1- Capital Conservation Buffer In order to ensure the coverage of losses that may arise during times of stress or financial crisis and to conserve the capital base of Egyptian banks, banks operating in Egypt have to comply with these regulations as of the first of January for banks with fiscal year ending in December and as of the first of July 2016 for banks with fiscal year ending in June, in order to meet the required total ratio of 2.5 percent in January/July Supervisory Regulations of Liquidity Risk Management First: Liquidity Coverage Ratio (LCR) Banks shall maintain a minimum ratio for each of local and foreign currencies, according to the following schedule: (%) Year Min. Ratio Second: Net Stable Funding Ratio (NSFR) Banks must comply with this ratio within a maximum period of three months starting from July 2016, as follows: Maintain a total minimum ratio of 100%. Maintain a minimum ratio of 100% for each of local and foreign currencies. Under the CBE's ongoing follow-up of the key tasks of banks' executive managers according to Article (43) of Law No. 88 of 2003 of the Central Bank, the Banking Sector and Money, instructions were issued by the CBE on 4 August 2016, requiring banks to submit to the Supervision Sector a list of the names of the staff in charge of key tasks at banks, attached with an organizational chart stating each incumbent's position, together with his reporting line. In order to boost the supervisory role and establish the instructions of banks' governance, the CBE as of the 1 st of February 2017 issued a number of regulations, requiring banks to submit a copy of the minutes of the BoD's meetings and the BoD's committees within a month from the date of meeting.

31 16 In the light of the instructions which stated that in the event of running for the post of Chairman or Vice Chairman of any bank, or executive board members, an interview shall be conducted before holding office, with Deputy Governor, or Sub- Governor in charge of the CBE's Supervision Sector. Thus, the CBE issued instructions on 19 February, 2017 stating that this procedure shall be applied to nonexecutive members in case of being a candidate for the first time or seeking renomination. In addition, the CBE intends to hold an annual meeting with nonexecutive board members provided that this meeting shall be determined in a timely manner so as to discuss and follow up the efficiency and effectiveness of the governance rules applied at banks. During the period under review, (48) BoD members and 29 executive managers were added to the register of banks, pursuant to Article (43) of Law No. 88 of 2003 of the Central Bank, the Banking Sector and Money, and in compliance with the applicable Fit and Proper criteria. In light of Article 32/3 of the aforesaid Law which states that the Governor of the CBE, following the consent of the Board of Directors, shall approve the statute of the bank, and any modification thereto, certain articles of the statute of (12) banks were modified during the year in question. Furthermore, (116) new branches [including (63) ordinary branches, (1) Islamic branch, (47) mini branches, (3) mini- Islamic branches, (1) agency, and (1) seasonal branch] of (26) banks were added to the register of banks. This came in accordance with the regulations set by the CBE that give due regard to the soundness of financial positions, internal controls, and the efficiency of information systems of applicant banks to open new branches, together with their capital adequacy to ensure that they can better face the risks arising from the expansion in their activities. In light of the regulations established for electronic payment services, (15) banks were licensed to offer (32) e-banking services. Concerning on-site supervision, the Supervision Sector at the CBE continued assuming its role in exercising supervision over banks, guided by the set plan. Specifically, the following points were observed: Making sure that the inspected bank complies with the instructions stated in the Central Bank, the Banking Sector and Money Law and its Executive Regulations as well as the instructions issued by the CBE. Identifying the different kinds of risks to which the inspected bank is vulnerable and performing quantitative and qualitative risk analysis to assess the risk level, then take the appropriate measures to minimize them and set corrective plans for

32 17 their avoidance; and making sure that the inspected bank secures enough provisions against non-performing loans, in order to guarantee the safety of depositors' and shareholders' funds. Ensuring the soundness of banks' financial positions and verifying that the financial data therein are identical to those in banks' records. Following up - on a regular basis - the economic, financial and monetary developments, in accordance with the decisions taken regarding the foreign currency trading, especially in light of the CBE's Decision dated 3/11/2016 concerning the exchange rate liberalization. 1/6- Management of the Foreign Exchange Market and International Reserves 1/6/1- Foreign Exchange and Dollar Interbank Markets Performance and Development of the Foreign Exchange Market Out of its keenness to shore up confidence in the Egyptian economy and achieve monetary stability by targeting lower levels of inflation, the CBE decided on November 3, 2016 to embark on several measures to adjust the foreign currency trading policy through liberalizing the exchange rates. Pursuant to this decision, banks are at liberty to quote and trade at any exchange rate, with the aim of restoring FX trading to formal banking channels and eliminating the parallel market. This came in line with the economic reform program that would empower the Egyptian economy to face the longstanding challenges, unleash its potentials, and achieve the aspired growth and employment rates in a way that is commensurate with Egypt's capabilities and utilizes the full range of its human, natural, and material resources. Egypt's decision to liberalize the exchange rate on November 3, 2016 has positively affected foreign currency resources. Specifically, banks' resources of foreign currency as of the stated decision till the end of June 2017, amounted to US$ 34.0 billion (of which customers' sales recorded US$ 22.5 billion, while investment inflows registered US$ 11.5 billion). The CBE's resources of foreign currency since the aforementioned decision till the end of June 2017 reached US$ 53.8 billion, while its uses of foreign currency stood at US$ 33.3 billion. The weighted average of the US dollar interbank rate posted LE at end of June 2017 (against LE at end of June 2016), with a 51.5 percent drop in the value of the Egyptian pound during FY 2016/2017. At end of December 2017 (during the preparation of the Report at hand), the weighted average of the US dollar reached LE , with a rise of 2.0 percent in the value of the Egyptian pound during the period July/December of FY 2017/2018.

33 18 1/6/2- Management of International Reserves Net international reserves (NIR) at the CBE increased by US$ 13.8 billion or 78.4 percent in FY 2016/2017, to end the year at US$ 31.3 billion (covering 6.6 months of merchandise imports). At the time of preparing this Report, NIR increased, to stand at US$ 42.5 billion at end of February 2018 (covering 8.6 months of merchandise imports). (US$ bn) Net International Reserves & Months of Merchandise Imports at End of June (Months of Imports) Net International Reserves NIR in months of merchandise imports 1/7- Domestic Public Debt and External Debt 1/7/1- Domestic Public Debt At end of June 2017, domestic public debt amounted to LE billion (against LE billion at end of June 2016), scoring an increase of LE billion or 20.6 percent during FY 2016/2017. Despite the rise of domestic public debt as an absolute number, the public debt / GDP ratio dwindled to 91.1 percent at end of June 2017 (versus 96.7 percent at end of June 2016). Gross Domestic Debt at End of June 2017 (LE bn) Gross Domestic Debt Intra-Debt NIB Debt (Net) Net Debt of Public Economic Authorities Net Domestic Debt of Government * Domestic public debt includes net debt of the government, net debt of public economic authorities, and that of the National Investment Bank (NIB), minus the intra-debt of both public economic authorities and the government to the NIB.

34 19 1/7/1/1-Debt of the Government (Net) Net government domestic debt expanded by LE billion or 17.5 percent in FY 2016/2017 to LE billion at end of June 2017 (compared to LE billion at end of June 2016). Despite the increase in the net government domestic debt as an absolute figure, its ratio to GDP retreated to 77.4 percent at end of June 2017 (from 84.4 percent at end of June 2016).This was driven by the rise of LE billion in the balances of treasury bonds and bills and the contraction of LE billion in the net balances of the government at the banking system (due to the decline in government loans by LE billion and the increase in government deposits by LE billion). Add to this, the decline in the value of the issued Masri Dollar Certificates by LE 0.9 billion worth. Domestic Debt of the Government (Net) (LE bn) June 2016 June 2017 Change Balances at End of + (-) Value % Value % 2016/2017 Domestic Government Debt (Net) Balances of Bonds & Bills Bonds, of which, Tradable on exchanges (24.6) Treasury bills Facilities from SIFs Masri Dollar Certificates (0.9) - Net Balances at the Banking System (332.8) Credit facilities (190.1) Deposits (-) Net Domestic Government Debt/GDP (%) Source: Table 3/1 in the Statistical Annex. Ratios are calculated in terms of LE million. The increase of LE billion in the balance of government bonds and bills was distributed as follows: percent (or LE billion worth) was in government bonds (of which LE billion were treasury bonds at the CBE mostly to cover the cash deficit in government accounts, LE 72.1 billion worth were international euro bonds issued for the CBE in November 2016, and LE 41.3 billion worth were US dollar bonds issued for commercial banks) percent (or LE billion worth) was in treasury bills (of which LE billion were issued in Egyptian pound, LE billion worth in US dollar, and LE 13.8 billion worth in euro).

35 20 LE bn Net Domestic Debt of the Government June 2015 June 2016 June 2017 % Net Domestic Debt of thegovernment / GDP Net Government Balances with the Banking System Treasury Bills Bonds & other Credit Facilities Ratio of Government Debt /GDP 1/7/1/2- Net Debt of Public Economic Authorities During FY 2016/2017, net debt of public economic authorities hiked by LE billion to LE billion at end of June The rise was traceable to the pickup in their net borrowing from the banking system by LE billion (owing to the rise in their claims on the banking system by LE billion and in their deposits therewith by LE 44.0 billion), as well as the rise in their borrowing from the NIB by LE 0.1 billion. 1/7/1/3- Net Debt of NIB Net debt of NIB (including intra-debt) mounted to some LE billion at end of June 2017, up by LE 27.3 billion in the reporting year. That was driven by the increase in total resources invested at the NIB by LE 28.8 billion to LE billion, on the one hand, and the rise in its deposits at the banking system by LE 1.5 billion, on the other. Resources of the NIB at End of June 2017 Uses of the NIB at End of June 2017 Post Office Saving Account 35.5% Dollar Development Bonds &Others 0.7% Social Insurance Funds 16.3% Loans to Economic Authorities 15.0% Investment in Treasury Bills & Bonds 9.5% Deposits w ith the Banking System 2.1% Proceeds of Investment Certificates & Accumulated Interest 47.5% Loans to Holding Companies & Affiliate Units, Concessional Lending & Others 73.4% 1/7/1/4- Intra-Debt Intra-debt of public economic authorities and the government to the NIB reached some LE 84.2 billion at end of June 2017 (against LE 78.2 billion at end of June 2016), recording an increase of LE 6.0 billion in FY 2016/2017. NIB's investments in government securities (bills and bonds) recorded LE 32.6 billion, up by LE 5.9 billion in FY 2016/2017, while the loans extended by the NIB to these authorities registered LE 51.6 billion, up by LE 0.1 billion. Most of the increase was due to the rise in foreign currency claims due to the rise in the exchange rate of these currencies versus the Egyptian pound after the liberalization of the exchange rate in Nov

36 21 1/7/2 External Debt Total external debt (all maturities) increased by US$ 23.3 billion or 41.7 percent, reaching US$ 79.0 billion at end of June 2017 (compared to the end of June 2016). This came due to the rise in net disbursements of loans, facilities and deposits by US$ 23.6 billion as well as the depreciation of most currencies of borrowing versus the US dollar by US$ 0.3 billion. Below is a detailed review of the main developments of external debt structure, in addition to its service and indicators: First- External Debt Structure The data of external debt by original maturity indicated that medium- and longterm debts (guaranteed and nonguaranteed) registered US$ 66.7 billion, or 84.5 percent of total external debt at end of June In figures, long-term debt made up US$ 48.7 billion, while mediumterm debt constituted US$ 18.0 billion (mostly debts owed to international and regional organizations, and to Arab countries). In the meantime, short-term debt stood at US$ 12.3 billion or 15.5 percent of total external debt. 1- Medium- and Long-term Debt Rescheduled bilateral debt 5.4% Private sector (non guaranteed) 0.2% International & regional organizations 27.5% External Debt Structure End of June 2017 Long term deposits 23.5% Short term debt 15.5% Suppliers' & buyers' credits 8.2% Other bilateral debt 8.3% Egyptian bonds and notes 11.4% The structure of medium- and long term debt at end of June 2017 indicates the following :- - Rescheduled bilateral loans registered US$ 4.3 billion. - Other bilateral loans reached US$ 6.6 billion. - Buyers' & suppliers' credit stood at US$ 6.5 billion. - Debt of international and regional organizations posted US$ 21.7 billion. - The balance of Egyptian bonds and notes floated abroad (held by non-residents) reached US$ 9.0 billion. It consisted of the following: Sovereign bonds issued abroad in April 2010, at a value of US$ million, and falling due over two tranches by 2020 and Global Medium-Term Notes (GMTN) issued in 2015, at a value of US$ 1.2 billion, and falling due in Global Medium-Term Notes Programme issued in 2017, at a value of US$ 6.8 billion and falling due in 2022, 2027, and 2047.

37 22 - Long-term deposits from Arab countries reached US$ 18.5 billion. - Non-guaranteed debt of the private sector reached US$ million. 2- Short-term External Debt Short-term external debt increased by US$ 5.2 billion at end of June 2017 compared to the end of June 2016, to stand at US$ 12.3 billion or 15.5 percent of total external debt. This was ascribed to the pickup in short-term deposits of nonresidents by US$ 2.3 billion, to US$ 3.8 billion (including Chinese currency swap deal of US$ 2.6 billion) and short-term trade loans and facilities by US$ 2.9 billion, to US$ 8.5 billion. (US$ bn) June 2015 June 2016 June 2017 Deposits Short-term External Debt End of Other short-term facilities 3- External Debt by Debtor External debt owed by the central and local government accelerated by US$ 10.4 billion to US$ 34.9 billion at end of June 2017, representing 44.1 percent of total external debt: the monetary authority by US$ 8.2 billion to US$ 30.3 billion: and other sectors and banks by US$ 4.6 billion and US$ 0.1 billion, to US$ 9.7 billion and US$ 4.1 billion, respectively. %100 %80 %60 %40 %20 %0 External Debt by Debtor End of June 2015 June 2016 June 2017 Central & Local Government Monetary Authority Banks Other Sectors 4- External Debt by Currency The breakdown of currency composition of external debt showed that the US dollar accounted for the bulk of external debt, with a relative importance of 69.9 percent, due to the outstanding obligations in US dollar to creditors other than the USA. The euro came next with a share of 12.6 percent, followed by the SDRs (7.0 percent), then the Chinese yuan (3.4 percent), the Kuwaiti dinar (3.0 percent) and the Japanese yen (2.9 percent). SDRs 7.0% Kuwaiti dinar 3.0% Chinese yuan 3.4% External Debt structure by Currencies End of June 2017 Japanese yen 2.9% Euro 12.6% Other currencies 1.2% US dollar 69.9%

38 23 5- External Debt by Creditor The breakdown of external debt by creditor revealed that US$ 22.3 billion (or 28.2 percent of total external debt) were owed to Arab countries, mainly Saudi Arabia (10.4 percent), UAE (9.6 percent), Kuwait (6.3 percent), and Libya (1.3 percent). Debt to international and regional organizations registered US$ 21.7 billion, Egyptian bonds and notes US$ 9.0 billion and debt to China US$ 4.7 billion. In the meantime, US$ 19.6 billion were owed to main six countries; namely Germany (8.0 percent), China (6.0 percent), the UK (4.3 percent), Japan (2.8 percent), the USA (2.0 percent), and France (1.7 percent). International & regional organizations 27.5% Arab countries 28.2% Egyptian bonds and notes 11.4% External Debt by Creditor End of June 2017 France 1.7% Other countries 8.1% China 6.0% United Kingdom 4.3% USA 2.0% Japan 2.8% Germany 8.0% Second-External Debt Service External debt service reached US$ 7.3 billion in FY 2016/2017. Of this amount, principal repayments made up US$ 6.1 billion and interest payments (including interests on deposits and bonds during the reporting year) recorded US$ 1.2 billion. Third- External Debt Indicators Despite the higher level of external debt during the reporting year, most of its indicators are within the thresholds under the Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries, as illustrated below: - The ratio of external debt to GDP reached 33.6 percent compared to 16.6 percent at end of June The ratio of short-term external debt to total external debt reached 15.5 percent against 12.6 percent. - The ratio of external debt service to exports of goods and services recorded 19.1 percent against 14.6 percent. - The ratio of short-term external debt to NIRs registered 39.2 percent against 40.0 percent (due to higher international reserves) % External Debt Indicators End of June Government External Debt / External Debt External Debt /GDP Short-term Debt / Net International Reserves Short-term Debt / Total External Debt This was due to the decision of Egyptian pound liberalization on November 3, 2016.

39 24 In terms of international comparison, the indicators of external debt in Egypt relative to peer regional country groups showed that Egypt s debt as a percentage of GDP (33.6 percent) came among the global levels that ranged between 18.1 percent and 61.9 percent. Moreover, by recording 19.1 percent, the indicator of debt service/exports of goods and services also came among the global levels that ranged between 28.6 percent and 51.4 percent % External Debt Indicators during FY 2014/ / /2017 Debt Service / Current Receipts (including transfers) Debt Service / Exports of Goods and Services 6-New Commitments on Loans and Facilities During FY 2016/2017, new commitments on loans and facilities reached US$ 3.1 billion, compared with US$ 3.9 billion a year earlier. Specifically, loans from international and regional organizations registered US$ 2.4 billion (mainly with the International Bank for Reconstruction and Development (IBRD) and the African Development Bank (AfDB). Also, bilateral loans accounted for US$ 0.7 billion, mainly with France, Italy, Germany, and Japan. 1/8- Human Resources Development (HRD) The Central Bank of Egypt continues its efforts to develop and raise the efficiency of the human resources in the banking system. To this end, the Egyptian Banking Institute (EBI), an affiliate to the CBE, continues to hone the skills of the banking cadres, in line with its role in shoring up the national economy, by designing a number of training programs specialized in all banking fields. Such programs embrace activities that support the CBE's directives towards accelerating development and addressing the economic and social issues in a manner that achieves institutional development and the distinctive performance of the banking sector. 1/8/1- Activity of EBI The Egyptian Banking Institute is considered one of the major training and research institutions that contributes to boosting staff efficiency in both banking and financial sectors, at local and regional levels. Locally, the EBI has provided a diversity of training programs and specialized certificates that cater for the needs of banking and non-banking institutions. Also, it provides assessment services to all of its institutional clients, whether banks or corporations, through its Assessment Services Unit established in June 2015 by a decision of the EBI's BoD. The assessment results of this Unit help in selecting new recruitments, determining promotions, and putting in place plans for the development Source: IMF World Economic Outlook - October 2017

40 25 of employees at various institutions to meet their training needs. In FY 2016/2017, more than individuals from various banking and non-banking institutions were tested. Furthermore, the Unit conducts the assessment phase of "Future Leaders Program", by which English language proficiency and a number of crucial behavioral disciplines required for joining the program are assessed. This ensures the perfect and most accurate selection of candidates for this strategic program. The following chart shows the number of executed programs and the number of participants from 2014/2015 to 2016/2017: Training Activity Number of T raining Programs Number of T rainees 2014/ / /2017 The EBI continues to conduct the activities of Financial Literacy and the Development of Friendly Financial Products for Children and Youth Initiative, "Shaping the Future" through the development and implementation of the first phase of the project (School Bank) in cooperation with Banque Misr and an international school. The project aims at increasing the financial awareness of students, as well as providing a suitable financial product that entices them to save. The Institute seeks to expand the project to public schools. It has also developed and implemented, collaboratively with Visa International, the financial literacy project for civil servants (Payroll Project), to encourage them to use the newly issued payroll cards in payments, with the aim of creating a society more reliant on electronic payment system. Notably, Egypt, represented by the EBI, won, for four consecutive years, five awards, from the Child and Youth Finance International organization (CYFI) as follows: 2014 Global Money Week Award for MENA region Country Award for MENA region. Country Award for the MENA region and a recognition award of Global Money Week in Country Award for MENA region.

41 26 Due to the close relationship between financial inclusion and stability and the CBE's concern about their positive impact on the economies, the EBI organized its ninth annual conference "Promoting Financial Inclusion in the Banking Sector" in May, The conference discussed over three diverse sessions an overview of financial inclusion developments and indicators at the international level, the role of central banks in realizing the objectives of financial inclusion, and enhancing access to formal banking sector. This is in addition to highlighting the relationship between De-risking practices and mechanisms, and their direct and indirect effects on efforts aimed at financial inclusion. At the regional level, the EBI is expanding its activity through providing its services to some institutions in the Arab region. It also taps the global expertise to transfer the best practices in international banking industry to the Egyptian banking sector by cooperating with major international providers of training programs to employees in banking and financial sectors. 1/8/2 CBE Staff Programs The number of participants in the training programs for CBE staff reached 2507 trainees in FY 2016/2017, involving 2016 participants in local programs (specialized and administrative, language, and computer courses), 339 trainees in qualifying programs, and 84 trainees in external programs. Also, 68 employees of the CBE's staff completed their post-graduate studies. No. of Participants Participants from CBE in Training and Qualifying Programs Qualifying Programs External Programs Post Graduate Programs Local Programs 2015/ /2017 During the year under review, the Banking Institute offered different training programs for 1528 trainees in order to meet their various training needs. Such programs were diverse ranging from programs for the development of leadership and personal skills to a diversity of major banking and financial programs, in addition to computer programs and some assessment services.

42 Chapter 2 : Banking Developments 2/1 Financial Position 2/2 Deposits 2/3 Lending Activity 2/4 Cash Flows 2/5 Bank Performance Indicators

43 27 Chapter 2 Banking Developments 2/1- Financial Position The aggregate financial position of registered banks operating in Egypt (38 in number) posted LE billion at end of June 2017, up by LE billion or 55.3 percent in FY 2016/2017, well above the figures of the previous FY (LE billion or 29.4 percent). Relative Structure of Liabilities (End of June 2017) Equities 7.1% Other Liabilities 8.3% Provisions 2.4% Bonds & Long-term Loans 2.8% Obligations to Banks Abroad 4.4% Obligations to Banks in Egypt 6.5% Deposits 68.5% Roughly 57.9 percent of the rise on the liabilities side emanated from deposits at banks which grew by LE billion or 43.1 percent, posting LE billion. Increases were also observed in: (i) obligations to banks in Egypt (including the CBE) by LE billion, (ii) banks equities by LE billion, (iii) obligations to banks abroad by LE billion, (iv) bonds and long-term loans by LE 75.4 billion, and (v) banks' provisions by LE 41.0 billion. Change in Liabilities (LE mn) Change in FY +(-) 2015/ /2017 Value % Value % Capital Reserves Provisions Bonds and long-term loans Obligations to CBE Obligations to banks in Egypt Obligations to banks abroad Total deposits Other liabilities, of which: Cheques payable Total Liabilities

44 28 Relative Structure of Assets (End of June 2017) Other Assets 5.4% Loan & Discount Balances 32.3% Balances at Banks in Egypt 19.8% Cash 1.3% Securities & Investments in TBs 34.8% Balances with Banks Abroad 6.4% The increase on the assets side was mainly attributed to the hikes in balances with local banks (including the CBE) by LE billion to post LE billion at the end of June Likewise, lending and discount balances rose by LE billion, banks' investments in securities and TBs by LE billion, and balances with banks abroad by LE billion worth. Change in Assets (LE mn) Change in FY +(-) 2015/ /2017 Value % Value % Cash Securities and investments in TBs Balances with CBE Balances with banks in Egypt, of which: Loans and discount balances Balances with banks abroad, of which: (3760) (6.9) Loans and discount balances (129) (8.5) Loans and discount balances (market) Other assets Total Assets Relative Structure of Banks' Portfolio Investment 51.3 Treasury Bills Gov. Bonds Non-gov. Bonds Corp. Equities June 2017 June Foreign Securities