Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 48305 - EG

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF US%300 MILLION EQUIVALENT

TO

THE ARAB REPUBLIC OF EGYPT

FOR AN

AFFORDABLE MORTGAGE FINANCE PROGRAM DEVELOPMENT POLICY LOAN

August 24,2009

Social and Economic Development Group Egypt, Yemen and Djibouti Country Department Middle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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A D B CAPMAS CAS CBE CFAA CFR CGAP CPI DPL EFSA EMRC FDI FSAP FY GDP GSF GST HSPC IBRD IFC IMF ISDS LDP MFA MFC M&E NHP NIB NPLs NUCA PFM PPP PTI SIF SOE TAPR TSA USAID

ARAB REPUBLIC OF EGYPT-GOVERNMENT FISCAL YEAR July 1'' - June 3@'

CURRENCY EQUIVALENTS (Exchange Rate Effective as o f July 20,2009)

Currency Unit Egyptian Pound US$l .oo LE 5.56

WEIGHTS AND MEASURES Metr ic System

ABBREVIATION AND ACRONYMS African Development Bank Central Agency for Public Mobilization and Statistics Country Assistance Strategy Central Bank of Egypt Country Financial Accountability Assessment Corporate Financial Reporting Consultative Group to Assist the Poor Consumer Price Index Development Policy Loan Egyptian Financial Supervisory Authority Egyptian Mortgage Refinance Company Foreign Direct Investment Financial Sector Assessment Program Fiscal Year Gross Domestic Product Guarantee and Subsidy Fund General Sales Tax Housing Subsidy Policy Committee International Bank for Reconstruction and Development International Finance Corporation International Monetary Fund Integrated Safeguard Data Sheet Letter o f Development Policy Mortgage Finance Authority Mortgage Finance Companies Monitoring and Evaluation National Housing Program National Investment Bank Non Performing Loans New Urban Communities Authority Public Financial Management Public Private Partnership Payment-to-income Social Insurance Funds State Owned Enterprise Technical Assistance for Policy Reform Treasury Single Account United States Agency for International Development

Country Director: Emmanuel Mbi Sector Director: Rima S. Reinikka Sector Manager: Simon Bell

Task Team Leader: Sahar Nasr

FOR OFFICIAL USE ONLY

THE ARAB REPUBLIC OF EGYPT AFFORDABLE MORTGAGE FINANCE PROGRAM DEVELOPMENT POLICY LOAN

Table o f Contents

LOAN AND PROGRAM SUMMARY .......................................................................................................... i

I . I1 .

I11 .

I V .

V .

VI .

INTRODUCTION ............................................................................................................................. 1 COUNTRY CONTEXT ........ ; ........................................................................................................... 2 A . Recent Economic Developments ................................................................................................. 2 B . Macroeconomic Outlook .............................................................................................................. 6 C . Debt Sustainability ....................................................................................................................... 7 EGYPT’S MORTGAGE FINANCE REFORM PROGRAM ....................................................... 2 A . Overview of the Mortgage Finance Market Prior to Reforms ..................................................... 9 B . Recent Developments in the Mortgage Finance Market .............................................................. 11 C . Overview on Housing and Mortgage Subsidies 13 D . New Affordable Mortgage Finance Program ............................................................................... 15

BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ....................................................... 20 A . Links to the Country Assistance Strategy .................................................................................... 20 B . Collaboration with the IMF and Other Donors ............................................................................ 19 C . Relationship to Other Bank Activities ......................................................................................... 20 D . Analytical Underpinnings ............................................................................................................ 21 E . Lessons Learned from the Current Mortgage Crisis .................................................................... 23 THE PROPOSED OPERATION ..................................................................................................... 24 A . Objectives and Rationale of Operation ........................................................................................ 24 B . Policy Areas ................................................................................................................................. 25 C . Operation Description .................................................................................................................. 24 D . Program Feature. Loan Amount and Tranching ........................................................................... 29 E . Expected Outcomes o f Operation ................................................................................................ 30

OPERATION IMPLEMENTATION ............................................................................................. 31 A . Poverty and Social Impacts .......................................................................................................... 31 B . Implementation. Monitoring and Evaluation ............................................................................... 3 1 C . Fiduciary Aspects ......................................................................................................................... 32 D . Environmental Aspects ................................................................................................................ 33 E . Risks and Risk Mitigation ............................................................................................................ 34

...........................................................................

ANNEXES

ANNEX 1: LETTER OF DEVELOPMENT POLICY .................................................................................................... 35 ANNEX 2: AFFORDABLE MORTGAGE FINANCE PROGRAMaPERATIONAL POLICY MATRIX ............................ 43 ANNEX 3: OVERVIEW ON THE HOUSING MARKET IN EGYPT ............................................................................. 45 ANNEX 4: STRUCTURE AND EXAMPLE OF A BUY-DOWN SUBSIDY SCENARIO .................................................... 49 ANNEX 5: MAIN ASSUMPTIONS FOR DEBT SUSTAINABILITY ANALYSIS 2009-2015 ........................................... 51 ANNEX 6: INTERNATIONAL EXPERIENCE IN AFFORDABLE HOUSING FINANCE ................................................... 52 ANNEX 7: PROVISION OF LONG TERM FUNDING FOR MORTGAGES UNDER SUBSIDY PROGRAM ......................... 56 ANNEX 8: FUND RELATIONS NOTE .................................................................................................................... 59

ANNEX 10: MONITORING INDICATORS. BASELINE, AND EXPECTED OUTCOMES ................................................ 63 ANNEX 11: RISK IDENTIFICATION MATRIX ........................................................................................................ 64 ANNEX 12: COUNTRY AT A GLANCE .........................................................................................................

ANNEX 9: RESULTS FRAMEWORK AND MONITORMG ......................................................................................... 62

ANNEX 13: MAP .............................................................................................................................................. 69

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties . Its contents may not otherwise be disclosed without World Bank authorization .

Acknowledgments

The Affordable Mortgage Finance Program DPL was prepared by a core IBRD team comprising: Sahar Nasr, Task Team Leader and Lead Financial Economist; Loic Chiquier, Manager, Non-Banking Financial Institutions; Santiago Herrera, Lead Country Economist; Claude Taffin, Senior Housing Finance Specialist; Simon Christopher Walley, Housing Finance Specialist; Marja Hoek Smit, Professor (Wharton School, University o f Pennsylvania); Sara Flavell, Senior Counsel; Dominique Bichara, Senior Counsel; Hyacinth Brown, Senior Finance Officer; Sherine A1 Shawarby, Senior Economist; Akram El-Shorbagi, Senior Financial Management Specialist; Steve Wan, Operations Analyst; Amira Zaky, Program Assistant; Lai la Abdel Kader, Consultant; Noha Medhat, Consultant; Yasmine Wissa, Consultant; Mohamed El Sherif, Consultant; and Hoda Selim, Research Analyst. Special thanks go to the Peer Reviewers, Ruslan Yemtsov; Maria Freire; Lawrence Hannah; Deane Jordan; as well as Samia Msadek, Manager; Xavier Devictor, Country Program Coordinator; Sidi Boubacar, Lead Operations Officer; Thomas Zearley, Consultant; and Jennifer Keller for their useful comments and guidance. The team i s indebted to Zoubida Allaoua Director, Finance Economics and Urban Department, for her invaluable advice and guidance throughout the preparation o f this key operation.

The World Bank Group greatly appreciates the close collaboration with the Government of Egypt in the preparation of this operation. Special gratitude goes to H.E. Dr. Mahmoud Mohieldin, Minister of Investment, and H.E. Eng. Ahmed E l Maghraby, Minister of Housing, Util i t ies, and Urban Development. The team also wishes to thank Mr. Osama Saleh, Chairman, Mortgage Finance Authority (MFA); Mr. Mostafa El-Hayawan, Managing Director, Guarantee and Subsidy Fund (GSF); Ms. Mona Zobaa, Senior Advisor and Under Secretary, Ministry of Investment; Mr. Abdel Hamid Ibrahim, Senior Advisor, Ministry of Investment; Dr. Sahar E l Tohamy, Economic Advisor to the Minister, Ministry o f Housing Utilities, and Urban Development; Mohamed Hammam, Assistant to the Minister of International Cooperation in Charge of International Organizations, International Regional and Arab Financing Institutions; Ms. Seham Abdel Baky, General Director of Projects Department, Ministry o f International Cooperation; Dr. Sherif Otiefa, Senior Advisor, Ministry of Investment; Ms. May Abdel Hamid, Advisor to MFA Chairman, and Board Member of the Egyptian Mortgage Refinance Company (EMRC); Ms. Hala Ghazi, General Manager, Department of Planning and Business Development, Ministry o f Investment; Mr. Ahmed Rostom, Senior Financial Economist, Head of Research Unit, Ministry o f Investment; Ms. Ghada Waheed, Economist, Ministry of Investment; as well as countless other experts from the banks, mortgage companies and developers from the public and private sector who have contributed to the

LOAN AND PROGRAM SUMMARY

THE ARAB REPUBLIC OF EGYPT AFFORDABLE MORTGAGE FINANCE PROGRAM DEVELOPMENT POLICY LOAN

Borrower

Implementing Agency

Amount

Terms

Tranching

Main Policy Areas

Benefits

Key Outcome Indicators

Government o f the Arab Republic of Egypt

Ministry of Investment

IBRD Loan in the amount of US$300 million

Commitment linked, Variable-Spread (VS)

Three-Tranche Development Policy Loan (DPL), equal amount for each tranche (US$ l 00 million). The f i rs t tranche i s to be disbursed upon effectiveness, after deduction of the Front End Fee, while the second and third tranches will be disbursed following the fulfillment of policy actions implemented as per the loan agreement.

The proposed DPL will support the Government o f Egypt in implementing i t s Affordable Mortgage Finance Program. The main policy areas which the loan wil l support are: (i) strengthening the legal, regulatory, and institutional framework for the mortgage finance subsidy program to be effectively operated by the Guarantee and Subsidy Fund (GSF); (ii) developing an effective and efficient mortgage finance subsidies mechanism that will expand mortgage lending and therefore housing affordability for low and middle income groups; and (iii) improving the institutional framework to enhance transparency and targeting of housing subsidies, moving away from supply side and official budget implicit subsidies to a more efficient demand side system.

The program offers a number of benefits including: (i) decreasing the per unit amount currently needed to provide housing for underserved low and middle income households; (ii) opening access to housing to a broader category of the population, whilst at the same time deepening the financial sector; (iii) allowing government funds in the project to leverage private sector capital in the form o f mortgage loans; (iv) more efficient use of government fimds combined with private sector, allowing the freeing up of some fiscal resources that had been used for low and middle income housing, to be re-directed towards solutions for those with lower incomes who would not be credit worthy enough for a mortgage loan; and (v) decreasing the level of supply- side subsidies and implementing a wider range of planning standards for new housing developments in new and existing urban areas, improving the overall efficiency o f the new construction market.

The program’s key outcome indicators, include: (i) leverage substantial private sector resources for housing and free up national and local government resources for programs for the low income groups; (ii) expand access to mortgage finance through transparent demand subsidies compatible with the country’s developing market-based mortgage system; (iii) create transparent and equitable targeting and allocation system for housing subsidies; and (iv) institute an effective monitoring system that will help in adjusting subsidies to changing market conditions and their phasing out when no longer needed.

.. - 11 -

Program Development Objective@) and Contribution to CAS

Risks and Risk Mitigation

Operation ID Number

The main developmental objective of this DPL i s to reform the current system of inefficient and poorly targeted supply-side subsidies for housing for the broad low and middle income sector and replace them with a transparent and economically efficient demand-side subsidy system.

The proposed operation addresses two o f the key strategic objectives of the Country Assistance Strategy (CAS) for the period 2006-2009, and the CAS Progress Report for the period o f 2006- 20 1 1, namely: (i) facilitating private sector development through improving financial sector competitiveness and efficiency; and (ii) promoting equity and attaining an inclusive system. The CAS envisages support to the mortgage finance market and improving housing affordability through this proposed operation.

The program faces several risks that would be mitigated as follows: (i) Financial and macroeconomic environment. With the current global crisis, obtaining funding sources priced at a level appropriate for on-lending to the mortgage sector i s one o f the major short-term risks. In mitigation of this risk, the Egyptian Mortgage Refinance Company (EMRC) i s moving forward with plans to issue its own bonds. (ii) Inflation. Increase in inflation may result in increasing mortgage interest rates across mortgage lenders, thereby affecting the size of loan which beneficiaries will be able to afford. Measures to tackle the affordability problem would include: (a) moving from a buy-down to an upfiont subsidy; (b) reducing cost of construction through improved regulations or change the mix of units between new communities and existing urban areas; and (c) increasing the maximum subsidy amount, as a last resort. (iii) Market risk. Inability of a class of households drawn into mortgage obligations, to pay according to amortization schedules drawn up by lenders to expand initial affordability, risking loan default. The program deals with this risk in the following ways: (a) loans are fixed rate loans (hence the requirement for longer-term funding); (b) maximum payment-to-income ratios will be set by law at 33 percent, although for some lower income households, the program may operate below this ceiling; and (c) the operational rules for the program restrict risky type of loan repayment schedules. (iv) Political environment. Stakeholders opposition could weaken the government’s attempt to pursue the needed policy and structural reforms. Budgetary allocations for the new subsidy program on a sustained basis could be disrupted, thereby, impacting negatively lenders’ confidence. These risks would be mitigated through ensuring the issuance o f decrees, amending relevant laws, launching public awareness campaigns, and consulting with stakeholders (including political and popular opposition).

P112346

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A

TO THE ARAB REPUBLIC OF EGYPT PROPOSED AFFORDABLE MORTGAGE FINANCE PROGRAM DEVELOPMENT POLICY LOAN

I. INTRODUCTION

1. The reformist Cabinet o f Ministers that took office in July 2004 set a major agenda of macroeconomic and structural reforms. An integral component o f this comprehensive reform program was developing the mortgage finance market and including the private sector in the provision o f low and middle income housing. The mortgage market, though still small, i s expanding and private developers have successfully entered the moderate income housing market and have proven that they can serve that segment in a more cost efficient manner than government entities. However, there i s a disconnection between the current predominantly supply-side subsidy system o f the National Housing Program (NHP), which i s the main national housing program for the 2005 to 201 1 period, and the private mortgage and development sector. Under current market conditions, it i s increasingly difficult for the targeted income group to access new private sector housing options offered under the NHP and subsidies on publicly provided ownership and rental programs have reached extremely high levels that are clearly unsustainable. At the same time there i s evidence that the targeted population i s not reached.

2. In that context, the government since early 2008 has been working on designing a new Affordable Mortgage Finance Program, moving towards a more inclusive, transparent and efficient demand-side subsidy program for the low and middle income households that can be linked effectively to market based mortgage lending. The new program will be gradually phased in from 2009 onward and reach a similar scale as the current programs of the NHP by 2012. Programs for lower income households that will not qualify for mortgage lending will complement the Affordable Mortgage Finance Program. On April 24, 2008 the Minister o f Investment, and the Minister of Housing, Utilities and Urban Development requested World Bank support in the design and implementation of the new Affordable Mortgage Finance Program to be operated by the Guarantee and Subsidy Fund (GSF).

3. Housing continues to be a priority sector for the Government of Egypt. Housing i s the most visible indicator of social wellbeing and it i s politically important for governments to guarantee reasonable standards of housing for the majority of the population. In addition, housing i s a large part of the economy,’ and has a strong multiplier effect. There has been a persistent gap in Egypt between incomes and the cost of new housing even at the middle income level.2 I t i s estimated that around 175,000 to 200,000 new housing units are needed annually to keep pace with household formation, but only the top 10 to 20 percent of the income distribution can afford to acquire a formal sector house.3

4. The new program aims to expand the residential mortgage market and increase access to mortgage loans for low and middle income households in order to improve housing affordability. I t s focus i s on the 75* to 45* percentile of the urban income distribution and the intention i s to gradually move the bulk of subsidies to the lower income range of this income band. I t will encompass new and existing housing and new and older urban areas to offer a wider range o f housing options and prices. Lower income households, below the 45” percentile who would not have access to mortgage credit, will benefit from low-cost rental housing programs and “infrastructure only” programs planned for the same period.

Typically greater than 20 percent of GDP. This i s mainly due to high planning and subdivision standards of new housing, the lack o f a resale market for existing housing. At the same

time, household formation i s high because o f high urban growth rates and decreasing household size. According to the estimates of the Ministry of Housing, Utilities, and Urban Development (2009).

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5. Linking the program to mortgage credit will leverage substantial private sector resources for housing and free up government resources for lower income groups housing. The program will leverage financial market and household resources for housing, and alleviate pressure on the government to deeply subsidize much of the housing supply for middle income households. The new program will decrease the total and per unit housing subsidy burden. It also intends to improve the targeting and efficiency of subsidies by linking subsidies to affordable mortgage loans that beneficiaries are required to take out with a participating lender o f their choice. Households are required to pay a down-payment. Typically, the subsidy will be paid out over the initial years of the loan in the form o f a contribution to monthly mortgage payments on a maximum affordable loan.

6. The proposed US$300 million three-tranched Affordable Mortgage Finance Program Development Policy Loan (DPL) i s structured in such a way that by the time the last tranche i s disbursed in 2013, a strong policy, legal and regulatory system for the program would have been established, as well as the necessary institutions for its implementation, monitoring and adjustment. Fiscal sources for the funding of the subsidy component will be secured and sustainable funding systems for private sector mortgage lending, particularly for Mortgage Finance Companies (MFCs), will be in place. Plans to eliminate some and scale-down other supply-side subsidies will be implemented and a more competitive land allocation system in line with the government’s urban strategy will be put in place, and hidden subsidies on loans through government banks will have stopped.

7. Strong partnership has been established between the Bank and the Egyptian authorities over the past years through an integrated financial sector work program, reflected in an effective policy dialogue, analytical work, technical assistance, and key operations, focusing on financial sector development. The Bank has been supporting the government in implementing its comprehensive “Financial Sector Reform Program” since 2006 to achieve a sound, stable, and efficient financial system. A key priority area o f Bank support i s now improving financial intermediation, and attaining an inclusive financial system. The Bank has also been supporting the development of a well functioning mortgage market. The proposed operation would contribute to the consolidation of the reforms, the further development of the financial sector, and more importantly the enhancement o f financial intermediation. The Bank has also provided technical support to the government in assessing urban housing and land market operations and inefficiencies in NHP supply side subsidies.

11. COUNTRY CONTEXT

A. RECENT ECONOMIC DEVELOPMENTS

8. Over the last four years the government has implemented structural reforms including trade liberalization, a complete overhaul of the tax system, restructuring of the financial sector, and privatization of state-owned enterprises (SOEs) and banks (see Box 1). This led to a friendlier investment climate which, supported by a favorable global economic environment, yielded a strong private-sector supply response. Real Gross Domestic Product (GDP) growth increased from an average o f 3.5 percent during FYO1-04 to around 7 percent between FY06 and FY08, a record over the previous twenty years (See Table 1).

9. It increased from an average of 8 percent of GDP in FYO1-04, to 15 percent in FY08. Also, foreign direct investment (FDI) increased from an average of 0.6 percent of GDP during FYO1-04, to 8.1 percent in FY08. This increased total investment from an average of 17.6 percent of GDP over FYO1-04, to 22.3 percent in FY08.

The strong supply response was driven largely by an expansion of private investment.

- 3 -

The first reduc in 2005, followed by a more several items. More recently, the

10. Egypt accumulated significant net international assets in the period FY05 to FY08 due to both internal and external factors. Within the internal factors, the floatation o f the Egyptian pound in January 2003 and i t s subsequent depreciation, led to increased Egyptian exports. The change in relative prices was facilitated by the initiation o f a fiscal adjustment process. Within the external factors, the terms o f trade improvement and the acceleration o f world growth played important roles in increasing the value o f exports. Sustained global growth during that period implied increased demand for Egyptian services, namely tourism and transportation services provided through the Suez Canal. O i l prices and accelerated growth in neighboring countries also implied growing worker remittances contributing to the foreign currency inflow.

- 4 -

11. However, because import growth outpaced that of exports, the trade deficit widened from an average o f 9.3 percent o f GDP in FYOI-04 to 14.4 percent of GDP in FY08. Due to a large surplus in the services balances, the current account has been in surplus since FY04, but on a declining trend. Starting from FY05, large FDI inflows-sparked by ample regional liquidity-maintained a positive overall balance o f payments, averaging almost 4 percent o f GDP between FY05 and FY08. Gross international reserves were US$34.7 billion at endJune 2008, equivalent to almost 6.6 months of imports o f goods and non-factor services.

12. High growth registered until 2008 came at a price: rising inflation. At the same time, the economy was hit by supply shocks such as the international food crisis and the world fuel price increases. Expanding domestic demand and a significant r ise in monetary growth following large capital inflows also sustained these inflationary pressures. As a consequence, inflation of domestic food prices, which constitutes almost half the Consumer Price Index (CPI) basket, and Egypt’s overall CPI reached double- digit levels starting January 2008. The peak was in August 2008 when the overall CPI and food inflation rates increased to 25.6 and 35.5 percent, respectively, the highest level in 19 years. In response, the exchange rate was allowed to appreciate (by 3.4 percent over January- August 2008), the coverage o f ration cards was significantly widened (by another 15 million Egyptians), public sector basic wages were increased by 30%; and policy rates were raised by 275 basis points between February and September 2008, bringing the overnight deposit and lending rates to 11.5 percent and 13.5 percent, respectively. To finance the increase in public spending, the government passed a LE14 billion package in May 2008 stipulating several tax reforms. As global commodity prices started to fall, Egypt’s inflation rates started to subside, but only gradually, since September 2008 to stabilize at around 10 percent since May 2009.

13. Yet, in late 2008 the global financial crisis followed by a global economic slowdown changed the supportive external conditions for growth prevailing in 2005-08. Egypt’s relatively unleveraged banking sector was l i t t le affected by the financial shock which has kept the economy sheltered from the direct impact of the financial crisis. The banking system sector, which remains largely liquid with a loan to deposit ratio of 53 percent in FY08, has a limited exposure to troubled financial institutions and no direct exposure to risk derived from the financial innovation and unmonitored risk-taking of financial institutions in developed economies. On the contrary, the real sector of the economy suffered a direct impact of the slowing aggregate external demand. In FY09, real GDP growth declined to 4.7 percent versus 7.2 percent in FY08. Consequently, the unemployment rate increased to 9.4 from 8.4 percent. The current account also deteriorated following a widening of the trade deficit and a

- 5 -

slight fal l in remittances: FDI, another important foreign exchange earning sector, was negatively impacted (dropping down by 44 percent to 3.6 percent of GDP in FY09). Official international reserves have declined by almost US$5 billion in FY09, standing at US$3 1.3 billion in June 2009. Furthermore, foreign currency deposits o f the central bank in commercial banks declined by more than US$10 billion over the same period. Both effects add up to a total decline in international liquidity of US$15 billion. The exchange rate has however barely moved, depreciating less than 5 percent since July 2008.

14. In an attempt to mitigate the adverse effects o f the global crisis, the government announced a LE 15.5 billion (US$2.7 billion and 1.6 percent o f GDP) fiscal stimulus package to support economic growth in FY09. The package consisted of: (i)LE 10.8 billion in investment spending, mainly on infrastructure; (ii) LE 2.7 billion in export subsidies; and (iii) LE 2.0 billion in lower tariffs on imported intermediate and capital goods, and temporary lift o f sales tax on capital goods. In addition, the government planned for another LE 15 billion in investments in public private partnership (PPP) directed also towards infrastructure projects. Other measures included a one-year freeze of subsidized energy prices for energy intensive industrial users.

15. Fiscal reforms since 2005 were able to reduce the overall general government4 budget deficit from 9.2 percent of GDP in FY06 to 7.5 percent in FY07 and FY08. The large fiscal deficit stabilized in FY08 despite increased public spending (from 33.4 percent of GDP in FY07 to 34.6 percent in FY08) to accommodate increases in food and fuel subsidies (up to 9.7 percent o f GDP from 7.4 percent last year). On the revenue side (28 percent of GDP), tax revenues declined only slightly in FY08 (to 15.3 from 15.8 percent of GDP in FY06). In FY09 increased government spending and forgone revenues5, as announced within the fiscal stimulus package, are expected to produce an overall fiscal deficit o f the budget sector o f 6.9 percent of GDP, the same level as in FY08.

16. While total external debt has been declining for several years, reaching 20 percent of GDP at end- FY08, and then 16 percent in March 20096, the general government’s net domestic debt increased continuously between FY02 (44.6 percent o f GDP) and FY06 (53.8 percent of GDP), but declined to 43.4 percent o f GDP in March 2009.7 Implementation of a better public debt management policy has had the following effects: (i) lengthened the maturity o f tradable public debt from approximately 165 days in 2003 to two years to reduce refinancing risk; (ii) activated trading in Treasury bills with more participation from the private sector and foreign investors; (iii) created a liquid yield curve for Egyptian Pound-denominated debt issued on the international market; and (iv) introduced more-developed instruments to the financial market.

17. Up until June 2008, the exchange rate (to the US$) tended to appreciate, due to large foreign currency inflows, and the Central Bank of Egypt (CBE) intervened in the foreign exchange market. Annual sterilization costs were estimated at close to 1 percent o f GDP in 2007 (IMF, 2007), which forced the CBE to allow more exchange rate flexibility, policy that helped in the anti-inflation program, However, the exchange rate has only slightly depreciated between September 2008 and July 2009 (by 5.0 percent) following portfolio and other capital outflows. The limited exchange rate flexibility contrasts with adjustment in other emerging markets with fully-operational and transparent monetary policy rules, such as Brazil or Mexico, where international liquidity of the central bank has remained stable but the exchange rate has acted as a buffer to mitigate the international shock. As Egypt progresses towards a more mature stage o f monetary management, it i s expected that the exchange rate reflects more the interplay o f market forces. This i s especially important because in the medium term the foreign exchange

The general government provides the broadest available definition for Egypt’s public sector in Egypt, which includes the budget sector (the

The government has announced a reduction in tariffs and a one-year sales tax rebate to help importers o f industrial inputs and capital goods, The

This figure i s taken from CBE.

central government, local administration units and service authorities), the NIB and the SIFs.

cost o f th is measure i s estimated at around LE 1.7 billion.

’The Ministry of Finance started in March 2006 to publish a new series for domestic debt figures that have different from the CBE’s published ones. The annual series were calculated back to FYOl but quarterly data go back only to Q1-FY07.

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liquidity in Egypt i s expected to be subdued, and hence, the central bank's international liquidity position will be under pressure. Though the current liquidity position i s adequate, resources are not unlimited and future adjustment in the face o f unexpected shocks would be smoother if the exchange rate, like any other price, reflects scarcity more accurately.

Table 1: Selected Indicators, FYO3-FY08 and World Bank Projections until FYI3 Selected Indicators

Qutm Nomina l GDP at Market Prices (billion LE) Real GDP annual g r o w t h rate (%) Nomina l GDP (bil l ion US$)

M o n e v and Prices Broad money (Mz) g r o w t h rate (%) CPI inf lat ion rate (%) Nomina l Exchange Rate (period average LE/$) Real Effective Exchange Rate Index (%) (FYOO=lOO)

External sectox Trade deficit

Exports of goods Imports of goods

Exports of Non-factor services Imports of Non-factor services

Net Foreign direct investment** in US$ billion

Balance of Payments (+ = surplus)

Gross Public External Debt

Gross Foreign Exchange Reserves (billion US$)

Current account balance (+ = surplus)

in US$ billion

in US$ billion

( in months of imports of G&NFS)

Investment and Saving Gross capital formation Gross national savings

Public Finances (8udzet Sector) Total revenues (including grants)

Expenditures*** of w h i c h Tax revenues

ofwhich Domestic interest Foreign interest

Budget deficit * W o r l d Bank Staff Projections

FY03 FY04 FY05 FY06 FY07 FY08 FY09' FYlO* F Y l l * FY12' FY13'

80.3 78.8 89.8 107.4 130.4 162.8 199.9 217.1 241.1 264.4 291.4

16.9 13.2 3.2 4.9

5.20 6.16 67.5 52.9

8.2 9.9 10.2 13.3 18.4 23.2 2.4 4.3

12.2 15.9 5.9 6.3 0.8 0.3 0.7 0.3 0.7 -0.2 0.5 -0.2

42.5 38.2 29.4 29.9 14.8 14.8 9.1 7.6

13.6 13.5 18.3 15.7 8.9 11.4 4.2 11.0 11.7 16.8 6.00 5.75 5.71 5.50 5.51 55.1 59.5 62.1 64.0 na

(% of GDP, unless othetwise mentioned) 11.6 11.2 12.5 14.4 13.5 15.4 17.2 16.9 18.1 13.2 27.0 28.3 29.4 32.5 26.6 3.3 0.5 2.1 0.5 -2.3

15.7 14.4 13.3 14.7 12.0 6.7 7.2 5.4 6.3 4.9 4.3 5.6 8.1 7.5 3.4 3.9 6.0 10.5 12.1 6.8 5.0 3.0 4.1 3.3 -1.8 4.5 3.3 5.3 5.4 -3.6

31.1 27.6 22.8 20.1 16.7 28.9 29.6 29.9 33.9 30.9 19.3 22.9 28.6 34.6 29.4 7.7 7.2 7.5 6.6 8.1

7.5 7.4 7.0 9.7 7.2 6.8

5.62 5.68 5.73 na na na

14.0 15.8 17.0 13.9 14.0 14.6 27.9 29.7 31.5 -2.4 -1.3 -1.1 12.5 12.4 12.5 6.3 7.3 8.2 3.4 3.5 4.0 7.3 8.5 10.5 -1.8 -1.1 -0.6 -3.9 -2.6 -1.5 17.0 16.0 15.0 37.4 39.7 na 25.5 22.9 21.4

6.5 5.1 4.2

6.9 6.3

5.79 na

18.1 16.1 34.2 -0.5 14.3 9.5 4.5

13.0 -0.1 -0.2 15.0

na 21.2

3.5

16.9 16.9 18.0 18.7 20.9 22.3 19.1 16.3 18.7 19.6 20.7 22.3 24.1 26.3 27.5 27.4 28.1 16.8 13.9 17.3 18.6 20.2

21.4 21.0 20.6 24.5 24.2 24.7 26.4 19.1 22.0 25.1 27.9 13.4 13.8 14.1 15.8 15.4 15.3 15.7 12.2 14.6 16.5 18.8 31.8 30.4 30.2 32.6 31.5 31.5 33.3 27.5 29.2 31.2 32.7

5.6 5.7 5.5 5.5 6.0 5.2 6.9 5.4 4.7 3.7 3.0 0.6 0.6 0.6 0.5 0.4 0.4 0.3 0.5 0.4 0.3 0.3

10.4 9.5 9.6 8.2 7.3 6.9 6.9 8.4 7.2 6.1 4.8

"NFDI i s Direct Investment Abroad minus Direct Investment of Egypt as reported in theCBEMonthly Statistical Bulletin W* Expenditures for the budget sector include the net acquisition of financial assets Source: CBE, Monthly Statistical Bulletin, various issues; and Ministry of Finance, The Financial Monthly, various issues.

B. MACROECONOMIC OUTLOOK

18. The Government i s s t i l l facing the challenge o f managing a large fiscal deficit and a sizeable public debt stock, especially as the global environment turned unfavorable for Egypt. This section examines the medium-term economic prospects and possible risks emanating from Egypt's public debt level.

19. Real GDP growth i s expected to fall in tandem with the rest o f the world particularly in the United States and Europe, Egypt's two main trading partners. GDP growth in FY09 i s estimated at

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4.7 percent, and i s expected to be slightly lower in FY10. Assuming that the global economy will begin recovering in 2010, Egyptian growth i s expected to stabilize around 5.5 percent in FY 11, closer to i ts potential growth rate-the baseline assumption for the debt sustainability exercise.

20. In spite of the recent downward trend in inflation since September 2008, Egypt’s inflation remained for most of FY09 in the double-digit level, averaging 16.7 percent (higher than last year’s average of 1 1.7 percent). In the medium term, we expect inflation to gradually decline to about 8 percent by the end of the projection period. This i s based on the assumption that global commodity prices will continue to decline and that domestic demand pressures will ease following the deceleration in growth. The government has also put on hold its plan to reduce energy subsidies that, if resumed in 2010, will not only increase fuel prices but will also lead to pressures on al l other prices.

21. Given the expected growth slowdown and the fiscal stabilization plan, the government will be unable to meet i t s target o f cutting the fiscal deficit by 1 percent of GDP per annum in the near term. In fact, falling international commodity prices (especially for food and energy) should help in reducing expenditures on subsidies. Although this did not happen in FY09, as subsidy bill remained almost unchanged at around 9 percent o f GDP, FY 10 budget allocated 5 percent of GDP for this item. Public debt simulations assume that the primary deficit for the general government, currently at 2.9 percent o f GDP, will start declining in FYlO and gradually reach a primary surplus o f 2 percent o f GDP by 2016, according to the government’s fiscal plan.8

22. The slowdown in Egypt’s export markets should constrain both export and import growth. Nevertheless, merchandise exports are expected to decline as a ratio to GDP while imports to marginally increase, resulting in a slight widening o f the trade deficit. The services balances will also narrow as tourism and Suez Canal receipts are hit. As a result, the current account, which turned in FY09 into a deficit of 2.3 percent o f GDP, i s expected to remain in deficit, though declining slowly throughout the projection period. Net international reserves will consequently decrease in both volume and in terms of months o f imports of goods and non-factor services, yet remaining fully able to cover any potential short- term foreign currency drainage. The level of the foreign debt i s projected to decline in terms of volume and as a share to GDP.

23. Overall, reform policies adopted over the last five years have contributed to a better economic structure backed by a diversified output and should enable Egypt to accommodate the external demand shock. Table 2 shows the indicators of vulnerability. The recent drop in the ratio of gross external government debt to GDP has been impressive, declining from almost 42.5 percent in FY03 to 20.1 percent in FY08, and i s expected to drop further to 15 percent by the end of FY12. The ratio of domestic debt to GDP also exhibits a similar pattern.

C. DEBT SUSTAINABILITY

24. During the past few years, the public debt to GDP ratio has declined significantly as a result o f the high GDP growth rates that exceed the real interest rate. Similarly, the real exchange rate appreciated since 2005. In our projections, Egypt’s debt outlook remains robust under various bound tests. Similar to the International Monetary Fund (IMF) projection, the World Bank exercise shows a significant decline in the debt-to-GDP ratio, though we anticipate a slower rate of decline during the immediate future due to the following factors: (i) the anticipated growth slowdown to 4.5 percent in the next two years, expecting the US economy to begin to recover in 2010; (ii) a slight depreciation o f the currency in the next two years, resulting from the subdued capital inflows and reduced demand for Egyptian exports; (iii) reduced inflation that limits the inflation, tax resources in the short run; and (iv) higher international cost o f

The government’s plan targets the overall fiscal balance, and the announced target i s a deficit o f 3 percent of GDP to be attained in 2014, down from 8.2 percent programmed for this fiscal year. An overall fiscal deficit o f 3 percent o f GDP i s consistent with a primary surplus o f 2 percent of GDP given the projected path of interest payments.

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financing debt roll-overs, as measured by the sovereign spreads. The improvement in the debt indicators i s expected to continue after 20 10, when GDP growth stabilizes at a higher plateau. As shown in Figure 1 under the baseline scenario, net overall public debt declines to about 50 percent o f GDP in FY14. The baseline scenario assumptions are summarized in Table 3 ,’ 25. The main driver o f this result i s the GDP growth rate, which we assume stabilizes at 5.5 percent after a brief dip below those levels in 2009 and 2010. Real interest rates are assumed to be slightly positive throughout the entire forecasting horizon, and the primary deficit i s assumed to decline gradually and reach the surplus level consistent with the government’s target only in 2016. This i s a policy variable that can be adjusted depending on the medium term fiscal framework. In the other scenarios described below, this policy instrument i s simulated with different values, with the corresponding effect on the debt level.

Table 2: Indicators of Vulnerability Indicators of Vulnerability

FY03 FY04 FY05 FY06 FY07 FYO8 FY09 FYlO Fill FY12 FY13

Primary deficit of general government

Current account surplus Net foreign direct investment Gross external governement debt

Grossexternal debt External debt service short term external debt/Gross rmerves (%)

Sovereign borrowing spreads (in bp) Sovereign debt ratings: Standard and Poor’s

Long-term Foreign Cumncy Shod-term Foleign Cumncy Long-term Local Cumncy Shod-term Locnl Cumncy

Sovereign debt ratings: Moody’s Foreign Currency Local Curreno,

3.3

2.4 0.9

42.5

157.6 15.3 12.6

160.0

BB+ B

BBB- A-3

B a l Baal

2.6 2.9

4.3 3.3 0.5 4.4

38.1 31.0

127.5 100.3 10.8 9.4 13.3 9.6

118.0 64.0

BB+ BB+ B B

BBB- BBB- A-3 A-3

B a l B a l Baal Baa3

(In p ” n l of GDP J 3.5 2.4 3.0 2.9 2.5 1.0 1.0 1.0

0.5 2.1 0.5 -2.3 -2.4 -1.3 -1.1 -0.5 5.7 8.5 8.1 3.4 3.4 3.5 4.0 4.5

(In percenl of expods of goods and services )

8.5 6.9 5.1 .... .... .... .... 7.1 5.1 7.3 .... ..I. .. 1. ....

27.5 22.8 20.1 16.7 17.0 16.0 15.0

.... .... .... .... 82.4 70.4 59.9

86.0 144.0

BB+ BB+ BB+ B B B

BBB- BBB- BBB- A-3 A-3 A-3

B a l B a l B a l Baa3 Baa3 B a l

* Pm)ecbom

Source: CBE, Monthly Stutrsticul Builetm, various Issues, and Ministry o f Finance, The Finuncial Monthly, various issues

Table 3: Main Assumptions for Debt Sustainability Analysis 2009-2014, Baseline Case

2007 2008 2009 2010 2011 2012 2013 2014 Real GDP growth 7.1% 7.2% 4.7% 4.5% 5.5% 5.5% 5.5% 5.5% Real interest rate -4.5% -6.1% -1.0% 1.0% 1.5% 1.5% 1.5% 1.5% Primary balance -3.2% -3.3% -2.9% -2.5% -1.0% -1.0% -1.0% -1.0% Inflation 12.3% 16.1% 15.0% 9.0% 7.0% 6.8% 6.5% 6.3% Exchange rate (LENS$) 5.7 5.5 5.6 5.6 5.77 5.93 6 6.15

points) Debt to GDP 71.4% 62.3% 60.5% 60.0% 58.5% 56.6% 53.7% 50.0%

Sovereign Spreads (basis 250 150 100 100 100 100

Source: World Bank Staff calculations and Annex 5.

’ The analysis considers all the variables deterministic. The extension to do the analysis with stochastic variables i s currently underway.

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inflation, and interest rates. Egypt’s debt dynamics are

3 4 , , I 06 07 08 09 10 11 12 13 14 15

27. The negative shock scenario assumes that GDP growth stabilizes in the 3 percent to 4 percent range, which apparently i s not significantly different from the 5.5 percent rate assumed in the baseline case, but together with the other assumptions, produces a dramatically different debt trajectory. Regarding inflation, the negative shock scenario assumes a higher inflation rate, of about three or four percentage points throughout the simulation horizon. Hence, interest rates are higher. The primary deficit stabilizes at 3 percent of GDP (instead of the gradual decline in the baseline case) reflecting a deteriorated policymaking environment. This i s reflected in higher sovereign spreads. Under these combined circumstances, the net overall public debt-to-GDP ratio increases to 65 percent o f GDP by 20 15. Under these permanently adverse growth, currency, and interest rate circumstances, stabilization o f the debt to GDP ratio would require, on average, a primary surplus of close to 0.5 percent of GDP during the entire period.

Source: World Bank Staff calculations and Annex 5.

28. The positive shocks scenario i s very similar to the IMF’s December 2008 Article IV review baseline case, and reflects the pre-crisis Egyptian setting. Its main features are high growth (stabilizing at about 6.5 percent) and low real interest rates (zero or negative). Though these assumptions match Egypt’s reality during the past few years, it i s unlikely that these factors remain unchanged in the future. For instance, as the financial sector develops and real productivity increases, it i s difficult to foresee negative real interest rates, or close to zero, permanently. Similarly, it i s questionable whether Egypt can sustain growth rates o f 6.5 percent or higher without exerting excessive pressure on the rate of inflation.

29. Summing up, the baseline case i s the most realistic projection of the debt to GDP ratio, and shows a continued decline after an expected brief interruption during 2009 and 20 10 due to the global financial crisis. Hence, World Bank staff perceives no major risks arising from the public debt level in the medium term. However, in the short term the growth slowdown, the depreciation pressure, and lower inflation tax resources will exert pressure on the debt to GDP ratio. The prudent fiscal stimulus package reveals that authorities are well aware of the risks that permanent changes in the fiscal position would imply.

111. EGYPT’S MORTGAGE FINANCE REFORM PROGRAM

A. OVERVIEW OF THE MORTGAGE FINANCE MARKET PRIOR TO REFORMS

30. Access to affordable housing and home ownership for most Egyptian households has been constrained by an underdeveloped housing finance system. The banking sector over the past decade has offered l i t t le formal housing finance to households although a few commercial banks-both public and private-have made a limited amount of loans to homebuyers, mostly as part of their retail activities or o f

- 10-

their lending to developers, by using collateral other than mortgage pledges. Some developers have also been providing term financing under deferred installment sale contracts, but these have not offered secure nor favorable conditions for borrowers, and housing affordability i s not improved because loan maturities are too short.

3 1. Until a few years ago, only some individuals buying houses in Egypt were able to obtain finance, and this would not be in the form of mortgage loans. The most common finance arrangement was the deferred-installment system, by which the developer sells a house and i s paid by a down-payment of around 10 to 25 percent of purchase price, followed by installments over a period ranging from four to eight years. The title i s formally transferred when the last installment i s paid. Under this system, the purchaser pays a significantly higher rate of interest and higher repayments than if they could have secured a loan on the property. The system also ties up the funds of developers, who would rather invest into new projects, and can be constrained by an adverse cycle of real estate markets. In general, the system prevents many from entering the housing market, and only represents a second-best to genuine residential mortgage markets.

32. Prior to the recent reforms, mortgage market developments, and access to mortgage loans in Egypt have been impeded by the lack o f a conducive legal regulatory and institutional framework, along with various constraints, including: (i) lack o f access to long-term funding; (ii) cumbersome property registration procedures; and (iii) inadequate collateral enforcement and cumbersome foreclosure procedures.

33. Lack of long-term funding. The lack of long-term funds available to primary lenders presents one major obstacle to the flow of private funds to housing. In order for households to afford housing, the payment stream needs to be spread out over a number o f years. Most mortgage lenders are commercial banks that rely mainly on abundant short-term deposits for their funding, and hence are reluctant to extend long-term (more than five years) loans for housing because of the liquidity and interest-rate risks inherent in funding such loans with short-term deposits. And most of the primary lenders do not have sufficient market capacity to raise long-term funds in the capital market at attractive financial terms.

3 4. Cumbersome property registration procedures. Mortgage finance has been constrained by poor property registration. Limited titles have been registered in the past, mainly due to a costly and time- consuming registration process. This has led to the growth of large informal housing stocks, slower economic growth, weakened social protections, and reduced collection of fiscal revenues. Except for mortgage credit applications, the registration of property i s not mandatory in Egypt for a legal real-estate transaction. In recent years, the cost of deed or title registration has been lowered and i s no longer tied to the property value but charged as a maximum flat fee of LE 2,000. Also, a special agreement has been made between the Ministry o f State for Administrative Development and the Ministry o f Investment to fast track the registration o f new housing in priority zones under the New Urban Communities Authority (NUCA). However, registration o f existing units in older urban areas i s s t i l l time-consuming, particularly for multifamily housing. The registration of the large stock of informal housing on agricultural land i s to be resolved through approving the current building and planning standards of the area, which i s facilitated by the new Building Law 119 o f 2008. Only then, individual units can be registered.

3 5. Inadequate collateral enforcement and cumbersome foreclosure procedures. The repossession of real estate (notably through eviction) in case of borrowers’ default was a difficult if not impossible challenge, canceling any stronger collateral effect through applied credit rates (insecure lending). This problem has largely been addressed through the enactment of the Real Estate Finance Law 148 of 2001, a major breakthrough from past practices. The effectiveness of enforcement remained untested until early 2008, when lenders were hesitant until there was greater certainty that collateral can be recovered through the judicial system. The execution of the first court cases according to clear and precise rules was

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therefore critical, along with other training and explanatory efforts deployed by the Ministry of Justice for Property Registration Offices.

B. RECENT DEVELOPMENTS IN THE MORTGAGE FINANCE MARKET

36. The government has introduced a number of reforms to promote mortgage and housing finance. Most notably i s the introduction o f the Real Estate Finance Law 148 o f 2001 that paved the way for mortgage finance, the establishment o f the Mortgage Finance Authority (MFA), the setting up o f the GSF, and the creation o f specialized MFCs. Moreover, the mortgage foreclosure regime was modernized, the property registration system has been improved and fees reduced, and the private credit bureau i s now operational (Box3). In July 2009, Law 10 of 2009 was adopted to create the Egyptian Financial Supervisory Authority (EFSA), which subsumed the functions o f the MFA.

37. GSF was formed partly to channel subsidies to eligible lower-income groups o f the society. By law, the GSF must also provide temporary social safety for borrowers who experience adverse l i f e events, such as a loss of employment that leads to payment defaults. It would finance up to three monthly mortgage payments on behalf of borrowers in times of demonstrated social hardship; the costs of this program would be covered by fees charged on mortgage loans. But this i s perceived as insufficient to ensure any positive impact. MFA was established as a new regulatory institution for real-estate activities in 200 1. In July 2009, i t s functions were incorporated in EFSA.

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38. One recent development has been the incorporation of the Egyptian Mortgage Refinance Company (EMRC) in June 2006 with the

of the World Bank, which enabled qualified mortgage lenders to access term

better manage financial risks related to long-

refinancing operation in August 2008. The 2.5 I Mortgage Companies participating lenders were able to increase

credit affordability through lengthening the

Figure 2: Cumulative Outstanding Mortgage Loans

refinancing for their mortgage loans and 3.5

term mortgage lending (Box 4). It began its

their lending for housing and improve their

maturity o f mortgage loans. The EMRC will mostly rely for funding on issuing bonds and

EMRC to improve the efficiency of their

3

v)

2 2 - .- P W 1.5 cl

1

0.5

0

other securities in the capital market." The primary lenders will also be able to use the

portfolio and risk-management activities, which should help lower financial spreads in the market to the benefit of borrowers. EMRC i s expected to enhance access to housing finance in Egypt.

Dec 05 June 06 Dec 06 June 07 Dec 07 June 08 Oct. 0

39. The government i s making an effort to address property-registration issues to facilitate the development of primary markets. First, it has enacted major reductions in the fee structure (from 12 percent to 6 percent to 3.5 percent to a maximum flat fee of LE 2,000) that are expected to generate a significant increase in consumer demand for registration. Second, the government has undertaken to implement several urgent measures to alleviate current bottlenecks in the new urban communities, which are expected to be the main source o f demand for mortgage loans, at least in the initial stages o f market development. Third, the Government has recently launched a systematic title-adjudication, survey, and registration process to modernize the property registration system over the next several years.

40. Progress in imposing the legal, regulatory, and institutional environment, has been evident in the steady growth in outstanding housing loans made under the Real Estate Finance Law, to reach LE 3.1 billion as o f January 2009, accounting to less than 0.1 percent o f GDP-still relatively low." Nine non- bank MFCs were created, and others are currently being formed, but they s t i l l only account for a small share o f lending due to inadequate long-term funds and delays in registering property titles in the new urban communities.

lo The state-owned banks may be able to issue bonds in their own name on favorable terms, should the market perceive them to be government- guaranteed; in t h i s case the Government could, in turn, take on substantial market risks unintentionally. It would also tend to defeat the purposes of the Government's Financial-Sector Reform Program. " Of which 68 percent of these mortgage loans were made by banks, and the balance by MFCs, (MFA, June ZOOS).

- 13 -

Box 4: The Egyptian Mortgage Refinance Company (EMRC) EMRC i s a joint stock, wholesale (second tier), specialized liquidity facility operating on commercial principles with a profit making goal. It i s majority privately owned by the users of its fmancial services, mainly participating mortgage lenders (PMLs)--active banks and real estate lending companies. Many public and private lenders have joined the capitalization of the EMRC, which indicates their interest in expanding their mortgage lending. The CBE i s a strategic investor with around 20 percent ownership share; the GSF with a small, 2 percent ownership share, and 19 banks and 6 mortgage companies have the remaining shares. The EMRC will neither take deposits nor lend directly to households. It wil l help set up prudential lending standards while enhancing competition in the mortgage market by creating a fhnding source also accessible to non-depository institutions. I ts business i s the refinancing or purchase with recourse of longer-term residential mortgage loans originated by primary lenders for which it wi l l raise term funding by issuing bonds and notes in the capital markets.* This narrow mandate will strengthen the credit quality o f the bonds and thereby help to keep the EMRC’s cost o f fhnds relatively close to rates on government bonds. A mortgage lender, by borrowing from the EMRC, or at least by having the EMRC available when needed to serve as f i rst resort source o f finance, wi l l be better enabled to offer longer-term financing for residential housing development on market terms and conditions that are favorable for many potential homebuyers. Lenders wil l view the EMRC as a source o f liquidity they can tap at short notice.

There are a number of international examples of liquidity facilities, including the Federal Home Loan Banks in the US, Cagamas Berhad in Malaysia, Caisse de Refinancement de I’Habitat in France, the Jordan Mortgage Refinance Company, and the Swiss Pfandbriefe Institute. These institutions have similar missions but somewhat different structure, powers and privileges.

c. OVERVIEW OF HOUSING AND MORTGAGE SUBSIDIES

41, To help improve access to formal home ownership by low and middle income households, the Government o f Egypt has in the past provided a range of subsidies, through a plethora of special programs. Since the 1950s, social housing programs have focused on delivering finished and relatively high standard housing units, mainly in the new towns and satellite cities, and at the fringe of existing cities. These government programs are under different authorities; however, the housing models and payment conditions are remarkably similar and have changed l i t t le over time. Many of these public housing schemes continue to involve large government subsidies. Overall, they have imposed a heavy burden on public finances, making such efforts unsustainable, while satisfying only a small part of the demand and not reaching targeted income groups.

42. Production of government housing over the past decades has ranged from around 15,000 to 35,000 units annually, but has significantly increased under the current NHP which has fully committed a total of 500,000 subsidized units for newly constructed houses between 2005 and 201 1, an average of 85,000 subsidized units annually, for rental, leasing and ownership. The armed forces and Ministry of Interior have built additional public housing for their personnel. The largest portion of subsidized housing has traditionally been produced by government entities; Le., local government and governorates housing cooperatives-new towns and new urban communities under the NUCA-and smaller projects by government housing companies, the joint projects agency, the housing fund, the housing bank, and ‘Tamiir ’ agencies. Under the NHP, private developers have, for the first time, played a substantial role and have committed to bring approximately 95,000 units out of the 500,000 to the market and taking the market risk. An additional 100,000 units will have been produced by individuals under the “Ibni Beitak” or site and service component o f the NHP.

43. Importantly, the total direct and indirect subsidies for private sector delivered units have proven to be much lower (roughly one third of unit price) than those linked to government provided NHP units (up to 80 percent for leasing/ownership and 90 percent for rental units). Private sector entrepreneurs have adjusted unit sizes in order to reach the beneficiary groups stipulated by the NHP, while government entities have added subsidies when house prices proved unaffordable for the targeted income group. A

- 14-

breakdown of different programs under the NHP, with approximate direct and indirect subsidy levels including for land and services i s given below.

44. Housing subsidies in Egypt are typically supply-side subsidies from both national and local government and are cumulative. Several different subsidies are applied to each housing program. The Ministry o f Housing, Utilities and Urban Development and the World Bank have calculated approximate present value estimates o f all the different direct and indirect subsidies applied to various NHP programs:

(0 Direct on budget subsidies from national and local government: Direct subsidies to developers or local governments for unitdplots constructed under the NHP (a maximum of LE 15,000 per unit) for al l 500,000 housing solutions. Direct subsidies for infrastructure and public services provision (approximately LE 13,000 per unit) for al l 500,000 units.'* Construction costs supplements by NUCA and local government (approximately LE 8,000 per unit) for close to 300,000 units.

.

. (ii) Indirect (implicit) subsidies: . Subsidized state land that i s desert land and i s usually allocated to government authorities at

zero cost and to developers at prices that are well below market for all NHP provided units (approximate average o f LE 12,500 per unit). This subsidy i s granted to al l social housing developments and i s not restricted to NHP. Implicit housing finance subsidies through below market interest rates on mortgage loans issued by government banks (approximately LE 5,700 per unit) for close to 70,000 units and on construction loans through the NIB (approximately LE 17,000 per unit) for 200,000 units.

. 45. Total direct subsidies from the national budget are approximately LE 6.7 billion over six years (LE 1.1 billion annually). The total on- and off-budget NHP subsidies are estimated by the Ministry o f Housing, Utilities, and Urban Development to be in the order of LE 16 billion over the six year period or LE 2.8 billion per year, roughly 0.4 of the 2007 nominal GDP.

46. One o f the main issues in the implementation of the NHP i s that it i s increasingly difficult for developers to find lenders to finance construction and mortgages because of prescriptive and unrealistic terms on maximum loan repayments and income levels and restrictions placed on banks to lend for unfinished housing. Some government banks are currently participating in the NHP to finance houses built by NUCA and governorates and can only do so by internally cross subsidizing NHP loans and, worrisomely, increasing their exposure to interest rate risk,13 and credit risk (in order to reach the low initial monthly payment limits set by the government, amortization schedules include additional monthly (bullet) payments each year and other ways to make it possible to amortize the loan within the given term).

47. Subsidy targeting and allocation procedures used for current subsidy programs are another main concern. Government implemented housing programs under the NHP are aimed at households with a current maximum income well below the median (LE 640 based on a maximum monthly payment of LE 160 per month at 25 percent of income), without a system to adjust income targets over time. This income group cannot afford a newly built house with a market rate loan, even with the typical supply-side subsidy package. Nor do private lenders serve this income level yet. The outcome has been an increase in the general level of local government subsidies, hidden subsidies by government lenders and a gross misallocation of subsidies to households who can pay cash for a large part of the house cost. The

'' Key building materials, such as cement and steel bars, were subsidized in the past through the building permit regime. This subsidy has been discontinued. l3 This is mainly due to agreement on fixed interest rates that are well below market rates.

- 1 5 -

government continues to be bound in subsidy allocation for some 170,000 applicants for publicly- produced units announced and applied for prior to the issuance of the Prime Minister’s Decree raising the income ceiling for qualifying individuals (monthly income ceiling o f LE 2,500 per month for households instead o f 1,500).

48. NHP subsidies allocated through private developers o f LE 15,000 per unit, which are meant to be applied to lower the sales price o f the house, are only disbursed partially (LE 5,000) before construction and the rest when the unit i s delivered. Developers have been hesitant to incorporate the latter part o f the subsidy into the price o f the house. Similarly, government land allocated to private developers for social housing projects i s often not utilized in a timely fashion, forcing developments to go further out while large tract of serviced land remain vacant. Government has recently begun to enforce these contracts and has taken back land allocated for social housing that i s not utilized within the time-limit stipulated in the contract. It intends to enforce the land contracts with developers under the NHP which have a three year lead period for land utilization which i s ending soon for most developers.

49. Allocation of units in the NHP i s based on a basic point system where higher points are given for applicants that are older, have higher education levels, are married and are gainfully employed, preferably in the new town for which the application i s made. Governorates may have minor variations that add further requirements, as long as they do not contradict the main income or size stipulations. The system i s based on self-reporting while random spot checks are applied.

50. In 2006, a new small scale experimental mortgage-linked subsidy scheme was launched by GSF under the Ministry of Investment. This i s a demand side upfiont subsidy o f LE 15,000 to low and middle income households who take out a mortgage loan for a new or existing house priced below LE 95,000. The subsidy i s meant to reduce the down-payment requirement or, in case the household can contribute more than the required down-payment, the subsidy can be applied to the loan amount. Participating lenders are typical MFCs supervised by EFSA. The maximum income level for potential beneficiaries i s defined by executive orders linked to the Real Estate Finance Law 148 of 2001. I t has recently been updated to LE 2,500 per month for married couples and LE 1,750 for individuals up from LE 1,500 and LE 1,050 re~pectively.’~ GSF as a government entity was entitled to receive land and infrastructure subsidies for the construction of new housing and has accessed this subsidy by acting as a developer o f houses affordable to the targeted income group for their direct subsidy program, while at the same time assisting in “jump-starting” the mortgage sector. This development function i s no longer necessary and has been halted.

5 1. The GSF subsidy program has been implemented successfully and i s appreciated by participating lenders. Since the subsidy i s linked to a mortgage loan that lenders have to underwrite, household income verification and unit appraisal are done professionally. It disbursed approximately 5,000 subsides since 2006 o f which roughly 10 percent were applied to existing units and the bulk to new units. However, its funding base i s small, uncertain and ad hoc, and it i s therefore unsuitable to assist in the mortgage financing of larger scale new developments.

D. NEW AFFORDABLE MORTGAGE FINANCE PROGRAM

52. Approach of the new Affordable Mortgage Finance Program. The new program builds on lessons from the NHP and the experimental GSF program. It intends to gradually replace the supply-side subsidy approaches to housing delivery for low and middle income groups under the NHP and improve and expand GSF’s mortgage-linked demand-side subsidy program, as follows:

The Real Estate Finance Law no. 148 of 2001 terms this as “low income,” however, according to the CAPMAS figures, updated from their 2004-2005 income and expenditure survey, the LE 2,500 income level i s closer to the 90” percentile o f the income distribution.

- 1 6 -

. First, the direct subsidy to developers will be eliminated, and instead a transparent direct subsidy i s issued to qualifying beneficiary households.

Second, interest rate subsidies on the part of government banks will be eliminated and replaced by mortgage loans made at market rates by a variety o f lenders. The targeted income group will be households that are mortgageable, but are currently underserved.

Third, subsidies will not only be provided for new construction but for unfinished and existing housing as well and in existing and new urban areas.

Fourth, household targeting systems will be improved and gradually move to an indexation system when data bases are improved. Allocation systems will be based on a set of subsidy parameters that will align public and private objectives and reduce incentives to cheat. Professional lenders and appraisers will verify incomes and house-values. In addition, an independent monitoring system will verify outcomes.

Fifth, government will enforce land contracts with private developers who do not utilize the land within the given period of time and will assess alternative land allocation systems in the context of the urban strategy for Egypt.

Sixth, the bulk of the housing supply under the program will come from private large and small-scale developers.

Seventh, GSF will stop acting as a developer o f low/middle income housing but rather focus on the implementation of the new subsidy program.

.

.

.

.

.

. 53. The program and i ts technical assistance support intend to unleash several supply responses that will gradually increase a more diverse market supply of affordable housing and expand mortgage lending down-market, stimulate greater mobility in the existing stock, use of vacant and unfinished housing and the utilization of currently vacant but serviced land, which are all major issues in Egypt’s urban housing market (for details on the housing market in Egypt, please refer to Annex 3).

54. Instruments under the new program. The proposed mortgage-linked household subsidy has three parts-a market rate fixed rate mortgage loan, a minimum 20 percent down-payment by the household (which could be assisted by a savings program), and a demand subsidy to assist qualifying borrowers to pay for part of the monthly mortgage payments. This monthly payment assistance will decrease each year in line with expected increases in household incomes and will be phased out after approximately four to seven years when the household can handle the full monthly payment.

55. The choice o f a buy-down subsidy i s based on the fact that the monthly payments on a loan for a formal sector house are high relative to incomes in Egypt. Most Egyptian low and middle income households can rely on their extended family to collect the down-payment for the mortgage and would not need a subsidy for that purpose. The preferred subsidy mechanism for the program is, therefore, a monthly payment buy-down during the early years of the loan when the interest rate burden of a fixed rate mortgage i s highest (Le., a buy-down of the monthly payment).

56. The additional advantage of a buy-down i s that the borrower will only receive the full subsidy over time and has therefore an incentive not to default during the initial years of the loan which, as research has borne out, i s the most vulnerable period. For the low income end of the target population, for whom saving for the down-payment i s a constraint, upfront subsidies may be applied partly to lower (never eliminate) the down-payment amount to approximately 10 percent of the house price, or to lower

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the loan amount, and partly to buy down the monthly payments in the initial years of the mortgage loan.” (See Annex 4 for examples o f a buy-down instrument)

57. The critical provision for successful operation o f a buy-down i s that the present value o f the multi-year subsidy will be paid out upfi-ont to the lender, who will administer the funds over the course o f the buy-down period. Lenders will not participate if the disbursement of the subsidy i s scheduled yearly or over several periods. Experience in other countries has borne out that fact. This will necessitate a clear process where the lender will effectively hold funds in escrow as they are gradually disbursed. It will also require clear procedures in cases of early repayment o f the loan.

58. Adequate and effective targeting under the new program. Based on detailed analyses by the Ministry of Housing, Utilities, and Urban Development and GSF on incomes, house prices (mostly for new construction) and lending criteria, the initial target group will include households that: (i) have incomes between LE 2,500 and LE 1,000 per month (roughly the 90th to 45* percentile o f the urban household income distribution), and focused specifically on the LE 2,000 to LE 1,000 income group which i s the 75* to 45* percentile o f the urban household income distribution; (ii) are creditworthy (need to be approved by lenders for a loan); (iii) are f irst time home-buyers o f either a new house or an unfinished or existing house, in either the new communities or in existing urban and semi-urban areas; and (iv) did not receive any form o f a housing subsidy before. Given the vulnerability of the middle class, focusing on this segment i s justified from a social and welfare perspective. The private sector will not provide housing for this income group without access to subsidies and mortgage finance. And without housing support to low middle income households, experience within and outside Egypt has proven that whatever housing i s made available for low-income groups will end up in the hands o f middle income households. The program will aim to gradually increase the proportion o f household at the lower income end of the targeted range.

59. Efficiency and equity gains. The Affordable Mortgage Finance Program i s considerably more cost efficient than government provided lease and home-ownership options under the NHP, because it leverages household and private financial sector resources and cuts out the local government construction costs subsidies and the mortgage finance subsidies, which together account for a large part of total NHP subsidies. In addition, efficiency gains are made by including not just new but existing housing in already built up and serviced urban locations. Lastly, allocation of subsidies will improve, since the process i s driven by demand rather than administrative procedures.

60. From an equity perspective, subsidies within the targeted income bracket will decrease with increasing incomes and will gradually focus on the lower income end of the income range. There will be a smooth transition to subsidy programs planned for the poor (with income below LE 1,000) who do not qualify for a mortgage loan as their saving ability and capacity to mobilize funds is limited.

61. The Affordable Mortgage Finance Program in the context of the future housing subsidy policy. The total government subsidy package currently being discussed to replace the NHP in 2012 consists of two main components: the new mortgage linked subsidy (65,000) and around 20,000 units for new housing programs for the lowest income groups, including, subsidized rentals and infrastructure only programs, which require progressively higher subsidies and more direct government involvement. In the early years of the new 2012 housing policy, the mortgage linked subsidy may not yet be able to reach the planned 65,000 subsidies, but scaling up i s expected to quickly reach the planned numbers.

62. Allocation procedures. New guidelines for how the subsidy allocation can be made more transparent are being developed jointly with lenders. While GSF will maintain a waiting list of potential

Is An upfront subsidy to lower the loan amount should be considered in times of very high interest rates when it i s more efficient to keep down the loan amount.

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beneficiaries, allocation mechanisms will be run through private lenders who are responsible for background checking of their borrowers and appraisal o f the property value before they receive final approval from GSF. Household incomes have proven difficult to check and government wants to move away from allocation systems based singularly on declared incomes. Government also prefers not to put a cap on house prices since that will create market distortions and misallocations. In addition, with the varied locations (urban and semi-urban, new and older urban areas) and the inclusion o f new as well as existing and unfinished houses in this program, house price targeting will not be very meaningful. For that reason a combination of loan terms has been discussed with lenders that will provide disincentives to those who want to cheat on income to maximize the subsidy amount because they will qualify for a lower loan amount and hence for a lower priced unit.

63. One specific measure to indirectly limit house-prices i s the provision to cap the down-payment amount to one third of the house price, which puts a cap on the maximum house price for different income groups and eliminates the group that has sufficient wealth to pay cash for more than one third o f the price. Home appraisals will be conducted by professional appraisers who have been trained and vetted by MFA and EFSA (currently 131 qualified appraisers have passed MFA’s training). Lenders are confident that they can get a fair reading o f income and house value under these conditions. Special procedural protocols for underwriting and subsidy allocation will be developed for new, existing and unfinished registerable houses.16 An independent monitoring system will be put in place to detect mis- targeting and misallocation at an early stage.

64. Program parameters. Based on the above considerations the proposed parameters o f the subsidy program are as follows: (i) subsidy amount should decrease with income; (ii) buy-down subsidy amounts should decrease over time and be limited to the first 4 to 7 years of payment depending on income; (iii) maximum allowable payment-to-income ratio could be set at a higher level than the present 25 percent (allowed to go up to 33 percent) in order for lenders to apply a higher payment-to-income (PTI) for more creditworthy households; (iv) beneficiaries should take out an affordable loan (determined by income and subsidy and based on lender underwriting criteria) that typically increases with income; (v) beneficiaries would pay a minimum down payment o f 20 percent of the value o f the house (using official appraisals) or the subsidy will pay part o f the required 20 percent down-payment to create owner equity in the house and minimize the chance of negative equity; and (vi) the maximum allowable down payment would be 33 percent in order to (indirectly) cap effective house-prices and improve targeting (see above). Since there will not be an actual cap on house prices under the program, a cap on the total financing package has to be put in place.

65. Regular adjustment of program parameters. This should be institutionalized and ideally some o f the parameters should be indexed upon trustworthy data on income, house-price and interest rate movements. Such data do not exist yet to make that possible, so adjustments have to be based on regular analyses of existing Central Agency for Public Mobilization and Statistics (CAPMAS) data on income/consumption and construction prices, and critically on monitoring and evaluation studies of the new program that will be presented to the Housing Subsidy Policy Committee for review and action. The policy committee will make proposals for parameter changes in decrees and laws. When data bases strengthen, indexation and modeling o f the parameters should become feasible.

66. Phasing in and potential cost. The current NHP has been fully committed through 201 1 and government i s obliged to adhere to negotiated conditions under the NHP. Additional budget funding has, therefore, to be allocated to the Affordable Mortgage Finance Program, during the 2009 to 2012 period. For the new program to be ready to reach the required scale o f 65,000 mortgage linked subsidies by the early years of the new subsidy policy that starts in 2012, a gradual phasing in i s proposed starting in

l6 Unfinished houses will have to be occupied by the subsidy beneficiary. These houses can not currently be mortgaged by banks under the CBE regulation.

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2009/2010. This will allow GSF to build up i t s human resource and technological capacity to implement a program of such large scale.

67. To estimate preliminary total subsidy amounts required for the program, the following range o f subsidy amounts per household (down-payment plus the present value for the buy-down component) i s assumed which decrease proportionally by income; a maximum o f LE 25,000 for the lowest income group of LE 1,000 per month and a minimum of LE 6,250 for the highest income group of LE 2,500 per month. For the low income group (approximately below LE 1,500) the subsidy amount i s divided over a down payment and a buy-down subsidy. In addition, the following assumptions were made on the proportion o f beneficiary income groups in the overall program: one third in the income range of LE 1,000 to LE 1,499; one third in the range of LE 1,500 to LE 1,999 and one third above LE 2,000. Based on these assumptions and using Q1 2009 market conditions” to calculate loan and subsidy amounts, the average subsidy amount for the first year i s LE 16,300. Under a phased implementation scenario discussed by the taskforce, the total cost per year would look as follows:

FY 2010: 10,000 beneficiaries @ LE 16,300; total cost LE 163 million

FY 2011: 20,000 beneficiaries @ LE 17,200; total cost LE 344 million

FY 2012: 35,000 beneficiaries @ LE 18,150; total cost LE 635 million

FY 2013: 65,000 beneficiaries @ LE 19,200; total cost LE 1,247 million

68. The total amount o f subsidy funds required for the first three years i s LE 1.142 billion (approximately US$200 million). After the initial three year period there will be a significant scaling up o f the program which will disburse 65,000 subsidies per year in a permanent regime amounting to around LE 1.5 billion in current terms or approximately US$220 million. Since the mortgage subsidy i s demand driven, the actual numbers will reflect effective demand for specific market segments, Le., new and existing houses in varied locations. Also, changes in interest rates, which are currently on a downward trend, will have a major impact on affordable loan sizes and hence the required subsidy amounts. Lastly, final subsidy levels set by the policy committee may differ from this example scenario.

IV. BANK S U P P O R T TO THE G O V E R N M E N T ’ S PROGRAM

A. LINKS TO THE COUNTRY ASSISTANCE STRATEGY

69. The proposed Affordable Mortgage Finance Program DPL addresses two o f the key strategic objective o f the Country Assistance Strategy (CAS) for the period 2006-2009, and the CAS Progress Report for the period 2006-201 1, namely; (i) facilitating private sector development through improving financial sector Fompetitiveness and efficiency; and (ii) promoting equity and attaining an exclusive system. The program aims at redefining the new objectives and role for the state, enhancing the capacity o f the financial system to facilitate private sector development; and improving access to finance especially for the disadvantaged. The CAS envisages support to the mortgage finance market and improving affordability through the proposed DPL.

B. COLLABORATION WITH THE IMF AND OTHER DONORS

70. To carry out the program, the authorities have also sought financial and technical support from

” Interest rate i s 14 percent, 180 monthsho bullets, 25 to 33 percent payment-to income ratio, buy-down subsidy decreasing over 4 to 7 years depending on income level, nominal upfront subsidies remain constant over time; see annex 4.

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various development partners, including, the IMF, and the US.” At the request of the government, the Bank i s playing a coordination role among donors in the financial sector through a Financial Sector Donors Group that it chairs in the field. The close collaboration between the Bank and development partners seeks to eliminate duplication, emphasize the respective strengths of donors’ efforts, and make more optimal use of available grant and loan resources available to the Government o f Egypt. The Fund’s Assessment Letter of the Government’s reforms i s in Annex 8. There i s also good collaboration between the World Bank and the IMF in Egypt in the financial sector, through the joint Financial Sector Assessment Program (FSAP) and coordination o f technical assistance.

71. Among the bilateral donors working closely with the Bank i s the USAID, which i s providing technical assistance in many areas, including strengthening the legal and regulatory framework for the mortgage market, modernizing the property registration system, securitization, dispute resolution, and enforcement of mortgage collateral under i t s on-going Egypt Financial Services Project (EFS). In addition, there i s the USAID-funded project, Technical Assistance for Policy Reform I1 (TAPR II), which

‘has undertaken two key studies in 2007: Housing Demand in Greater Cairo, the first comprehensive housing demand survey carried out in the last 30 years,lg and the 2007 Analysis of Subsidized Housing Programs that assessed past, existing and pipeline housing subsidy programs in Egypt to draw lessons learned, comparing features of NHP with previous programs, These two studies were followed by a joint World Bank-USAID report, Framework for Housing Policy Reform in Urban Areas in Egypt in 2008. Annex 3 which gives a detailed overview o f the housing market in Greater Cairo i s based on the findings o f these joint studies.

c. RELATIONSHIP TO OTHER BANK ACTIVITIES

72. The World Bank Group’s work in Egypt’s financial sector has been exemplary in the sense that support has been provided through a continuum o f instruments, from analytical work (including successive FSAPs), technical assistance, and lending from International Bank for Reconstruction and Development (IBRD), to advisory services from the Consultative Group to Assist the Poor (CGAP), as well as International Finance Corporation (IFC) investments. The synergies between these various instruments have proven critical to the success of the overall engagement.

73. The proposed operation i s closely linked as well to the Mortgage Finance Project (US37.1 million) that was approved by the Board in July 2006, which aims to: (i) establish a mortgage finance liquidity facility; and (ii) strengthen the regulatory framework for mortgage lending; and (iii) modernize property rights registration.20 The Mortgage Finance Project has been very successful, achieving tangible results on the ground, most notably the establishment o f EMRC, modernization of mortgage foreclosure regime, and streamlining property registration system. The Mortgage Finance Project and this proposed DPL are mutually reinforcing as the triggers identified under this operation are addressing impediments to the development of the mortgage market, and several of the measures supported under the mortgage project would reinforce the objectives of the proposed financial sector operation in building a resilient financial system.

74. The proposed DPL i s also related to the two previous Financial Sector DPLs that aimed at supporting the government in implementing the two phases of the “Financial Sector Reform Program”,

Is Support provided by USAID for the Financial Sector Reform Program, includes: (i) financial sector reform-MOU (US$1.2 billion) in the form of budget support; (ii) reform o f the commercial law (US25 million); (iii) banking sector reform (US$IOOmillion); (iv) capital market reforms (US$37 million); (v) mortgage finance (US$40 million); and (vi) insurance sector (US$50 million). EU support for the financial sector reform program i s provided through the FISC financial program that was launched late 2004 covering the period from 2005 to end of 2009, with a budget of Euro 15 million covering the payment system (Euro 2 million), banking supervision (Euro 2.4 million), public bank restructuring (Euro 8 million), and capital markets (Euro 2.6 million). EU i s currently finalizing a follow-up program which i s expected to be launched in mid 2009. l 9 This i s based on a Housing Demand Survey conducted in December 2006, that yielded results that shed light on the housing market, especially demand and household characteristics, in the Greater Cairo area. ’“The project i s currently being successfully implemented and already has positive impact on the ground.

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respectively.2' These Financial Sector DPLs aimed at strengthening the enabling environment for financial intermediation, resource mobilization and risk management, and increased private participation in the provision of financial services. Specifically, these operations supported policy reforms in the following areas: (i) significant reduction o f state ownership in the banking system; (ii) financial and operational restructuring of state-owned commercial banks and specialized banks; (iii) strengthening the regulatory and supervisory framework for the banking sector; (iv) improving the efficiency of capital markets; and (v) strengthening financial sector institutional infrastructure, including the operation of the first private credit bureau which helped to improve contract enforcement and creditor protection, as well as the establishment o f the Specialized Economic Court to address problems of bankruptcy, foreclosure, and cumbersome judicial system, and regulatory framework for microfinance.

75. CGAP has provided analyses and recommendations with respect to Egypt's access to finance efforts. CGAP has provided support to the government in the creation of a microlending non-bank financial institution category o f companies aimed at building a sustainable and robust microcredit sector. In addition, CGAP has promoted the exploration of opportunities for greater penetration o f financial services to the low-income population through branchless banking.

76. IFC has assisted several banks through its Banking Advisory Services. For example, IFC has collaborated with the World Bank to set-up EMRC and has taken an equity position in the company. In addition, IFC i s also proving advisory work and technical assistance to EMRC through IFC PEP-MENA, as well as to i-Score, to help start-up the first private credit bureau in Egypt. The proposed DPL builds on analytical and diagnostic work that has been undertaken by the Bank and other development partners (see development partners section below).

D. PARTICIPATION AND CONSULTATION

77. This operation builds on the priorities identified by the Government o f Egypt during several high- level Ministerial policy workshops undertaken in April, May and September 2007. The joint World Bank and USAID work on housing policy prepared the foundation for these dialogues. This work emphasized that expansion o f access to mortgage finance was one critical component o f improving affordability o f housing and key to lower current levels of deep supply-side subsidies and reduce rampant misallocation o f housing subsidies. In September 2007, the Minister o f Investment and the Minister of Housing, Utilities, and Urban Development approached the World Bank team with the request to assist the government to design a mortgage-linked subsidy program to replace the NHP. In that context, an inter- ministerial taskforce was established as the local counterpart to the World Bank team and as a precursor to the committee that will guide the implementation and adjustment of the subsidy program. The taskforce collected the necessary information for program design and worked with the World Bank team, including in between missions, on the formulation o f program parameters and implementation mechanisms. In addition, the economic advisor to the Minister of Housing, Utilities, and Urban Development, and co- chair of the taskforce jointly with the chairman o f the then MFA, held other consultation meetings with the World Bank in January 2008 on the design of the program.

78. The preparation of the details o f the DPL were achieved in a truly participatory way through frequent meetings between the key technical counterparts in both Ministries from 2007 through 2009 and substantial inputs by the World Bank team. At the end of each mission a detailed debriefing to both Ministers and their technical staff was prepared. Extensive and frequent consultations were also held with a range of developers and lenders, both banks and non-depository financial institutions and a workshop with lenders and senior policy-makers was conducted by the taskforce and the World Bank team in July 2008 to receive input on the proposed subsidy and loan mechanisms. The recommendations made by the lenders and developers were extremely helpful in the preparation o f the final design of the program.

2 1 Financial Sector Development Policy Loan I was approved by the Board in June 2006, and Second Financial Sector DPL I1 was approved by the Board in May 2008.

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Lastly, key government advisors and senior staff received training in housing finance and housing subsidy design at the MFP o f the Wharton School, University of Pennsylvania, which facilitated constructive exchanges on how best to expand the mortgage sector to low and middle income groups.

E. ANALYTICAL UNDERPINNINGS

79. Well documented international experiences and academic studies analyzing and comparing different housing subsidy programs have been instrumental in developing the Affordable Mortgage Finance Program. Studies by Hoek-Smit and Diamond, 2008, document 25 different case studies of housing finance linked subsidy systems including Chile, Mexico, Morocco, Jordan and South Africa and are in turn based on detailed evaluation studies. The recommendations coming out o f the extensive international experiences with housing finance subsidies focus on a two-pronged subsidy policy approach to cover the large underserved population in most emerging market economies:

(i) extend mortgage lending down-market and in scale and provide complementary subsidies for home-purchase to households who could qualify for a mortgage to buy new and existing housing. The latter i s particularly important to gradually decrease vacancies and create mobility; and

(ii) for low income household develop more comprehensive housing strategies such as rental options and partial self-construction programs. This i s the path Egypt i s now following.

80. Several other Bank finance studies provide analytical underpinning to the design o f the proposed operation, including the 2008 FSAP Update, the 2007 report on Access to Finance and Economic Growth, the 2008 IFC Financing Homes report which recommends that enhancing access to affordable housing for the poor and improving housing finance subsidies should be given high priority, and the 2007 Finance for All: Policies and Pitfalls in Expanding Access report.

81. Major studies were also conducted by the Bank on urban development issues and the housing sector in Egypt, including: the 2006 Egypt Public Land Management Strategy, the 2007 Analysis of Housing Supply Mechanisms and the 2007 Moving f rom a Program-Based to a Policy-Based Approach to Housing in Egypt. These studies show the inefficiencies in current land allocation, land planning and building regulations and make recommendations for change. The new Building Law 119 o f 2008 has incorporated many of recommended actions. Technical assistance was provided directly to the Ministry of Housing, Utilities, and Urban Development on analyzing current housing subsidies. The data quoted in this report on NHP subsidy levels and issues with its implementation stem from these detailed studies. General urban sector work by the Bank such as the 2008 Urban Sector Strategy, were relevant in the preparation of the project as well.

82. These studies concluded that the urban housing crisis in Egypt i s not necessarily about scarcity of housing, but about distortions in the market that have caused a mismatch between demand and supply. The problem manifests itself in high vacancy rates and an oversupply of formal housing for upper-middle income groups, while there i s a shortage of formal housing supply for low and middle income groups in alternative locations.

83. Past and current subsidy programs, with their singular focus on new construction o f relatively high standard housing on the periphery, have escalated rather than alleviated these issues. Low and middle income groups have therefore continued to opt for shelter in the informal sector. The development o f the mortgage sector opens up demand by the middle income segment of this underserved population, but past studies showed that there i s a need for some financial support under current conditions of high house-prices and high interest rates. Access to mortgage finance for this group i s needed to allow the purchase o f new and existing houses, including vacant units, rental units by sitting tenants and in general to increase mobility in the housing market. This program i s based on the detailed market and policy analyses o f those studies and follows the recommendations of the Framework Study.

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84. Additional policy recommendations from these studies dealt with the need for changes in the regulatory and institutional context to eliminate distortions and improve housing market efficiency; e.g., find ways to speed up the phasing out o f rent-control and bringing more rental units under the “new” rent law of 1996, change land management and land allocation systems and adjust subdivision (density) and planning requirements.

F. LESSONS LEARNED FROM THE CURRENT MORTGAGE CRISIS

85. The current mortgage crisis in the US has revealed that closely monitored subsidized housing programs under the Federal Housing Administration with strictly enforced loan characteristics and underwriting requirements (specifically loan-to-value ratios, debt-to-income and payment-to-income requirements, the use of Fixed Rate Mortgages and strict documentation guidelines) and/or Community Reinvestment Act compliant loans in low income neighborhoods, were not involved in the subprime debacle. Subprime mortgages were indeed not specifically a problem o f low income households but affected middle and higher income households just as much.

86. The main cause was irresponsible lending terms that focused singularly on making loans affordable at the outset and irrespective of future repayment shocks. Apart from fraudulent practices, this type o f lending was based on the assumption that house prices would continue to increase and refinancing would remain an option in case future loan payments became unaffordable. Loan practices currently being considered or implemented to comply with the mismatch between incomes and payment limits

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under the NHP are o f great concern and are one of the reasons to develop a rational program to subsidize mortgage linked subsidies in Egypt that adheres to sound lending principles and does not force mortgage loans onto a target group that i s unlikely to handle long-term loans.

87. The extension of mortgage lending for low and middle income households often requires liquidity support, credit insurance as well as direct household subsidies to this segment. Several countries have combined non-distortionary supply support to the financial sector with some form of transparent household subsidies. Mexico and Morocco are also examples of countries where special mortgage insurance was introduced to expand mortgage lending to mortgageable households. Some international examples o f support to the housing finance sector through liquidity funding and/or credit insurance are included in Annex 6.

V. THE PROPOSED OPERATION

A. OBJECTIVES AND RATIONALE OF OPERATION

i. 0 b j ec tive

88. The main developmental objective o f the DPL i s to reform the current system o f inefficient and poorly targeted supply-side subsidies for housing for the broad low and middle income sector and replace them with a transparent and economically efficient demand side subsidy system that i s expected to: (i) leverage substantial private sector resources for housing and free up national and local government resources for programs for the lowest income groups; (ii) expand access to mortgage finance through transparent demand subsidies compatible with the country’s developing market-based mortgage system; (iii) eliminate financial risks imbedded in the mortgage programs affiliated with the current NHP; and (iv) create a more transparent and equitable targeting and allocation system for housing subsidies and an effective monitoring system that will help in adjusting subsidies to changing market conditions and their phasing out when no longer needed.

ii. Rationale

89. The proposed operation intends to ensure the achievement o f the strategic objectives of the CAS o f 2005, and the CAS Progress Report o f 2008. I t addresses two key strategic objectives of the CAS, namely: (i) facilitating private sector development through improving financial sector competitiveness and efficiency; and (ii) promoting equity. The operation would contribute to the consolidation of the reform, the further development o f the financial sector, and enhancing access to financial intermediation. Providing affordable housing i s a key priority on the Government of Egypt’s agenda. The government has been working on designing and implementing a new Affordable Mortgage Finance Program. The current political and economic momentum associated with the NHP as part of the Presidential pledges, provides an opportune moment to implement such a program and the associated policy changes to creating a more efficient housing finance market. With the development o f the mortgage market it has become feasible to implement a demand oriented household subsidy linked to commercial mortgage credit that can generate a supply response in both new and existing housing markets.

B. POLICY AREAS

90. The proposed operation will support the Government o f Egypt in implementing a new Affordable Mortgage Finance Program. In that context, the DPL has three main components as follows: (i) strengthening the legal, regulatory and institutional framework for the Mortgage Finance Subsidies Program to create a robust demand driven and credit linked subsidy scheme for creditworthy but underserved low and middle income groups; (ii) developing an effective and efficient Mortgage Finance

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Subsidies mechanism to have implementation systems created that allow the program to be implemented in new, as well as, existing urban areas, for new, existing and unfinished houses to have the maximum impact on household choice, mobility and market efficiency; and (iii) improving the institutional framework to enhance transparency and targeting o f housing subsidies-basically eliminate implicit subsidies through government lenders and direct subsidies to developers, and preparing a schedule for the gradual decrease in supply subsidies for land and infrastructure.

91, The Operational Policy Matrix (Annex 2) describes the logic of the program by showing for each of the components of the program, the main axes through which the main objective i s expected to be attained, as well as the key actions and the specific measures to be implemented during the course o f the program. Moreover, to guide the supervision of the program, efforts were made to specify baselines and expected outcomes. Given that this i s a three-tranche operation, the matrix and the text below are explicit about the measures to be implemented by the government under each tranche.

92, The program includes prior actions (first tranche), and conditions o f second and third tranche release. The right balance has been struck between the critical importance of ownership, the required ambition of the reform program and realism and effectiveness o f implementation within the timeframe o f the program.

C. OPERATION DESCRIPTION

93. The proposed DPL would support the Government o f Egypt in implementing the Affordable Mortgage Finance Program which would gradually replace the supply-side subsidies that had been commonly used. In order to develop an effective and efficient housing subsidy mechanism, a number o f preconditions must be met. Some aim at strengthening the legal, regulatory and institutional framework, others at adopting ad-hoc financial reforms. The future improvement of the subsidy program requires additional measures to enhance i t s transparency and targeting.

I. STRENGTHENING THE LEGAL, REGULATORY AND INSTITUTIONAL FRAMEWORK FOR THE MORTGAGE FINANCE SUBSIDY PROGRAM

94. Affordable Mortgage Finance Program. This objective i s pursued through the following actions:

The main objective i s to adopt the necessary policy measures to design and implement the

(i) Adopt policy measures to create and adjust a demand-driven and credit-linked subsidy scheme. The Program i s under the joint responsibility o f the Ministry of Investment and the Ministry of Housing, Utilities and Urban Development and will be operated by GSF. It i s therefore necessary to establish a consultative (i.e. not decision-making) Housing Subsidy Policy Committee which would advise on the development and implementation o f the program. Specifically, it would design the core features o f the new subsidy program and prepare the necessary adjustments over time. Both the creation of the Committee and the core features of the program would require ministerial decrees. The enactment o f the decrees would be conditions to the first tranche o f the loan. Relevant amendments and updates of main parameters, when planned revisions prove such changes necessary, will be specific conditions for the second and third tranches. As a condition for the third tranche, the creation of a model will be required for adjustment o f parameters based on macro-economic and housing sector indices.

(ii) Strengthen the GSF-the implementing entity for the new subsidy program. GSF currently implements both a mortgage payment guarantee program and a mortgage linked subsidy program and used to act as a developer. The guarantee program reimburses lenders for some missed payments and i s considered a temporary program that will be replaced by a regular market based mortgage insurance program when data on credit risk are available and the credit risk can be priced. The role of GSF in such mortgage insurance program i s not yet clear. One possibility i s

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that it may share some o f the risk with private insurers. Alternative guarantee products may be needed as well. For GSF to engage in a risk-taking activity requires that it i s separated into two units, a guaranty and a subsidy unit. This should be done progressively, first, by separating functions and staff that manage the current guarantees and the old and new subsidies, and in the later years of the DPL when GSF’s role in a new mortgage default insurance program (or other types of guarantee) has been defined, by creating distinct capitalized units. 22 The former i s a condition for the second tranche of the loan and the latter i s a condition for the third tranche. Real Estate Finance Law 148 o f 2001 regulates the GSF and will have to be amended accordingly.

95. Component I First tranche Drior actions: (i) enactment of a joint Ministerial Decree to establish the Housing Finance Subsidy Policy Committee and to determine the core features o f the new subsidy program. The decree includes the composition and responsibilities of the Committee. Membership includes the Ministry of Investment, Ministry o f Housing, Utilities and Urban Development, MFA-EFSA and GSF, as well as governorates, local authorities, and, on an ad hoc basis, associate market players (including, developers, banks and mortgage companies). Its functions would consist of making proposals on policy, budgeting, regulation, eligibility criteria, identifying beneficiaries, guiding the monitoring of the program and adjusting it when needed. The decree also determines the core features o f the new subsidy program-targeting by income, type of units both new and existing, locations, type of tenure, nature o f subsidy, lending criteria, land allocation criteria, and procedures to adjust parameters; (ii) issuance and submission to the Prime Minister, of a joint Ministerial Memo from the Minister o f Investment and Minister of Housing, Utilities and Urban Development to separating functions and staff for subsidy and guarantee operations o f GSF, as a first step towards a full separation; and (iii) issuance of joint Ministerial Memo from the Minister o f Investment, and the Minister of Housing, Utilities and Urban Development, which i s approved by the Prime Minister halting the property development role of GSF to avoid conflicts o f interest.

96. Status of Component I j i rs t tranche prior actions: (i) joint Ministerial Decree 166 o f 2009 by both Ministers o f Investment, and Housing, Utilities, and Urban Development; establishing the Housing Subsidy Policy Committee and determining the core features o f the new subsidy program was issued on August 3, 2009; (ii) joint Ministerial Memo from the Minister of Investment and Minister o f Housing, Utilities and Urban Development to separating functions and staff for subsidy and guarantee operations of GSF was issued on February 9, 2009, and approved by the Prime Minister on March 21, 2009; and (iii) joint Ministerial Memo by Minister o f Investment and Minister of Housing, Utilities and Urban Development, halting the property development role of GSF was issued on February 9, 2009, and approved.

97. ComDonent I-Second tranche actions to be taken: strengthening the legal, regulatory and institutional framework for the Mortgage Finance Subsidies Program through determination of the subsidy parameters in line with changes in macro-economic and housing sector changes.

98. ComDonent I-Third tranche actions to be taken: strengthening the legal, regulatory and institutional framework for the Mortgage Finance Subsidies Program by introduction of a mortgage insurance or guarantee function.

*’ The GSF may also undertake other market-oriented activities through its guarantee activities, which should be totally separate from activities dedicated to channel and assess subsidies. On the guarantee side, priority consideration may be given to: (i) pre-titling guarantees for housing lenders, in order to cover the credit risk for a limited period until the mortgage lien i s registered; and (ii) a mortgage-insurance program with or without private sector partners covering part of the mortgage debt for the lender (therefore sharing part o f the credit risk) and facilitating access to housing finance.

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11. DEVELOPING AN EFFECTIVE AND EFFICIENT MORTGAGE FINANCE SUBSIDY MECHANISM

99. The new subsidy program will be based on a combination o f an upfront subsidy and a monthly payment buy-down subsidy limited to the first years of the loan and decreasing over time. Lenders will be at the frontline in taking the subsidy application from qualifying borrowers and GSF will have to vet the applications and disburse the funds. Technical and institutional systems have to be developed for the efficient operation o f the program. This objective i s pursued through the following two main actions:

(0 Design, implement and regularly adjust according to monitoring and impact evaluations, a new mortgage-linked subsidy program that covers new and existing affordable housing. Program design and implementation require that: (a) a complete Business Plan and Operational Manual for the program i s in place, which includes al l program parameters such as targeting by income, type of units, locations, nature of subsidy, lending and land allocation criteria, and subsidy adjustment methods, as well as underwriting and process guidelines for lenders for different types of properties-new, existing and unfinished units; and efficient and trusted disbursement procedures to lenders; (b) amending o f GSF procedures pertaining to the inclusion of existing and unfinished units in the mortgage subsidy program; (c) regular monitoring and evaluation studies will be conducted; the first one will be made available for examination by the Housing Subsidy Policy Committee and the World Bank at least six months before the deadline set for the disbursement o f tranche three of the loan.

(ii) Scaling-up of ex-GSF subsidy section as the institution in charge of the subsidy program. The key step i s the issuance o f joint Ministerial Memo from Ministry of Investment, and Ministry of Housing, Utilities and Urban Development, endorsed by the Prime Minister, announcing that GSF i s the implementing entity for the new subsidy program. More importantly, GSF has to scale up its operations and prepare for the efficient implementation of the program. GSF has over the last few years administered a small upfront subsidy program with participating MFCs. While the process that was developed was efficient and lenders received approval for applications and disbursement o f subsidies in a timely way, the program i s extremely small relative to the new program. Quite a number of separate actions and data entry systems are involved and these have to be scaled-up or developed for the new program (for example, applicants have to be checked against data basis from different subsidy programs, household income, property and loan characteristics have to be checked and recorded), monitoring systems have to be established. Ultimately, systems have to be integrated across al l stakeholders and across urban areas so that documents can be shared in real time. The new GSF's Business Plan has to incorporate in its subsidy section these new functions and scale of operation. An on- and off-site monitoring and evaluation systems and a reporting system to the Committee, should be in place prior to the disbursement of the second tranche. This latter i s a critical task since in relation to the need for ongoing refinement and adjustment o f the program which should be based on monitoring input. This will be the first time that housing programs will be systematically monitored and extensively evaluated.

100. ComDonent 11-First tranche Drior actions: (i) adoption by GSF's Board and endorsement by the Minister of Investmeqt of the Business Plan and Operational Manual for the Affordable Mortgage Finance Program; and (ii) issuance of ajoint Ministerial Memo by Minister o f Investment and Minister of Housing, Util i t ies and Urban Development indicating that GSF i s the implementing agency for the Affordable Mortgage Subsidy Program.

101, Status of Component II first tranche prior actions: (i) both the GSF Business Plan and Operational Manual have been drafted and finalized in early June 2009, and approved by Housing Subsidy Policy Committee (HSPC) on June 28, 2009, was issued by GSF Board, and endorsed by the Minister of Investment on July 2,2009; and (ii) joint Ministerial Memo by the Minister of Investment and the Minister of Housing, Utilities, and Urban Development was issued on February 2, 2009, and was

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endorsed by the Prime Minister on March 21, 2009 specifying GSF’s new role and responsibilities as implementing agency for the Affordable Mortgage Subsidy Program, and including the separation of the guarantee and subsidy functions of GSF.

102. Component 11-Second tranche actions to be taken: development o f an effective and efficient mortgage finance subsidy mechanism through establishment by the Ministry of Investment of on- and off- site monitoring and evaluation systems.

103. Component 11-Third tranche actions to be taken: further development of an effective and efficient mortgage finance subsidy mechanism through taking into account the results of. the first impact evaluation.

111. IMPROVING THE INSTITUTIONAL FRAMEWORK TO ENHANCE TRANSPARENCY AND TARGETING OF HOUSING SUBSIDIES

104. One of the main objectives of the program i s to create a more transparent housing subsidy system as well as reducing its overall costs. Since supply-side subsidies are deeply ingrained in the Egyptian housing system, a new approach has to be introduced gradually in order not to create a sudden price shock. A complete move to demand side subsidies requires, moreover, much better data on the housing sector and households (in particular household income and house prices) than are currently available in Egypt. The second main objective i s to improve the allocation system for housing subsidies to make sure that the actual beneficiaries are in fact the targeted population. These objectives of the DPL are reflected as follows:

(0 Reduce supply-side constraints for subsidized housing. One o f the procedures that can slowdown the issuance o f mortgages and therefore of the subsidies i s the deed or title registration, particularly for housing units in existing urban areas. While there i s a protocol to fast track land registration for new units in new urban communities, this fast tracking agreement has to be extended to include property registration for existing mortgageable properties under the program. A second supply side measure i s to make sure that new housing under the subsidy program will not expand on new lands on the periphery while existing land previously allocated to social housing has not yet been utilized. It i s therefore critical that the Ministry o f Housing, Utilities, and Urban Development executes measures to withdraw previously allocated but unutilized land for affordable housing. A third constraint on the supply side i s the inefficiency of building and planning standards for new housing. Implementation o f the Executive Regulation linked to Building Law 119 of 2008 on density standards for new developments will result in a cost reduction for the new programs and should be completed for the second tranche to be disbursed. Lastly, public land allocation mechanisms are unnecessarily generous and do not create a competitive environment for land or an efficient use o f land. The government i s looking into methods to improve land allocation for different types o f urban uses. A trigger for the third tranche is therefore that Ministry of Housing, Utilities, and Urban Development will have undertaken an assessment of land allocation methods in the context o f the country’s urban development strategy. These measures together will come a long way to improve supply side efficiency of land and housing.

(io Improve the legal and regulatory framework to ensure adequate targeting for affordable housing. First a tracking system should be put in place to eliminate double subsidy allocations to households between the proposed mortgage finance subsidy scheme and any other scheme, including GSF and NHP subsidies. Second, current maximum debt to payment ratio o f 25 percent defined in Law 148 of 2001 does not offer lenders sufficient flexibility to allow a higher PTI ratio to creditworthy customers. In addition, maximum income levels for mortgage linked subsidy programs are set in Prime Ministerial Decree and are therefore often poorly aligned with movements in macro-economic conditions or income changes. Executive Regulations of Real

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Estate Finance Law 148 o f 2001 should be amended for these two parameters. Ultimately, the maximum income level for subsidy beneficiaries should be revised according to changes in macro-economic and housing sector parameters rather than by general agreement.

(iii) Strengthen housing sector knowledge base. There i s a shortage o f housing market and housing finance information in the country. Data on household incomes and the housing market are scattered and not reconciled. In the short term, CAPMAS data on household incomes and data from the recently completed housing demand studies o f Greater Cairo and other main urban and peri-urban areas (the Delta Governorates, Alexandria, Canal and Upper Egypt as well as the Peri- Urban Greater Cairo Region) has been made available in an accessible form to all stakeholders, including HSPC and GSF’s monitoring unit. In the longer-term an entity should be established and a system o f data production and reporting should provide reliable and timely data on house prices, housing transactions, etc., by market segment. On the housing finance side, currently disjointed information systems on the depth and nature of the housing finance sector should be consolidated. Currently data from MFCs are collected by MFA while the Central Bank collects information on banks. Systems o f data collection differ and cannot be compared, hindering deeper analyses of the housing finance sector. The current world crisis has shown that countries ignore such data at their peril.

105. Component 111-First tranche prior actions: On supply-side constraints: (i) implementation o f fast-tracking property registration for al l mortgaged properties under the Affordable Mortgage Finance Program ; (ii) introduction o f measures to withdraw previously allocated but unutilized land for affordable housing. On improving targeting o f subsidies: (i) submission to Cabinet of Ministers o f draft amendment to Real Estate Finance Law 148 o f 2001, adjusting the debt payment-to-income ratio, from 25 percent to 33 percent, (ii) issuance of Prime Ministerial Decree adjusting the maximum income level for subsidy beneficiaries to LE 2,500 monthly income for households; (iii) establishment of a tracking system to eliminate double allocations to households between the proposed mortgage finance subsidy scheme and any other scheme. On strengthening the knowledge base: (i) completion of analysis o f the housing demand studies of main urban areas and placing the data in the public domain; and (ii) enactment o f Article 6 of Building Law 119 of 2008, creating an entity with the mandate of collecting housing market information.

106. Status of Component I I I f i rs t tranche prior actions: On supply-side constraints: (i) Protocol between NUCA and MFA has been signed in September 2 1 , 2006, streamlining registration procedures for al l mortgaged properties under the Affordable Mortgage Finance Program; and (ii) based on a protocol signed by the Ministry of Housing, Utilities, and Urban Development and GSF, the former has recently started to withdraw land from projects that were not developed according to the conditions of developer contracts for social housing.

107. On prior actions on targeting improvement: (i) the draft amendments to the Real Estate Finance Law 148 o f 2001 including the change in the debt payment-to-income ratio prepared by MFA on July 28, 2009, was approved by EFSA Board, and submitted to Cabinet of Ministries on August 18, 2009; (ii) Prime Ministerial Decree 1864 of 2008, adjusting the maximum income level for subsidy beneficiaries to LE 2,500 monthly income for households, was issued on July 10,2008; and (iii) a manual file-based tracking system i s in place between GSF and the Ministry of Housing, Utilities, and Urban Development subsidy data systems to eliminate double allocations to households between the proposed mortgage finance subsidy scheme and any other scheme. This i s based on a protocol signed between NUCA and GSF on May 7,2006.

108. On prior actions to strengthen housing sector knowledge base: (i) the demand studies for Cairo and other main urban areas have been completed on December 2, 2008, including the analysis o f data. The Ministry of Housing, Utilities, and Urban Development have made the studies available to the HSPC, and GSF, and the studies are currently posted on the Ministry of Investment webpage; and (ii) Building

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Law 119 of 2008 has been enacted in May 2008, creating an entity (under Article 6) with the mandate of collecting housing market information. A Ministerial Decree 243 of 2009 was issued by the Minister of Housing, Utilities, and Urban Development on June 16, 2009, establishing the housing observatories under the General Organization for Physical Planning to collect housing information as per Building Law 119 o f 2008.

109. Component 111-Second tranche actions to be taken: improvement o f the institutional framework to enhance transparency and targeting of housing subsidies through compilation o f housing market information.

110. Component III-Third tranche actions to be taken: improvement of the institutional framework to enhance transparency and targeting o f housing subsidies through expansion o f the housing market information data base by inclusion of a house price l i s t by sector in main urban areas.

D. PROGRAM FEATURES, LOAN AMOUNT AND TRANCHING

11 1. The Government has requested a DPL amount of US$300 million from the World Bank to support the new Affordable Mortgage Finance Program, and the policy reforms associated with this new program. The Bank will use the policy matrix as a means of monitoring the progress made, and ensuring effective implementation o f the operation.

112. The first tranche i s expected to be disbursed upon effectiveness of the operation based on the government achievement of the first tranche prior policy actions for Board approval. The second tranche would be disbursed once the government meets the various triggers listed in the Operational Policy Matrix (Annex 2), by June 30,201 1. The third tranche would be disbursed once the government meets the various triggers listed in the Operational Policy Matrix, which i s expected by June 30, 2013. The three tranches would be approximately equal in amount (US$lOO million each).23

E. EXPECTED OUTCOMES OF OPERATION

113. Program’s key outcome indicators, include the following: (i) maintain and update a well- functioning credit-linked subsidy scheme for low and middle-income home buyers; (ii) maintain and update a credible legal and regulatory framework for the mortgage finance market; (iii) use o f index for variation in income and subsidy levels for the program; (iv) use o f index for variation in maximum income level for subsidy beneficiaries; (v) a well-functioning and efficient GSF; (vi) adequate long-term financing for mortgage loans; (vii) loan funding sufficient to fund 65,000 new loans per year in steady state; (viii) subsidy budget allocations consistent with planned scaling-up o f the program to 65,000 new beneficiaries per year in steady state; (ix) new mortgage-linked subsidy program for low and middle- income households in permanent regime; (x) disbursement o f 65,000 subsidized loans per year in steady state (minimum); (xi) fully operational subsidy unit in ex-GSF; (xii) competitive and transparent mechanism for the sale of government land; and (xiii) a Real Estate Observatory providing quality and timely information and data on the housing and mortgage market.

*’ The second and third tranches would be US$lOO million. The front-end fee would be deducted from the first tranche as indicated by the government in the loan sheet.

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VI. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACTS

114. The government i s committed to improving both the efficiency and the equity o f housing subsidy programs. Analyses show that approximately 75 percent of newly formed households cannot afford to acquire a formal sector house without a subsidy and have to rent or own in the informal sector or squat. Current supply side subsidies, being developer oriented, they are predominantly focused towards new urban areas rather than towards existing urban housing. This limits the options for employment within a reasonable distance from the residence, and increases the cost o f commuting for potential beneficiaries who work in old urban areas. In addition, there are severe inequities in the distribution o f subsidies linked to the existing stock. For example, rent controlled units benefit both rich and poor and st i f le mobility in the existing older housing stock that would provide cheaper and more appropriate housing for low income households in more suitable locations. While rent control i s being phased out through the new rental act of 1996, it will s t i l l take considerable time.

115. The government i s keen to address this major affordability gap in a more transparent and efficient way. I t i s developing a two-pronged approach in the housing plan it i s developing for the year 2012: (i) create a demand oriented and credit linked subsidy program for the broad low and middle income housing market (earning LE 1,000 to LE 2,500 per month, which i s roughly the 45‘h to 90th percentile of the urban income distribution) that will provide in a steady state 65,000 subsidies per year for new as well as existing units in new and old urban and semi-urban areas; and (ii) create special rental and “infrastructure” housing programs for the low income bracket (below LE 1,000 per month) jointly with local governments for approximately 20,000 households per year. The total of 85,000 yearly housing subsidies in the future program, which can be expanded depending on the subsidy resources available for each subsidization track (adjust the percentage to fit the lower number o f units if this sentence i s necessary). Both horizontal and vertical equity o f the planned housing program are therefore exceptional.

116. The Affordable Mortgage Finance Program will be the only program available for the low and middle income group and will focuses on the 75th to 45th percentile of the household income distribution for urban areas (with only a small percentage going up to the LE2,500 level certainly in the first year). This middle income group i s especially vulnerable during the current economic downturn. By including existing urban areas for new (high density) housing and existing housing as well as unfinished registerable housing, the housing options for lower middle income households and those employed in existing urban areas are greatly increased compared to current programs which only deliver new housing in far away locations and will have a beneficial social impact. A well-functioning program for low and middle-income households who with a subsidy and access to a mortgage loan can buy a new or existing formal sector house of their choice will decrease the needed subsidy amounts for this group and will free up subsidy resources for housing programs for the poorer households (with incomes below the 45th percentile).

B. IMPLEMENTATION, MONITORING AND EVALUATION

1 17. Implementation and coordination responsibilities. The responsibility for implementing the program in government rests with the GSF-affiliated to the Ministry o f Investment. GSF would report to the consultative Housing Subsidy Policy Committee which would advise on the implementation and adjustment o f the program. GSF will establish a professional Monitoring and Evaluation Unit which will make timely information available to the Subsidy Policy Committee. GSF will design the core features o f the new subsidy program and develop its implementation manual. Its functions would consist in making proposals on policy, budgeting, regulation, eligibility criteria, identifying beneficiaries, adjustment of subsidy scheme and monitoring the program. The Committee will oversee monitoring progress in implementation and impact evaluation studies.

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118. Supervision by the Bank. Regular supervision will allow the Bank to continue providing policy advice and technical assistance to the institutions involved in the implementation o f the program of reform. The Bank will continue to maintain continuous dialogue with the relevant government ministries and will conduct regular reviews in close collaboration with other partners (this will take the form ofjoint donor missions and shared analytical underpinnings).

119. Monituring and evaluation. The monitoring and evaluation of the program and its expected results will be fully embedded in the monitoring and evaluation (M&E) framework o f the GSF. The World Bank and other development partners will continue to provide support to the government to strengthen monitoring and M&E, improve data quality and management and enhance capacity for using development outcomes to inform policy making, in particular the timely adjustment of program parameters. Periodic process monitoring and impact evaluation studies will be made available for examination by the Housing Subsidy Policy Committee and will be agreed upon by the Bank at least six months before the estimated deadlines for the disbursement of tranches 2 and 3 o f the loan.

120. Monitoring indicators, include: (i) timely and accurate time-series data points (CBE, CAPMAS, and Real Estate Observatory) to revise the main parameters o f the mortgage subsidies program; (ii) number of GSF staff dedicated to ‘the mortgage subsidy program; (iii) number of subsidies-to-number of GSF staff dedicated to subsidies program; (iv) disbursement o f subsidized loans per year (minimum); (v) number and variety of financial institutions participating in program (Banks and MFC’s); (vi) average turnaround time to process a mortgage subsidy application; (vii) submission o f quarterly reports on process and program indicators; (viii) time to register a real estate title; (ix) land relative to total size land that i s still unutilized past contract deadline; (x) reliable and periodic household income indicator to ensure adequate targeting; and (xi) improved housing sector information leading to house-price index for selected urban areas.

C. FIDUCIARY ASPECTS

1. Public Financial Management (PFM)

121. As stated in OP 8.60-Development Policy Lending “Drawing on relevant analysis of the country’s PFM, the Bank determines whether the operation should include measures to address identified fiduciary weaknesses”. As per the Bank‘s recent update o f the Country Financial Accountability Assessment (CFAA), updated in 2007, some significant improvements were noted. Highlights include a major increase in transparency, including making public the 2004/05 budget; the extension of the 2005/06 budget to include quasi-fiscal activities for payments to state enterprises and consumers and to bring into the Treasury Single Account (TSA) approximately 5000 special revenue accounts o f ministries, departments and agencies. The passage of revisions to the law on Accounting gave authority for the creation of the TSA and the introduction o f a GFS-2001-compliant chart of accounts with an 8 chapter classification structure. The government signed the MF’s Special data Dissemination Standard and prepares a monthly Financial Bulletin and a quarterly Economic Monitor. The Ministry o f Finance i s continuing its work to establish a well-trained macro-fiscal unit to prepare a multi-year fiscal and expenditure framework to guide future budget preparation activities and has issued a policy forbidding state guarantees for state enterprises.

122. Work on other key reforms continues, however, further improvements could be achieved through the implementation of the budget process modernization plan for budget preparation, execution and reporting through: (i) revised budget legislation drafted; (ii) launch the process o f restructuring the Ministry o f Finance, including development o f the internal audit function; and (iii) develop a plan for the implementation o f the integrated information system.

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ii. Corporate Financial Reporting (CFR)

123. The Ministry of Investment i s leading the reform in the area o f CFR through many initiatives that are either locally funded or through donors. During the past three years, Egypt had made significant efforts to align CFR requirements with the international standards and to close the “compliance gap” in both accounting and auditing practices. The Bank launched an Accounting and Auditing ROSC update in 2007 and some significant improvements were noted. Highlights include: (i) a new Accounting Practice Law has been drafted and reviewed by the Bank, though not yet ratified; (ii) translation of IFRS into Arabic and developing the needed arrangements to update on annual basis; (iii) issued quality control standards as a listing requirement; and (iv) translation of the ISA. Further improvements could be achieved by the following actions: (i) issuing a decree creating the Audit Oversight Board at the CMA; (ii) developing a plan to enhance the capacity o f the CMA in monitoring CFR; and (iii) issuing a decree to adopt the newly translated IFRS (Le., Egyptian Accounting Standards).

iii. Disbursement and Auditing

124. The proposed DPL will follow the Bank’s disbursement procedures for development policy lending. The Borrower i s the Government of Egypt. This operation will be disbursed in three tranches. The first tranche of loan proceeds would be made available to the Borrower upon the effectiveness of the Loan Agreement; while the second and third tranches would be made available upon the fulfillment of the respective tranche conditions.

125. Flow of funds (including foreign exchange) i s subject to normal financial management processes. It i s not possible to track the ultimate use o f the foreign exchange provided by the DPL proceeds, but loan proceeds flow into a designated account at CBE and from it to Egypt’s budget, and are thus subject to normal PFM processes and CBE procedures. By way o f a letter, the Government will provide confirmation to the Bank when the loan amount has been credited to an account used to finance budgeted expenditures. The diagram below depicts the envisaged flow of funds arrangements:

Dedicated Finance Egypt PFM

126. The Bank will reserve the right for audit of the designated deposit account and would request the government if such an audit report i s needed. In such case, the auditors o f CBE will be requested to provide a special opinion confirming that the DPL funds went into the state official foreign exchange reserves then an equivalent amount i s credited into the state budget taking into account the accuracy of the exchange rate used at the transaction.

D. ENVIRONMENTAL ASPECTS

127. Since this proposed operation i s a DPL it falls under OP/BP 8.60. As the operation i s not expected to have significant environmental effect, according to OPBP 8.60, safeguard policies (such as OP4.01 Environmental Impact Assessment), and an Integrated Safeguard Data Sheet (ISDS) i s not needed as none o f the Bank’s safeguard policies are triggered by this operation based on due diligence review of the environmental and social implications of the project that has been carried out. The proposed Affordable Mortgage Finance Program DPL will not have significant effects on the country’s environment, forests and other natural resources. The environmental and natural resource implications are driven to a large extent by the nature o f an operation. In the proposed operation, none of the prior actions as listed in the policy matrix will have environmental impacts or risks. None of the Bank’s safeguard policies are triggered by this operation.

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E. R I S K S AND RISK MITIGATION

128. global, financial, macroeconomic, regulatory, institutional, and political environment.

129, With the current uncertain global financial and macroeconomic environment, funding risk of mortgage lenders i s one o f the major short-term risks of the program. Approximately LE 5 billion i s needed in mortgage loans in the first three years of the program increasing to an annual LE 5 billion in a steady state.24 MFCs are likely to issue the major share o f mortgages under the subsidy program. These non-depository institutions will depend on EMRC funding to step up lending. A detailed analysis of the funding issue i s presented in Annex 7. In mitigation o f this risk EMRC i s moving forward with plans to issue its own bonds. Given that it i s a private company albeit with public sector shareholders it will not benefit from government debt raising conditions. However i t s systemic role and public sector shareholders will ensure that it i s able to raise funding at a competitive rate. EMRC also has bank lines o f credit available which allows it to ‘warehouse’ some of i t s refinance loans and gives it flexibility on when to tap the bond market.

The program i s relatively simple in structure; however, it entails several risks related to the

130. The second risk i s an increase in inflation, which may drive up mortgage interest rates across mortgage lenders, and will negatively impact the size of the loan beneficiaries will be able to afford. A move from a buy-down to an upfront subsidy that lowers the loan amount would need to be considered under such circumstances. Also, given that an increase in the maximum income level o f beneficiaries i s not an option, one o f the ways to deal with the affordability problem i s to further reduce the cost o f construction through improved regulations or change the mix of units between new communities and existing urban areas. This could be attained through improving subdivision and planning standards. Lastly an increase in the maximum subsidy amount may be considered as a temporary and last resort solution.

131. The third risk i s related to market risk and the inability o f a class of households drawn into mortgage obligations, to pay according to amortization schedules drawn up by lenders to expand initial affordability, risking loan default. The program deals with this risk in the following ways: (a) loans are fixed rate loans (hence the requirement for longer-term funding); (b) maximum payment-to-income ratios will be set by law at 33 percent, this will be a ceiling and the true payment-to-income may set at a lower rate; and (c) the operational rules for the program restrict risky type o f loan repayment schedules, e.g. limit the number of annual bullet payments lenders can require and set the maximum annual payment increase at 7.5 percent (in line with mandated wage increases set for the public sector). This latter provision still poses some credit risk in case wage increases do not materialize or inflation exceeds wage increases.

132. Lastly, there i s a political risk associated with stakeholders’ opposition that would weaken the government’s attempts to pursue the needed policy and structural reforms. The current reform-oriented government has been a strong advocate of developing the mortgage market and i s committed to unifying the housing subsidy system. In particular there will be a number o f legal, regulatory and institutional reforms required for the program to go ahead, which the current government strongly supports. Going back on this decision could create potential risk in terms of budgetary allocations for the new subsidy program that may not be put in place on a sustained basis. Current allocations from the Ministry o f Finance to fund GSF’s subsidy are issued on an ad hoc basis, which will not create necessary lender confidence, and hence needs to be better institutionalized. These risks would be mitigated through ensuring the issuance o f various decrees, and amending relevant laws. Public awareness and consultations with the stakeholders (including political and popular opposition) would also help in maintaining the reform momentum.

*4 All amounts are in Egyptian Pounds of year 2009, calculated on the assumption that over the first three years, around LE 1 billion in subsidies will be disbursed. By working with this figure and by setting parameters for income, down-payment, affordable mortgage payments, i t can be estimated that this level of subsidy would result in mortgage loans totaling LE 5 billion in the first three years. The steady regime of 80,000 beneficiaries would be reached in 20144. The total loan amount o f LE 5 billion i s based on an average loan amount of LE 64,000 in 2009.

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ANNEX 1: LETTER OF DEVELOPMENT POLICY

Arab HcpuhIic of Empt

Ministty of Investment Minietry of Housing, Citilitie! and Urban 1)cvrlopmcnt

Mr. Koher~ R. 7,ncllick President of tlic World Hank International Hank for Reconstruction and Ikvcloprncnt I X I S I i Street. N.W., U'ashington, M'.. 70.133

With the appointrncnt of' this cithinct in ,July 2004, I he (iowmmcnt 01' f-.gypt hiis cniharkcci on a oonipiuhcnsivc program ctf' ccanotnie and siructursll reforms. A muin pillar of. this progmtn is the dwcloprncnt cif il ~ w l l lirnctioning mortg;tgc finance tiiarkct together uith s;lrcngthctiing the housing finstricc thmcwork. 'Hiis conics N ith Cimerniiicrit conimitmctit to dc\clttp tin cnahling enbirorinit'nt thr a tnodcrn iuidcntial mortgttyc markct that Ri l l a l l ou liir the rhilting of' most ol' thc hitrclen of' housing financc a w y Iron1 the state hudgei !oi\urds cfticicnt financial mwhcts. The etiabling cnc ironmcnt wi l l includc irnplcrncntation of politics. bu i Id i n g i ii st i t ut ions and adopting IO ticilitatc the enit'rgcncc of' i i t i ellicicnt. residuntial niortgagc finiince s>stciii in cchieh mortgitge Icndcrs opeerntc in it

coriipotiticc - markct hascd - enc ironrnent to rnahc housing finimcc. ;t\ailnhlc to houscholds on cccmmicall) attractirc tcnns and conditinns.

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We have also intrduced a number of reforms to promote Mortgage finance, Most notably the introduction of the Kea1 fistate Finance Law I48 of 2001 that paved the way for mortgage finance, the establishment of the Mortgage I:inance Authority (MFA). the setting up of the Guarantee and Subsidy Fund (CiSF). and the creation of specialized Mortgage f:inance C'ompmies (MFC's). 'l'hc Ciuvemment also cstahlkhed the f3gyptian Mortgage Refinance Company (I1MKC') to provide long-term funding. Moreover, the mortgage foreclosure regime wils modernized, the property registration system has k e n improved and fees reduced. a new unified building code has been issued, and the first private credit bureau has h e n operationalizcd.

The Ciovernmcnt o f Egypt has lead xmarkuble efforts that coupled with the approval of the Financial Sector First md Second E)evclopment Policy I.,cian, approicd by thc World Bank Board in June 2006 and May 2007. respcctivefy. in Etddition to the Mortgage Finance Project approved by The World 13ank Board of Directors in July 2006. The scope ut' our etTorts inherent in thc first phase ofthe Financial Sector Reforni Program that extended during the period 2005 x 2008 included restructuring of the banking sector, dcxpning of' our capital market. fostering m active mortgage finance market in addition to the restructuring of the insurance market. We have also made significant improvcnients in strengthening the financial iiifkastructure and the overall regulatory framework for financial activities. We would like t o stress our commitment to the complete and prudent implementation of these refcm-ns, which arc fully consistent with tho recommendations of the rcccnt World bnk-IbfF I%vmciat Sector Assessment Program IJfwiate.

'I he second phase of our financial refom program will hc implemented during Ihc pcriod 2009-201 2 and aims at improving access to markets, and building inclusive financial systems. 'Ilie second phase was initiated by establishing a unified non bank financial regulator. as a new law for a unified non bank financial supervision was approved by the parliament in February 2009 and will k enacted in July 2009. 'S'hc new law stipuliltcd that the Capital Market Authority, the Egyptian Insurance Supervisory Authority. and the Mongagc Finance Authority would be nicrgcd in a new entity to ensure more cf'ticicnt supervision and regulation of* these markets. Tho new entity would also supcrvisc arid regulate other iim bunk financial scwices including 1:inanciaI 1,casing :wid Factoring. This i s in addition to endorsing a new Afhrdable Mortgage Finance f'rogram, with the ob.jcctive of' building a stronger link ktwcun the housing subsidy programs and mortgage loans for aft'ordahle housing, iniprcwing market ct5ciency, transparency. and sttcial targeting. In this respect. we seek continued World IZank support to expand the residential mortgage market and increusc acccss to nwntgage loans for low income households in order to improve housing atrimiohility through an AIXmhble Mortgage I:inance Ikvelopnient Pol icy I .oan.

'Ihe coniprchcnsive program of macrcicccwomic and structural rcfciniis endorsed by 1 he fiovcrnment of Egypt hiis been reflected in higher economic growth rates. os thc l&ptiiln licononip managed to pursue a 7% rcal gmiith on average during the past thrcc yc:irs. this cati he furthcr clabomtcd in the fi)lto\i ing section.

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1. 'rtE MAC'ROE<'QNOMI(' FRAMEWORK

Over [he last five years, the Government of IIgypt ha!! implemented structural reforms including trade liberatizxxtion. complete overhaul uf the tax system. restructuring of thc financial sector, and privatization of state otvned enterprises and banks. 'f'his was reflected in higher economic growth rates that has averaged mound 5 pcrcent since f:YM and grew robustly at 7.2 prccnt in FY08 driven by strong danicstic demand, 'Tlre share cif investment in GDP increased to more than 22 p-ccnt (up from 21 percent in FY07 and 16.9 pcrccnt in FY03). supporting fuiure economic prospects. In rcsp1n.w to increased growth achieved. unemployment rate has decliiicd to ahout 8.8 percent, down from 9.4 percent in FY07, while poverty declined frttm 23.4 percent in 2005 to 18.9 percent in 2008.

The red GIIP growth i s expected to fall in tandem with the rest o f the world to about 4-43 percent due to the international financial crisis. The (iovemmcnt of Egypt. in an attenipt tit mitigate the adverse effects of the global crisis. announced an I& 15 billion fils$ 2.7 billion and 1 .S percent of GDP) fiscal stimulus package to support economic growlh in TY09. i'hc package consists of': (i) LE 10.5 billion in infrastructure investment spending; (ii) LE 2.8 billion in export subsidies; and (iii) L,6 1.5-1.7 billion in lower tariffs on imported intcrmcdiatc and capital goods. In addition, the Government plans for another 1,Ii I S billion in investments in I'PP dircctcd also towards infrastructure projects. Similarly, the (iovernrnent had resorted to fiscal policy to rctspond to the inflation shock in early 2008 and alleviate the social impacts o f higher prices. I t widend the coverage o f subsidized fhod to another 15 million f'gyptians, increased quotas of subsidized items. raised pensions by 20 percent. raiscd public sector basic wages by 30 percent, and called the private sector to raise wages.

Overall, reform policies taken ovcr the last five years have contributed to a better economic structure and showed the Government strong camniitment to economic refonn and macroeconc)mic stabilimtion. In addition. the Ciovernmcrit i s also iniplomenting a comprehensive Social Safety Net Prcigrani that would smooth the impact o f structurd refbrms.

Signilicant progress has been made in dtcpniny the mortgagc finance market anti imprcwing access to ufkm.lahle housing tinance. The (iovcrnment o f &ypt seeks to create a nictrc active. competitivc and sustliiiiubie mortgage morkct. '1'0 this end. mortgayo rnarket rcfonns undertaken rcccntly aimed at strengthening the legal. regulatory and institutional fkmcwork. Most notably the introduclion of the Real 1:state Finance I.aw 138 of 2001. the establishmcnt o f the Mortyagc f'inance Authority (h4FA). the setting up of the Guarantee and Subsidy Fund (<;Si:}, the creation o f specialized mortgage finance companies. and the cstablishnicnt o f a liquidity facility. the Ifgyptian Mortgage Refinance Company ( IMR( ' ) , to provide long-term tinance to primary lenders. Moreover. we have also tnodcmiml thc mortgage foreclosure rcyime. irnprovcd the prctpcrty registration system, reduced the rcgistration fees, issued rhc unified building code addressing various dcficiencies. and ctpcrationlairsd thc first private credit bureau.

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'Ilw Govcrnnicnt of Egypt continues strengthen the institutional friinicuork. 'lhi has h u n rellccted in the capacity building o f e MFA through developing the technical an nianngerial skills, establishing in 1)cccniher 2006 new departments (C'onsunier AlTair: Research, and Industry Monitoring); establishing a computer nctuork and the 1 '1 infrastructur in January 2006: and hnnulating a business plan Ibr the period (2005-201 Of. The authoritic are also devclopiny the M I A regitlatory roic to cnsurc market efliciency and lo protect il customers. in tcrms of developing and ensuring the usagc of stnndardi& niortyag agreements: .wftiiig new regulations for portfolio acquisition from the dcvclopcrs. issuing ne\ rcyulations yovcrning the provision of' mortgagc Iinancc to Ibreigncrs, and cstablishin regulations and controls for the GSF cash subsidy to ensure i t i s propcrly allocated to eligibl citimns; and developing a code rtl'cthics for appraiscrs.

'The Govcrnmcnt of' Egypt is committed to improving housing affordabitity, an creating an enabling environment fur Icndcrs atid investors in mortgage securities. (inter-ali in establishing umbrella insurance arriong several insuriince companies to provide bcttc comprchensivc niarket covcragc to horrcwers). The Govcrnnient is keen on establishing tritnsparcnt system to protect property rights in strcanilining real estate rcgistration. On thti liont. the (iovcnimcnt has laiinchcd the National Project f'nr tit le registration in 2005. propcrt registration fees have been reduced to a flat fee of ;1 niaxitnuni l,.E. 2,000 in August 2006. i% addition to thc fucilihtion ( 3 f fbrcclosure procedures. Mortgage finance agreements have ulsi been exempted from thc proportional stump duty in f ~ e b w r y 2006. Building an infimnzltioi system on real estate id mortgage tinancc in cooperation with Ministry o f I lousing I lt i l i t iec and I [rbm Ilcvelopmcnt is one of the targets of the mortgage market dcvelopnitnt program This coines with the development in tcrnis of secirritizing the portfblio of prfbrniing housinl loans to crcate liquidity that wottld hclp finance additional housing units.

'Tho Gotcrnment of Egypt has h e n supporting IMKC'. On that front variou developments have taken place, l'MRO i s now firnctional and can play a key rolc in providinj funding support for the GSF's all'tfordahle Mortgage 1:inancc program through creating : separate and dcdicated refinance window for these loans. This will prevent any tong tern distc)rtions to the mortgage markct. f WRC ha.; adoptcd a niore triinsparcnt pricing policy through the activation of its website, which carries pricing for retinancing ibr differcn maturities. There were no reported ptohlems or difliculties in securing the mortgage collatera on hetialfafL!MliC and lenders were generally plcascd with thc trimsaction.

A s I.MKC' scalcs up i ts opcrations occr the coming 3 years i t w i l l espcricncc a rrtpic growth in its assets. Moreover. :is the A\ITt)rdablc Mortgage I+'inance Progrrim Conics intc ef'i't'ct. thc refinancing needs of lenders w i l l also grtm fiiffher. fiMKC' has signed f i ~ i i

conlracts litr relitlancing portfblios of' financial institutions trpmnting in the mortgage fitiarict activity uirrth I.1; 350 million. i'he vnluc oflcians to he retinanccd by the conipmy will read I ,I3 400 million by the end ctf2000. thus prot iding more liquidity f iw thc instittitions operatink in the rnurtgagc fi~iancc. Also. the company has tinuIi/ed all internal regulations necessary foi enabling it to prrletice i ts activity 3s u.ell ils thc legal and regulator?/ liamcw>rk \iliich go\err its dealings with the rclatcd parties.

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?'he (bwernment o f f'gypt ensures that the consunier protection franicwork is good and close to best practice in rnany areas, There is no reported increase in non-pcrfitnning mcirtgage loans. Many consumer protection features are engmined in Kcal Estate 1:inancr Iau 148 such its cap on payment to income ratio. liniits on the Ioan to value. limits on the tariahilit! of interest rates through the use o f indices. 'Ihe tcrms and conditions fiir a mortgage loan within the contract are clear. wctl defined and standard. In cases of complaint the consunier has recourse to the MFA ombudsman scheme, and al l cmes that went through the scheme were rcsctlved satisfactorily

The program would address thc gap in the low income housing market associated uith high housing prices refative to income and lack of access to mortgage finance due to high interest rates and down-payment rcquirenicnts. The Government of' Egypt i s iniplcrnenting a new Al'hrduble Mortgage 1:inance program to: (i) expand housing aflordability through increased access to nictrtgage finance for households at the margin ('I'hosc who are first-time home-buyers and did not receive a housing subsidy kfbre); (ii) increase both now housing pmduction and use o f the existing stock, and (iii) iniprove the efficiency. targeting and transparency o f past supply-side housing subsidy systems for this income group. Current developer-oriented subsidies are costly and are captured to a large cxtent by dcvclopcrs. 'They do not address the main difficulties faced by low inconic Irouseholds in paying for the house. This program would h. implemcntcd in phases--starting in 2009---conrsponding with the scaling up and deepening of the mortgage and m.al estate markets.

Progress has k e n made in the legal, institutional and technical requirements for the implementation of' a rnwtgage linked subsidy program since July 20013. The Government intends to phase in the new program in 2009 imd reach full capacity by 2012. 'I'he rele\w~t executive order has been changed to increast: the maximum incotiic level of households that could qualify for a housing iinance subsidy to I.€ 2.500 pcr month, Moreovcr. proposed atncndrnents were outlined for the Kcal Estate finance I,aw 148 o f 2001. including; (i) a change in the maximum Debt Payment -to-lncotne Katio; and (ii) the separation of' the guarantee function from the subsidy function in GSF.

I t i s worth mentioning that the funding requested for this new At'fordable Mortgage I:in;lncc Subsidy Program would contribute to a more etXcient mortgage markct. 'l'he banking sector is running a loan to deposit ratio bctwcen 50-55% indicating the high liquidity position of the financial sector. The mortgage finance companies have their equity haw and lines availablc from hanks that con adequately fund the expected sdume ctf mortgages. The I'gyptian Mortgage Retinaticing C'ompany started i ts business niodcl and provided liquidit] to the market in accordance to each institution needs, More k r the point. JIMKC' cn.joys a g w d liquidity pcwitictn currontly that can handle the tirst year's need under this program reprcsentcd in i ts cxisting capital in addition IO the unutilizcd ptwtion of the lirst World f 3 d loan,

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fn terms of the implcmentaticzn of the Mortgage Finance Subsidies Program. we would like to highlight our commitmen[ to undcrtake important mcasurcs to improve the housing finance policy framework. These include the fizllowing:

A. Adopting policy measurcs to create and adjust a demand-driven and credit-linked subsidy scheme by establishing the 1 lousing Subsidy I’olicy Committee, and detemiining the core ikatures o f the new subsidy progrm and the conditions for rcvising the progmrn filatures.

R. Scaling up the GSF: Subsidy unit as the institution in charge of‘ the subsidy prc-’g:ram through the issuance o f a Joint Ministerial llecroe. announcing that CiSF is the implementing institution for the affi-rdablc mortgage finance subsidy program. and the coniplction o f TOR o f a nation wide publicity campaign for the new mortgage subsidy pmgrim.

C. Strengthening the Ciuarantec and Subsidy Fund (CiSf:) through submitting to the (‘abinet. thc draft cunendment to Real Estate f:inanct: I,aw 148, separating functictns. and staff fcrr subsidy and guarantee operations of’ (2%’. and approval of Prime Ministerial Ikcree climinaling the property development role of the (;SF,

D. Completictn of the opcrrttional manual for the program. adopted by GSF t)Owd and endorsed by Minister of Investment, including: ( i ) all rcfevant paramctcrs and adjustment nicthods: ( i i ) efficient and trusted disbursement procedures to lenders.

f i . Impraving the Institutional Framework to Enhance ’I’ransparency and Targeting of f lousing Subsidies through: (i) establishing a tracking system to eliminate any dwble allocations to households between thc proposed morlgagc flnancc stibsidy schcnic and any other schcnie. including (“SF and National IIousing Program subsidy schcme: (ii) implementing fast-tracking property registration for mortgaged propertics under the program including existing units: (iii) executing measures to withdraw previously allzwntcd but unutilized land for affordable housing.

1.’. hiproving Icgal and regulatory fi.aniework to cnsurc adequate targeting for atlitrdable housing, by: (i) ad-iusting debt payment-to-income ratio: (ii) ad.justing the niaximuni income lcvel for subsidy beneficiaries.

( i , Strcngthening housing sccktrr knowledge base by crmting i t Real 1:statc Obscmntot?, that will provide infbrmation on the housing and mortgage riiarket irtcftiding housing prircs. which is essential for the monitoring of the program.

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'I*hcrt. has been good collahomtion bctwccn the (iovcniincnt of' I*:gj pt and sariou donors involved in the development of mortgage finance arid rtfbrdahle housing progrants ii ligypt. Various clcmcnts in the reform program were based on the recomnicndations pu fiimard by the 1008 Access to Finance and l'cononiic (irciuth. the 2007 t S A P updatc, and thc IN1 Article IV process. The International Finance Corporation ( Ib'C*) had also cspresscc interest in funher invttlvernent in the mortgage, as opportunities may a r k for privatc transuctions.

Thc <;nvcrnrnent o f Egypt has k e n working closely with other donors, main11 EJSAlI), who have heen actively involved in developing the mortgage market and ir strengthening the regulatory atid institutional franicwwk for the housing tinancc suhsidie? program over thc past few years. More recently. IISAIL) hrts provided extensive supptxl through the provision of technical assistance in many areas, including strengthening the Iega'l and regulatory framework for the mortgage market, modernizing the prtipcrty rcpistration system, sccuritimtion, dispute rcsalution. and enfiwcement o f mortgage collateral. In addition, I JSAlD-funded projects have undertaken various analytical work, including a comprehensive housing demand survey that shed light on the housing market. espcially demand and household characteristics in t Irban Elgypt. A report has been prepared invcstiyating housing demand all over IJrban Egypt. In addition, specific region reports have been prepared covering the urban areas o f each of Greater Cairo Governorates, Alexandria, Delta (iovcrnorms. Canal Ciovcrnoratcs, Ilppccr Egypt and Pcri-1 Irban (ireater Cairo. Analysis of subs id id housing programs, assessing past, existing and pipeline housing subsidy program in ilgypt, and a joint World f3ank-IlSAfI) report. entitled Framework for I lousing Policy Reform in Ilrhan Areas in Egjpt have also been prepared. It is expected that this cooptation wil l continue.

The Ciovcrnment is kccn on ensuring good coordination bctwxn the various partncrs. and in that contcxt has requested the World 13ank to play a lead role with the various dnnors to ensurc that the various donors' initiatives related to financial sector reform arc wll coordinatcd 1.1) avoid overlap and address key issues on a timely and priority basis. '1'0 this end. a Iinancial Sector Donors Sub-group. chaired by the World h n k . has heen f'ormcd to coordinate both technical and financial support provided to the Ciovernmcnt.

'To ensure high-lewd oversight of' the linaiicini sector rcfhrm program, itn cffoctivc Minisrcrial and an inter-agcncy C'onimittec is responsible tbr planning, developing slratcgies. and monitctriny their implcmcntation. 'I-hc succcss o f the iniplcmcntatian o f the mcxtgage finance subsidies program will also require close coordination betwen various donor agencies invttl\ed. witti clearly defined rnandatcs. The World Hank has h e n rcqucstcd by the (;civcrnnietit of IIgypt to take a leading role in the coordination cffixts. Over thc last three !cars we have \+(orbed closely wi th the World t3ank in the implementation c t f our refbrni program providing khc Hank with ulxfn~es on the progress ofthe program and drwing on i ts resources to provide tcchnical expcrtisc rcquircd as nceJcd. ('orisisleiit with nctrnial fiscal accounting conwkws . the proceeds arid LIW of World 12ank loans u ill he full4 accounrcd t i w in the hudgct as part of-the consolidatcd central (iovemnicnt budget.

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Mr. President. HC would likc to cxprcss our upprwiation to thc World Hank for its in\ aluable assistance with thc implementation of this conipruhcnsivc program.

Yours Sincerely,

Ur. Mahrntiud Mohicldin Ministcr of' investment

.)

Eny. Ahnicd f<I-Maghrahy Minister of Housing. Utilities.

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m d

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4 . s

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I

d d I

D

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D

-0

8

D 8

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Quintile 1 Median household income (LEhonth)" 400

Income Category Low

ANNEX 3: OVERVIEW ON THE HOUSING MARKET EGYPT

2 3 4 5 600 750 1,000 1,750

Low Moderate Mirlr l ,p Moderate/ Middle/

Ilnner

1. A well-functioning land and property registration system i s fundamental for developing an active mortgage finance system, attracting investments, and creating an enabling investment climate. A critical step that has been achieved in 2007 was the significant reduction of land registration fees from 3 percent of property value to a flat fee not exceeding LE 2,000. This has already had an important effect on stimulating demand for land and property registration. The effort to mainstream the sejel ainee system of property registration in urban areas, coordinated by the Ministry o f State for Administrative Development (MSAD), i s also progressing. Detailed registration procedures have been developed. Mapping work at the new urban communities i s in progress. Also, the transformation of the Takhssiss form of land allocation (a conditional transfer of ownership) into a legal instrument has been acceptable by mortgage lenders. Partial registration of land has been authorized in large developments, on the condition that developers have been making regular payments up to the date of the request and that the full price for the partial area that they wish to register has been paid.

2. Despite the considerable progress made in developing the housing market recently, there is s t i l l a major gap in the broad middle-income housing market. This i s mainly associated with high house prices relative to incomes and lack o f access to mortgage finance because of high interest rates and down-payment requirements. This middle-income group could have better access to the housing market, if they receive some assistance to access long-term mortgage finance (See Table A l . 1).

* Median monthly income by quintile based on the 2006 TAF'RII Greater Cairo Housing Demand Survey

3. During the Presidential elections in 2005, President Mubarak pledged that the Egyptian government will facilitate the delivery o f 500,000 new affordable housing units in the six year period from 2005 to 201 1, or about 85,000 units per year, 50 percent of which would be located in new towns and 50 percent in governorates. Under the current program guidelines, each eligible household will receive an upfront subsidy of LE 15,000. The Ministry o f Finance i s thus allocating over LE 1 billion per year for this purpose. However, all off-budget and on-budget subsidies related to the typical unit are together estimated to cost LE 35,000 (70-75 percent of total development cost inclusive of infrastructure). This raises the price tag of this program to about LE 16 billion, which means, at existing subsidy levels, yearly subsidies of LE 2.8 billion (around 0. 4 percent o f GDP) to deliver 85,000 units per annum.25

4. In the past, government supplied housing directly (36 percentage of new formal sector residential construction has been provided by government during the last decades), but the current government has changed that model. Under the NHP the government began to involve the private sector in the provision o f middle income subsidized housing, both lenders and developers. However, overall subsidy levels have been high, hidden subsidies by government lenders have proven risky for participating institutions and the targeting and allocation through developers have been problematic. Subsidies have even contributed to already high vacancy rates.

5. The NHP Agency, placed under the Ministry o f Housing, Utilities, and Urban Development, i s an interim program agency assigned the primary responsibility for implementation o f the NHP through 201 1. The Agency offers public or private developers upfront lump-sum subsidies o f up to LE 15,000 per eligible limited income household to reduce the cost of newly built housing units. The up-front lump-sum subsidy i s offered to public or private developers, in addition to making land and off-site infrastructure available in new towns at no

'' World Rank estimate as o f June 2008.

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cost through the NUCA. The NHP represents a significant departure from previous supply-side housing construction programs. Its design features stimulate the incorporation of the private sector into i ts implementation. I t i s also more transparent and offers more choice to beneficiaries.

6. The most significant new product introduced under NHP i s a public rental program, which currently i s estimated to amount to a total of 130,000 units, or 26 percent of the expanded NHP target. Around 75,000 of rental units are a 46 square meter unit, which i s intended at the poorest segments of society.26 The rent level wi l l be determined at the decentralized level in conjunction with Ministry of Social Solidarity criteria for receiving other forms of subsidy. Already, 40,000 units are planned to be delivered within the coming two years in the 1000 targeted villages. A core housing option, entitled Beit AI-Ailaa (family house), was announced in May 2006. Land and an expandable core house are made available to beneficiaries by NUCA. Payments o f LE 80 per month would be charged to households for the 40 m2 model. The sites-and-services model, called Zbni Beitak (build your own house), was announced in November 2006. The 35m2 rental units are targeted at the lowest income groups who do not have savings for down payment on a homeownership unit and are very income- constrained. The larger 63m2 rental units attract moderate income groups with a preference for a starter home with 5-10 year lease duration andor who do not have sufficient funds for a down-payment. Moderate-income groups with preference for homeownership and with the ability to provide a down-payment have options in the NUCA and Governorate 63m2 ownership units.

7. On developments with regard to NHP, the program has gradually shifted away from i t s initial target of the government building 500,000 new homeownership units. Instead, the NHP redefined i ts target to a more attainable goal of creating 500,000 housing “solutions,” introduced rental and self-build housing options in response to demand, and reached agreement with the Ministry of Religious Endowments to utilize subsidies for rental housing to be developed on the much-better located Awqafland. The Egyptian government has also explicitly budgeted for housing subsidies under the NHP, relied on transparent upfront subsidies, and actively promoted private sector production o f housing. Mortgage lending under NHP has also been initiated. Within the GSF program, there are currently 4,100 qualifying households that have benefited from upfront subsidies administered by the GSF, which also facilitated beneficiary access to mortgage loans through Banks and MFCs (for a total volume o f approximately LE 100 million).*’

8. Following are some of the main concerns hindering the advancing of the sector:

1 Almost 3.7 million housing units are unused, either vacant or closed. According to the 2006 census, the total number of unused units in urban areas in Egypt reached 4.58 million units, of which 1.18 million were closed and 3.40 million were vacant. Due to the lack of detailed breakdown by unit use in the preliminary census results made available by CAPMAS, it was estimated that 8 1.3 percent o f these 4.58 million unused units are for housing use, while the remaining 18.7 percent are for work use.28 The scale of vacant urban housing units, much more serious than in other emerging markets, i s a specific and puzzling phenomenon of the Egyptian housing market.

1 The large stock of vacant houses i s not unique of Egypt. Similar problems occur in the large cities in Brazil, Morocco, Peru, and Mexico-just to mention some countries. Housing i s s t i l l the most secure type o f investment for many people and particularly now in conditions of uncertain capital markets. If we add this natural preference for real estate assets to pervasive rent controls, the natural result in a large housing stock will remain vacant for a long time, as families will use second homes as part o f

z6 Developments are built and owned by Governorates, The construction cost i s estimated at LE 30,000 per unit. The financing available for this purpose includes: (a) a LE 15,000 - LE 25,000 subsidy extended to Governorates per eligible unit; and (b) a LE 20,000 soft loan to be financed from their Economic Housing Funds. 27 Banks accounted for 83 percent o f the number of loans and 81 percent of the total volume o f mortgage finance processed by June 2007 (average loan amount of LE 22,425), while MFCs accounted for 17 percent o f the number of loans and 19 percent of the total volume of mortgage finance (average loan amount of LE 26,735). All but 10 cases were new units, mostly controlled by the GSF in new urban communities including 1,200 units in New Damietta and the remainder near Cairo and Giza (6th October, AI-Shorouk). By June 2007, as many as 18,000 applications were received. As for the subsidies administered by the NHP agency, it i s unclear how many mortgage loans have currently been extended, but the number i s still quite small.

This estimate is based on the fact that of the 9.74 million occupied units in buildings in urban areas (excluding work and official establishments), 81.3 percent or 7.91 million units were used for housing and 18.7 percent or 1.82 million units were used for work. The assumption therefore i s the breakdown of unused (both vacant and closed) units would follow the same distribution between housing and work uses.

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their assets, safety net, etc. I t i s worth noting that vacant units will also be subject to taxation under the new Property Tax Law. . An estimated 42percent of the housing stock in Greater Cairo is frozen under rent control. Since the passage of Law 4 o f 1996 that freed the rental market for newly built and the then-vacant units, the rental market i s showing signs o f much dynamism. The TAPRII Greater Cairo Housing Demand Survey found that 81 percent o f all the new units accessed in the 2001-2006 period were through rental contracts signed under the new law and only 19 percent were for ownership. Yet, the TAPRII survey also indicates that 42 percent of the total urban housing units in Greater Cairo are still locked under the old rent control regime and its aging policies, and that this i s not necessarily benefiting the poor. This greatly constrains residential mobility, locks a large proportion of units out of the market, causes lack o f stock maintenance, and distorts the overall housing market. Addressing this issue has social implications, especially on the elderly and retiree. However, the government has still addressed this by putting a limit on the generations eligible to keep the houses that were rented in the previous decades. Getting rid of this old rental system would take decades-approximately (60 years in France), and there are urgent needs to face.

. Some 45 percent of new urban housing is produced by the informal sector. During the inter- census period (1996-2006), the urban housing stock i s conservatively thought to have grown by an annual average o f 2.8 percent or 263,838 units.29 Of these, 55.6 percent were formal and 45.4 percent informal. Constrained by high building and zoning standards, as well as a bureaucratic, time consuming and costly permitting process, many families and small developers operate within the informal sector to meet the growing needs of lower income households. The informal sector i s the source of the flexibility of Egyptian housing market, its vitality, and the ultimate real source of the affordable housing solutions.

9. I t i s worth noting that the overall population in Egypt i s growing at about 1.5 percent annually, and i s projected to reach about 88 million by 202 1, representing an increase of about 18 million people over the next 15 years. The Government of Egypt has estimated that approximately 5.3 million housing units wil l need to be constructed between 2005 and 2017, of which an estimated 3.7 million units would be needed for low-income households. Much o f this population growth wil l be in the main urban centers, further fuelling pressure on the housing sector, even if the share of the urban population in the total population does not increase significantly. Accommodating the projected urban population growth in such a short period presents major challenges for the Government of Egypt’s housing and urban policies, infrastructure and institutions. Institutional reforms are needed to streamline the housing delivery system and better match housing subsidies with limited income households.

10. There are a number o f government agencies which carry out overlapping functions relating to housing supply. Programming, land acquisition and development, housing production, financing, beneficiary targeting and unit allocation are duplicated by a large number of separate agencies. The 28 governorates also cany out parallel functions, largely through their economic housing funds. With the exception of the Housing Development Bank, other banks, and the MFCs, there i s l i t t le specialization. And al l of these agencies, with the exception of the new GSF, are limited to supporting the supply o f new housing and do not operate on the demand side of the housing equation. I t i s also worth noting that the establishment of a housing information system i s a priority action. The lack o f housing information affects almost all areas of proposed reforms and hinders policy making. Information collection on housing markets should be designed based on analytical models and compiled through central and local government and other entities.

11. A large share of Egypt’s urban housing stock i s characterized by high vacancy rates, rent control, and informality. Indeed, almost 3.7 million urban housing units are either vacant or closed, an estimated 42 percent o f the housing stock in Greater Cairo i s frozen under rent control, and some 45 percent of new urban housing over the past decade was produced by the informal sector. Wh i le these three distortions are not entirely additive (e.g. an informally built unit may be held vacant andlor under rent control), it could be conservatively estimated that 50-70 percent of the urban housing stock in Egypt suffers from such market constraints. These combined

29 This i s 9 percent higher than the annual average for the previous inter-census period 1986-1996 where the average was 241,916 units. The preliminary results of the 2006 census made available by CAPMAS do not allow for a precise calculation of the number o f housing units. As such, the total number of housing units in urban areas was inferred as the sum of “apartment units” (in Arabic shakka) and “qne/more independent rooms” (in Arabic hogra mostakela). This figure i s counter-balanced by the exclusion of single family housing and the failure to account for housing units converted into offices.

- 4 8 -

market weaknesses directly affect the affordability of housing (which i s further compounded by the rapid rise in construction costs and property values), the success of the newly initiated mortgage system, the mobility of labor, and the government’s ability to address the shelter needs of limited income groups.

12. There are significant fiscal and macroeconomic consequences o f a poorly functioning housing system. A well-functioning housing market produces a wide range of house types with a broad range of prices and tenure options, which reduces the demand for government subsidies. Over the past 25 years, the public sector in Egypt built as much as 36 percent (1 -26 million units) of all formal housing units supplied in urban areas. This came at a significant fiscal cost of LE 26.4 billion, not including additional off budget subsidies related to the cost of land and off-site infrastructure (trunk water, wastewater, power, and phone lines). Moreover, while the Ministry of Finance has allocated over LE 1 billion per year towards the NHP, it i s estimated that the true direct cost o f the program will reach at least LE 2.8 billion per year, or around 0.4 percent o f GDP for this program alone.

13. The main challenge today i s to devise affordable housing policies and strategies that address the distortions that to date constrain the housing market from functioning efficiently. The first critical steps in this regard were the abolition of the rent control legislation in 1996, after five decades during which it severely distorted the housing market, and the creation of the regulatory and institutional frameworks governing housing mortgage finance. Remaining challenges that the new affordable housing policy will need to address are to: (i) put in place the institutional frameworks and incentive structures needed to enable an expanded private sector role in the financing and delivery o f affordable housing; (ii) rationalize the subsidies provided to limited-income groups developing efficient targeting instruments; and (iii) ensure the continued development of a viable rental market to serve the needs of the lowest income groups in conjunction with some homeownership opportunities. A well-functioning housing system has multiple benefits including improved affordability, reduced fiscal burden, and enhanced macroeconomic stability.

- 49 -

ANNEX 4: STRUCTURE AND EXAMPLE OF A BUY-DOWN SUBSIDY SCENARIO

A.

The structure of the subsidized mortgage would be as follows: (i) a mortgage loan fully paid in monthly installments to the lender; (ii) a buy- down subsidy which pays for part of the monthly installment in the initial years of the loan, decreasing over time; and (iii) for the lower income groups a subsidy which will form part o f the initial down-payment and (iv) a monthly payment by the borrower which increases over the initial period o f the loan. The parameters and subsidy amount would vary depending on the income level. For instance, households on a monthly income of LE 1,000 may receive a buy down subsidy for the frst 7 years of their mortgage loan. Households at the upper limits o f income eligibility may receive assistance for iust the first 4 years.

Structure of a Buy-Down Subsidy

Figure A4.1: Monthly Payments in Egyptian Pounds

-- --- 800 *y---------- 700

600

500

E 400

300

200

100

0 1 2 3 4 5 6 7 8 9 10111213141516

Loan Term

Figure A4.2: Example of a Down Payment Subsidy for the LE1,500 income group

The monthly payment ratio may also vary with level o f income. So for instance a household on LE 1,000 may only borrow under the scheme up to 28 per cent of its income compared to 31 per cent for a household on LE 2,500. This allows for some additional safeguards in the budgets of the more vulnerable groups.

following parameters are used: (i) income level LE 1,500; (ii) Payment to Income Ratio of 3 1 per cent; and (iii) payment increases 7.5 percent per year. This produces an initial monthly payment o f LE 435 for the household and a subsidy o f LE 287. The borrower's payment gradually increases

where it finishes. Figure A4.2 further sets out the breakdown o f contributions towards the purchase price of a property. The bulk of the price i s obtained fkom a mortgage loan, with a 20 per cent borrower contribution in this example although it could increase to 33 per cent and lastly an upfront subsidy which further adds to the down payment.

80,000 ;

70,000

--I 1

Borrower ' Downpayment 1

i In the example given in Figure A4.1, the ' Total

~ 0 w n Payment j property Subsidy Purchase

~

Mortgage Loan

I I and the subsidy decreases up until end of year 7

B. Example of a Mortgage Subsidy

The subsidy amounts are set as an example and decrease with increasing income, ' The affordable loan amount i s derived from the affordable monthly payment amount and a payment-to- income ratio which will vary slightly according to the absolute income level, and using the loan conditions given below and applying the buy-down subsidy which decreases every year (Le., the monthly payments for the borrower increase by 7.5 percent) for the period o f the subsidy (will vary from 4 to 7 years).

The affordable house price i s based on the maximum loan amount plus a maximum down-payment from the borrower o f 33 percent o f the house-price. It i s worth noting though that the total down payment including the downpayment subsidy can be over 50% for the lowest income groups, This cap on the borrower's contribution i s

- 50 - necessary to keep the program subsidies targeted towards the desired income group, Le., those that require a maximum mortgage loan with a buy-down subsidy in order to be able to buy a new unit in the market.

Table A4.1: Example of a Buy-down: Subsidy, Loan Amount and Affordable House Price, by Income Income LE 1,000 LE 1,500 LE 2,000 LE 2,500

Mortgage Interest Buy-down subsidy 7,070 10,983 12,500 6,250

Total Subsidy 25,000 18,750 12,500 6,250 Affordable loan with subsidy* 34,882 54,191 7 1,488 77,717

Affordable unit/LE 33% down** 78,824 92,474 106,698 1 16,299 Affordable unit LE 20% down 66,015 77,447 89,360 97,400

Downpayment subsidy 17,930 7,767 0 0

* Interest rate=14%, 180 monthsho bullet, maximum 33 percent payment-to-income down to 28% for LE1,000 group, 7.5 percent increase in monthly payment for length of subsidy period which may vary between 4 and 7 years.. ** Cap on borrower down payment to 33 percent of unit price in order to limit house price and improve targeting. Total down payment may be higher for the lowest income group if upfront subsidy i s included

- 51 - ANNEX 5: MAIN ASSUMPTIONS FOR DEBT SUSTAINABILITY ANALYSIS 2009-2015

Table A5.1: Negative Shock Case 2007 2008 2009 2010 2011 2012 2013 2014

~~

GDP growth 0.071 0.072 0.03 0.04 0.04 0.04 0.04 0.04

Real interest rate -0.045 -0.06 1 0.03 0.02 0.01 0.015 0.02 0.02

Primary balance -0.032 -0.033 -0.04 -0.03 -0.03 -0.03 -0.03 -0.03

Inflation 0.12 0.16 0.15 0.10 0.10 0.09 0.08 0.07

Exchange rate 5.70 5.50 6.50 6.95 7.44 7.89 8.28 8.61

Sovereign spreads 4 3 3 3 3 3

Debt-to-GDP 0.63 0.58 0.63 0.65 0.66 0.68 0.69 0.71

Table A5.2: Positive Shock Case 2007 2008 2009 2010 2011 2012 2013 2014

0.071 0.072 0.05 0.07 0.065 0.065 0.065 0.065

-0.045 -0.061 -0.02 0.013 0.015 0.01 0.015 0.01

GDP growth

Real interest rate

Primary balance -0.032 -0.033 -0.033 -0.008 0.01 0.01 0.002 0

0.123 0.161 0.11 0.075 0.072 0.076 0.08 0.08 Inflation

Exchange rate 5.7 5.5 5.5 5.5275 5.5275 5.5275 5.5275 5.5275

Sovereign spreads

Debt-to-GDP

200 150 150 150 150 150

0.627 0.582 0.556 0.534 0.497 0.461 0.434 0.41 1

- 52 - ANNEX 6: INTERNATIONAL EXPERIENCE IN AFFORDABLE HOUSING FINANCE

A. Mexico’s Liquidity Facility Sociedad Hipotecaria Federal (SHF)

1. SHF, a government funded entity, was tasked with stimulating the private housing finance sector through a combination of liquidity lending, financial guarantees and upfront household subsidies for those households not covered by the housing funds (see Section 2). I t supported the creation and growth o f private non-bank lenders called Sociedades Financieras de Objeto Limitado (SOFOLES) which successfully started mortgage lending when the banks dropped out of that market after the country’s 1994 financial crisis. SHF provides liquidity funding for SOFOLES focused on moderate income housing loans, complemented by an upfront subsidy for qualifying borrowers. It also provides interest rate swaps indexed on minimum wage movements.

2. SHF was instrumental in developing the secondary market for mortgages, and larger SOFOLES began to access capital markets directly, mostly through structured finance arrangements. The institution i s s t i l l the secondary lender of last resort. This function has expanded as a result of the recent upheavals in the capital markets for mortgage securities. Wh i le SHF’s liquidity lending was to be phased out in 2009, i t i s now allowed to continue that continue that function. SHF administers the mortgage linked upfront household subsidy program for this middle income segment that was introduced at the same time the liquidity facility was established. I t was targeted specifically towards the informally employed, since formal sector employees have access to a lending operation funded by special labor taxes. SHF has recently added payment for i t s mortgage insurance as part of the upfront subsidy. Lenders responded positively to this additional credit risk guarantee.

B. Malaysia’s Cagamas

3. The central bank o f Malaysia, Bank Negara, organized the establishment o f a centralized liquidity facility, Cagamas, in 1986. Bank Negara retains only a 20% ownership share, but i s prominent in its governance. The company does not have an explicit government guarantee, but i s seen to be implicitly guaranteed by virtue of i t s close ties to Bank Negara.

4. Cagamas was created in order to address two immediate problems. Macroeconomic shocks had created a liquidity shortage for the banking sector. Moreover, the banks were mandated to hold a significant share o f their portfolio in residential mortgages in l ine with government stimulus programs for formal sector middle income housing development. In addition, the national treasury operated a subsidized mortgage lending window for civil servants and it wanted to be able to rebuild its liquidity.

5. Since it f i rs t started operations in 1987, Cagamas has grown into a major source for the funding for mortgage loans in Malaysia, recently providing 1530% of total funding. Banks and other lenders (including non-bank finance companies) are able to borrow at either fixed or floating rates for terms o f three, five, or seven years. However, the bulk of the borrowing i s for three years at a fixed rate, despite the fact that the standard loans terms are for 15 years or more at a floating rate. This situation reveals how Cagamas loans, and liquidity facility financing in general, are viewed as not so much medium-term funding for housing loans but rather as an asset-liability management (ALM) tool for the entire portfolio, that happens to use mortgages as collateral. As in the case of Mexico, the capital markets are now well developed and banks no longer require Cagamas to deal with portfolio risks on their mortgages.

C. Indonesia’s S M F

6. The Indonesian liquidity facility, SMF, was initiated in 2006 and so far has been only modestly successful in contributing to the growth of the mortgage sector. I t was only allowed to make loans for a maximum term of three years, there were issues with double taxation o f i t s products, and it did not receive explicit government or outside guarantees. This made i t s offerings unattractive for lenders. Moreover, banks were liquid and did not need the products that the SMF could offer. Now that most o f the constraining operating conditions o f SMF have been changed and liquidity in the system i s drying up, more financial institutions, including mortgage companies, are interested in refinancing their loans with SMF. It recently began to refinance

- 53 -

mortgages that benefit from a government buy-down subsidy, as well as Sharia compliant mortgages and i s about to finalize i ts f i r s t securitization.

7. Some lessons. Some lessons drawn from the examples of government support to the liquidity facilities of Mexico, Malaysia and Indonesia are that there must be a clearly identified market or public need for a liquidity facility, and its offerings must be attuned to those specific needs. Government regulations needed for the smooth operation o f such institutions should be put in place at the time of initiation. In order for mortgage lending to reach a larger proportion and a gradually lower income segment o f the broad underserved middle income group, additional credit insurance (Mexico and Morocco) and non-distorting household subsidies are frequently applied. Lastly, government support should be phased out when no longer needed.

D. The Case of Morocco's F O G A R I M Guarantee Program

8. In 2004, the Moroccan Government launched i ts Cities without Slums program (Villes sans Bidonvilles or VSB) with the intent to eliminate a l l slums by 2010. The nationwide VSB program aimed at providing accommodation to the approximately 212,000 households living in urban slums across the country by 2010. Initial efforts focused on physical solutions, but VSB soon discovered that most households could not pay for the new housing or serviced plots that were offered. Access to housing loans was required to make the housing solutions affordable to lower-income groups. Three main reforms were made: a) establishment o f mortgage guarantee funds; b) extension of micro-finance services to housing; and c) establishment o f contractual savings schemes for housing.

9. As part of the housing reforms, the government introduced FOGARIM, a mortgage guarantee fund. Its objective i s to give banks the security they require in order to lend to households with irregular or informal sources of income. For this, the banks are guaranteed 70 percent of the principal balance in case o f default after a nine month period. Guarantee payments come from a fund managed by the Caisse Centrale de Garantie (CCG), a public agency under the purview o f the Ministry of Finance and Privatization. The fund (USD 25 million) receives its allocation from the Housing Solidarity Fund (FSH) which, in turn, i s replenished from a dedicated tax on cement. The FSH i s controlled by the Ministry of Housing and Urban Planning and i s dedicated to finance social housing programs and the eradication o f slums. FOGARIM's initial capitalization amounted to USD 23 million, with a commitment from the Ministry to release two more payments of USD 23 million in 2006 and 2008.

10. The FOGARIM program experienced a slow start, attributed to the lack of marketing o f the product to banks and low-income populations. By May 2005, only 660 credits had been guaranteed. However, it ultimately caught on and led to a significant increase in the number of housing loans being made by banks to this target population with considerable competition on interest rates and services. As of April 2008, the number of loans guaranteed was 34,600, with a mean size of US$ 18,260 and US$700 million guarantees committed

11. Partly as a result o f reduced risk through the FOGARIM guarantee, banks reduced the interest rate o f mortgage loans from 7 percent in 2004 to 5 percent in March 2008, and increased the maximum loan term to 25 years as compared to seven years in the past. The maximum monthly household income for loan eligibility i s US$375, and the maximum loan amount i s US$25,000. Final loan payments must be made before the borrower turns 60 years old.

.

12. Despite i t s success, there have been several issues with the implementation of the FOGARIM guarantee. The maximum monthly payment amount i s low relative to the average house price under the program. Moreover, the age limitation requires every beneficiary over 35 to take out a shorter term loan with higher monthly payments. The eligibility requirements are not always enforced and there i s evidence o f subsidy misallocation. Also, the 70 percent guarantee seems to be a disincentive for banks to conduct adequate due diligence on potential beneficiary households. Yet another issue i s the use of FOGARIM-guaranteed credits for the acquisition of parcels of land, rather than for complete housing units for which they are intended.

13. A credit education program will be undertaken by the MHU in collaboration with the participating banks, in order to disseminate information about the program and stimulate demand by those low-income beneficiaries of the VSB program that are supposed to acquire new housing units. Adjustments to the eligibility criteria are required to minimize mis-targeting and control corruption. Also, government may consider gradual

- 54 - downward adjustment of the level of guarantee from the generous 70 percent now that the market has gained experience with this population group.

14. Some international examples of subsidy support to households linked to credit: When there i s a possibility that lenders will expand their lending to moderate income households, the key question becomes what type(s) of subsidy will be most effective in making households with acceptable credit records good borrowers. This choice depends critically on the analysis of specific constraints faced by moderate income households in acquiring a loan: (i) income constraints relative to the house prices in the formal market; (ii) savings constraints; and (iii) volatility or informality of income or employment.

15. These constraints vary in different developing, emerging or transition economies and for different sub- markets within countries. For example, in Egypt, households are typically aided by family members to collect the large down-payment and upfront cost of obtaining a mortgage, but may require support for the monthly payments on a loan because of the discrepancy between incomes, house prices and prevailing interest rates. In countries in Latin America where family savings are not so easily available, the hardest part of becoming a homeowner i s saving for a down-payment while still paying for rental accommodation. The design of subsidies to support households to access mortgage loans should reflect such varied household conditions (Hoek-Smit, 2008).

16. Subsidies to alleviate income constraints. Several types of subsidies address the discrepancy between required monthly payments and income levels of potential beneficiaries. A favored type of subsidy introduced in several countries such as Indonesia and Jordan i s the buy-down o f monthly payments or interest payments. A key factor that lowers the cost o f these subsidies relative to interest rate subsidies for the full loan period i s that such buy-downs are phased out over the initial years o f the loan, under the assumption that inflation or normal growth in incomes will permit the borrower to bear a greater burden. When the present value of the total buy- down value i s calculated and the money deposited in an escrow account in the bank, such subsidies are completely transparent as well.

17. Borrowers appreciate such subsidies because they can fully understand the impact on their housing options. Lenders like them because they expand the size of their average loan and the number of borrowers, although the administrative complexity o f certain schemes can be a deterrent to use by some private lenders. Finance ministries like them because the cost of the subsidy can be calculated transparently and put on the budget for the full commitment or on a yearly basis.

E. Jordan’s Interest Buy down Subsidy

18. The Hashemite Kingdom of Jordan had used a number o f programs for housing production or government-sponsored lending prior to 2000, but al l involved non-transparent budgeting and relatively ineffective targeting. In 2000, the government decided to replace these with a new interest rate subsidy that would be transparently funded and allocated and utilize private sector distribution channels.

19. The subsidy that the government opted to utilize i s a 5% reduction from the market rate set by a private lender, applicable for the entire term of the loan (typically 20 years, but with high rates of prepayment). Initially, market interest rates were about 15% but have drifted down since 2000, leaving the net effective mortgage rate at about 10%. This was s t i l l above the rate of return on investment options for cash savings, and thus did not elicit negative arbitrage in the financial sector. The subsidy could have been more efficient if it were phased out over, for example, the first five years of the loan.

20. The full present value of the future payments i s budgeted out o f the corpus o f a special fund. The number o f subsidies allocated each year i s designed to permit the fund to sustain i t se l f indefinitely (depending on the course of real interest rates). In addition, there are binding limitations on income and house prices, and a transparent point system for allocating access to the limited number of subsidy contracts funded each year. The loan can be used for the acquisition of a house or flat, improvements, or the acquisition of a plot for self- construction. The actual average size loan under the program has been only JD 6,000 (about US$ 8,400).

- 55 -

F. Chile’s Upfront Grant Subsidy

2 1. Chile i s a good example of how upfiont subsidies to households can work to expand lending and formal house-construction, I t also shows that such subsidies do not work for a low income population. In 1978, Chile had a fairly developed commercial banking system, social security and pension fund systems, and capital market. The government believed that given the proper regulatory and macroeconomic environment, the housing sector could function as a tool to stimulate economic development, alleviate economic recession, and improve low- income housing conditions. Thus, it created a transparent national housing cash grant / voucher program for first-time homeowners to use for partial down payments on loans fiom private lenders for new homes built by the private sector. A maximum house value was set as well as a progressive subsidy amount based on a point system. This ensured that of the 20% of eligible applicants selected each year, low-income households received the largest grants in proportion to their loan size and that more needy households and those who had saved more would be given priority. In 1990, new construction rose above the rate of new household formation and the program was revised to include existing houses.

22. While the program worked well for the lower-middle income market and above, demand-side incentives were insufficient to compel private lenders and developers to move into the low-income segment. Even for the lower middle income segment, the Banco del Estado, the largest state bank, continued to hold the largest market share. In 1980, government began contracting out construction of low-income unfinished units on cheap land far from city centers, providing loans directly to beneficiaries. Beneficiaries disliked both the housing products and the locations which resulted in high levels of abandonment, and poor loan repayment.

23. In 2002, major revisions were made and moderate-income lending was left to the banking sector (mostly the Banco del Estado, now renamed BancoEstado). The government provided a maximum USD 3800 upfront cash grant and incentives to lenders in the form o f loan servicing compensation and partial credit risk guarantees to serve households that could afford a loan for a maximum house price o f USD 15,000. The lowest income brackets that could not save or carry debt were provided with a very basic house worth less than USD 7500 which they had to finish themselves. While middle-income beneficiaries were allowed to select from new and used houses, low-income households’ choices were limited to these new government houses.

24. In summary, repeated efforts to make the program work for low-income groups have yielded poor results and have moved the program to a supply-side approach. The low-income bracket s t i l l does not have access to appropriate credit mechanisms and because the subsidy cannot be applied to existing housing which i s more affordable, the top of this income bracket cannot begin to filter upwards.

- 56 -

ANNEX 7: PROVISION OF LONG TERM FUNDING FOR MORTGAGES UNDER SUBSIDY PROGRAM

A.

1. The introduction o f the Affordable Mortgage Finance Program and the continued growth of the mortgage market wil l generate a big increase in the funding requirements for banks and especially the MFCs. There are two key parameters which need to be considered; the absolute volume o f funds required and the type o f interest rate associated with these funds.

2. The absolute value of funding required will be determined by the speed at which the Affordable Mortgage Finance Program takes off, and the continued growth of the ‘traditional’ mortgage market. The table below provides an estimated projection for the funding requirement for the fvst 5 years o f the program. A number of assumptions have been made to arrive at these figures including the distribution o f funds to different income bands, the mortgage rate, the rate at which incomes wil l grow the size of the subsidy, etc.

Funding Requirement of the Affordable Mortgage Program

Table A7.1: Affordable Mortgage Finance Funding Requirement

Year 1 Year 2 Year 3 Year 4 Year 5 Total Number o f loans 10,000 20,000 35,000 45,000 65,000

59,700 64,200 69,000 74,200 79,700 597 1,284 2,415 4,821 5,183

Average Loan Size (LE) Value of Loans (LE million)

3. Based on the figures above the funding requirement for the first three years of the program i s in the region of LE 4.3 billion. This requirement rises steadily and reaches a steady state in year 5 where an annual funding need of LE 5.2 billion will have to be met. This compares to a mortgage market which i s currently worth around LE 3.1 billion and growing at a rate of LE 1 to 2 billion per year.

4. The ?ype of funding i s just as important as the amount of funding. Ideally fixed rate mortgages should be made available to borrowers under the program. Fixed rates are preferable as they avoid fluctuations in rates which could lead to payment shocks and difficulties in paying back the loans. This i s in line with the Egyptian Real Estate Law, which requires mortgage loans to be fixed or fixed to a specified index which will protect the borrower. Fixed rate mortgages, however require fixed rate funding to avoid interest rate risk for the lenders. The section below looks at the funding options to meet the needs set out above.

B. Sources of Mortgage Funding in Egypt

5 . Deposits. This option i s only available to deposit taking institutions which are the commercial banks. MFCs are not allowed to take deposits by law. Whilst the volume of deposits i s large in Egypt, they are typically short term and not suitable for funding long term fixed rate assets. As the financial market develops, more sophisticated products such as Certificates o f Deposit which could be issued for as long as 10 years may become an option, but at present deposits cannot be relied on to provide the necessary funds for this project.

6. Capital Markets. A number of banks are looking at securitization as a potential way of raising long term funds and this i s likely to be an option at a future stage. The recent deal done by the Arab Land Bank showed that the market can be interested in new types of financial assets, although it should be recognized that the government support played a large role in that issuance.

Table A7.2: Egyptian Public Debt Issuance Program (LE million)

91 Days 181 Days 273 Days 364 Days 3 years 5 years Total January 3,500 8,000 9,500 5,500 3,000 29,500 February 3,500 9,500 9,000 6,000 3,000 3,000 34,000 March 3,500 12,000 12,000 6,000 3,000 36,500

Total 10,500 29,500 30,500 17,500 6,000 6,000 100,000 Source: Ministry o f Finance.

7. The current market conditions and high rate of inflation (close to 20 per cent) effectively stopped most forms of long term debt issuance in Egypt at the end of 2008. Going into 2009 the Debt Management Office

- 5 7 -

issued a new Bond Auction schedule where the longest issuance planned i s for 5 years. An early issue in January 2009 of 3 year bonds was 3 times oversubscribed. The longer term objective of the Debt Management Office i s to extend its borrowing to 7 years and beyond, and to start regular benchmark issues which would allow it to build a yield curve, The issues of 3 year bonds made in January were in high demand which i s a good sign for investor appetite at the longer maturities.

8. EMRC. MFCs in particular are likely to be almost entirely reliant on EMRC to meet their funding needs. EMRC i tse l f has so far relied on a World Bank Loan of LE 214 million to refinance the mortgage operations of a number of MFCs and banks. However the init ial World Bank funds are almost fully disbursed and EMRC now needs to find a source of new funding to continue i t s operations. A range o f options are possible, but the likeliest course of events would be for EMRC to start issuing bonds. However for the initial period o f the program, EMRC may be able to rely on lines of credit from banks which would enable it to warehouse loans before accessing capital markets, it i s also likely to benefit from further lending under the World Bank Mortgage Project and lastly it may be possible for GSF to consider providing some limited funding as part o f the Affordable Mortgage Project. The init ial phase of the program (late 2009 early 2010) coincides with a slow-down in Egypt’s mortgage market which has relieved some of the funding pressure which could have been faced by lenders if both traditional and affordable mortgage markets were taking off rapidly at the same time.

9. Others. There are a limited number of further options, such as reliance on further donor funding from such organizations as OPIC or African Development Bank (AfDB). Over the longer term securitization and mortgage bonds are likely to play a bigger role. Funding o f mortgages from capital i s currently being done by some lenders but this i s expensive.

C. Funding Risks

10. There are three main classes of risk which need to be considered when looking at the funding needs for this program. These are liquidity risk, interest rate risk and credit risk

11. Liquidity Risk. In a perfectly matched balance sheet, the maturity o f mortgages would be exactly matched by the maturity o f the funding, including the matching of all the cash-flows. However in practice, it i s quite acceptable to rely on some shorter term funding which i s rolled over on a regular basis as long as this i s managed dynamically. This means ensuring that liquidity bottlenecks do not start forming where large amounts of funding roll over a l l at the same time. This should also be managed with the use of back up lines of credit to act as bridging funding which wil l give some flexibility on when to go to market.

12. Credit risk. The credit risk in this case i s that EMRC will default on the bond it issues. This would be caused by the refinancing of banks defaulting on the advances they have received from EMRC. By i ts risk averse nature EMRC will attempt to minimize this risk. One of the problems however i s that as EMRC i s a new and untested institution the credit risk premium may initially be set very high. This could make the funding uneconomic and would severely limit the affordability of the mortgages available under the program, even with the subsidy component. This i s especially likely to be the case for MFCs or banks seeking to raise funding on their own.

13. Znferest Rate Risk. Interest rate risk will be driven by differences in the maturity structure o f the funding compared to the assets taken on by EMRC. Typically the assets will be of longer maturity than the funding; this implies that the funding wil l have to be renewed during the lifetime of the assets. If the prevailing interest rates have gone up, EMRC will be faced with a higher cost of funds which could be in excess of the income it i s receiving on i t s assets.

14. A second reason which could account for interest rate risk arising, i s if there are unexpected early repayments o f the advances made by EMRC. I t would then have to re-invest the funds, but if interest rates have fallen, it could again face a position where it i s paying out more on the funding than it i s receiving on i t s assets. A pre-payment penalty i s in place to avoid this situation or to at least compensate EMRC for any loss in income.

D. Funding the Affordable Mortgage Finance Program

15. Analysis of the hnding needs for the program has indicated that the volume of funding over init ial three years of the program should be around LE 5 billion. The interest rate on the mortgage loans should be at fixed rates and hence to avoid interest rate risk the funding should also match this. The solution proposed below i s based on EMRC providing the long term funds to banks and MFCs with a government guarantee for its bond issuances in the initial years of the program.

- 58 -

16. Managing the Interest Rate Risk. The weighted average maturity of a mortgage i s much shorter than the actual maturity as mortgages amortize over their lifetime. So a typical 15 year mortgage loan would only have an average weighted maturity (or duration) of around 6 years. This i s because the loan i s gradually paid o f f and because the value of future payments i s much lower as they are discounted to a present value. A typical bullet bond with a maturity of 7 years and quarterly coupons would have a similar weighted average maturity or duration. This means that although the cash-flows would be very different the interest rate risk can be managed.

17. Managing the Credit Risk. The credit risk associated with EMRC in issuing a bond i s difficult for it to overcome in present market conditions. It i s difficult to conceive that it would be able to raise funds through a bond issuance at a reasonable price without government support. The program i s therefore contingent on receiving a guarantee from the Ministry of Finance for the bond issuances taking place in the f i rs t few years o f the program. Several conditions should be attached to such a guarantee however:

Government support should be for a limited period -e.g. first 3 years of the program, and should be gradually phased out m EMRC should pay a fee for receiving the government guarantee to ensure that it does not distort market pricing. . The guarantee should be capped to a certain amount e.g. first three years of program which would be equivalent to LE 5 billion.

The funds raised using the guarantee should be earmarked to refinance mortgage loans issued as part of the Affordable Mortgage Program

18. Managing the liquidity risk. As stated above, EMRC should minimize the mismatch in i t s cash-flows where practical and cover any refinancing requirements with a back up line of credit fiom a bank to give i t some flexibility on the timing of rolling over i t s bond market funding.

E. Contingency Proposals

19. Allowing an interest rate reset. If EMRC i s unable to raise funding o f a long enough term at fixed rates, it could consider providing fixed rate funding for as long as it i s able to and then to roll over the lending at whatever the prevailing interest rate is. This would result in the interest rate risk being passed onto banks that would subsequently pass i t on to customers fully or partially. Although this i s not an ideal scenario there are a number of safeguards which would make the impact of such an interest rate shock manageable for the consumer and the banks. Firstly as incomes r ise (typically at a mandated rate o f 7.5 percent), the payment to income gradually falls. This would mean that the borrower would have some capacity to absorb any interest rate shock (so called ‘til?’ effect). Secondly especially for the lower income groups under the program i t i s proposed to have a lower maximum ceiling on the payment to income ratio in the region o f 29% as opposed to the 33 percent legal ceiling. Thirdly, there i s a significant portion of the income o f lower income groups which i s informal and i s not taken into account when calculating the payment to income ratio. Over time this would also grow and provide hrther capacity for servicing the loan.

20. EMRC to expand range of funding tools. Over the longer term EMRC should consider other funding instruments such as mortgage bonds or securitization which would enable it to lower its cost o f funds and potentially broaden i ts investor base.

- 5 9 -

ANNEX 8: FUND RELATIONS NOTE

Arab Republic o f Egypt-Asressment Letter to the World Bank

August 6,2009

This note provides the IMF staff's assessnient o f recent niacroeconoriiic &velopiiients. prospects. and pol ic ies in Egypt.

Recent macroeconomic developments

Egypt has weathered the impart of the global financial crisis relatl'tdy well. Fkiancial contagion was contained by liuu'ted direct exposure to s tn i c twed products and OW levels o f f inancial integration with world f inancial markets. Empt has been more susceptible to tl ie rea l spil lovers o f the global slowdown. w l i i ch have begun to affect economic act iv i ty. However. sustained refoii i is sirice 1004 have reduced fiscal. moneta iy and extei i ia l vulnerabilities. leaving some r o o m to i m n e i w m on the i i iacroeconomic p o l i c y respouse.

Fiscal nnd monetniy poiicy actions helped cushion the impnct of tlie global slo~t*dorrtz on economic a r t i v i ~ in Egypt. The government utldertook a package o f additional (niauily infrastntctwe) expenditures to help sitpport economic act iv i ty. These are expected to have k e n executed within the 1008iO9 bitdgct def ic i t target of 5.9 percent o f GDP, un account of ovei-perfoniiance against revenue nieasures adopted before the crisis and c a r r f d budget execution ki a d i f f i cu l t external environment. The Central Bat& o f Egypt (CBE) eased n ioneta iy p o l i c y appropriately, cut t ing p o l i c y rates four times by a cu i i i da t i ve 150 basis points sitice ear ly 2009. In October 1008. the CBE also reiterated i t s 100 percent guarantee of loca l baiik depositr.

.Notwithstanding some slowing of economic activity7 economic performnrrca during 2008/09 tvas favorable. Real GDP growtli i s expected to be @-I?< percent. be low t h impressive 7 percent i t has averaged in recent years. but s t i l l heal thy g iven the global eraviron~nent. I n f l a t i on f e l l &om i t s August ZOOS peak (34 percent) to below 10 percent hi June 2009 as world food prices moderated. The current accouiit sl-rifted into a def ic i t o f about Z percent o f GDP. driven by weaker exports. remittances. Suez Canal traffic. and towism receipts. Th is was m e t with some draw down in resenes. but these have stabil ized in recent months and coverage remains conifoi-table at 6% moi i t l is o f i i i iports o f goods and sei-vices. F o l l o w i n g tl ie sharp reversal of por t fo l io investment k ~ l O t . V S ki August-October. the f inancial situation has largely stabil ized and. in recenr months, the stock niarket has begnn to recover g r o w i d lost in late 200S~edy 2009.

Prospects for 2009/10

The economic ent4ironment is fikaly to remain difficult irt the,iww ahend and, in the zincemin global enttironment, downside risks remnin. Economic act iv i ty in Egypt i s expected to continue to soften in 1009*10. with real GDP growth l i k e l y to remain be low potential at around 4 percent. I t i f la t ion i s expected to subside fk t l ier . to single digits. The

- 60 - external current account i s expected to remain in deficit o f about 2 percent o f GDP. pending a i i iore robust recovery of external denrand, reiiiittances. arid Suez Canal receipts.

Staff's assessment

The key riaallvnge for Egpr in 2009,'lO will be to execute a illix o f policies that helps ameliorate the continuing impact o f the wor ldwide recession. whi le limiting medium-teii i i ~ d n e r a b i l i t i e s . Near-term nmcroeconouic policies 5 h O d d coiitkiue to be geared toward supporting growtli. wh i l e reducing inf lat ion and ii inintaii i ir ig a sustaiiiable publ ic debt and exteinal position.

0 The targeted widenbig o f the deficit to 8.3 percent o f GDP in 2009 10. largely as a result o f an expected cyclical deterioration in revenues. appropriately a i m s to ease downward pressure on economic activity. Given the remaining fiscal ~dnerab i l i t i es . tlierc i s l imi ted scope for additional s t imu lus . Tlie high publ ic debt arid domestic f inancing need rem& key vulnerabilities. but financing-planned to b e tiiakily met doiiiestically-should be available in the near temi. Given the relatively moderate level o f external debt. oyportunitics for external budget financing 011 favorable teniis could improve the debt profi le. alleviate pressure on i n t e n i a t i o i d resen-es, and release resource5 fo r the private sector.

With inf lat ion continuing to fa l l and groivth below potential. there limy be scope for additional reduction in pol icy interest rates. However. nionetaiy po l i cy decisions in die near t e r m wi l l become inore fuiely balanced, and the focus should be 011

underlying inf lat ion developments and prospects. In considerkip fitrtlier rate cfianges. the CBE should also take in to account the iii ipact on the balance o f payments. A degree o f additional f lexibi l i ty in the exchange rate would increase the scope for an independent iiionetaiy pol icy.

Donwsidv risks are contnifled in the short run. W h i l e a lareer-tliati-anticipated s lowdown among trading partners could further reduce real GDP growth and w o r ~ e n the balance of payi ients outfook. these vulnerabilities appear contained at t h i s stage. Reserves continue to provide a comfoi.table buffer against external pressures. Bank refoims since 1003 have helped reduce vulnerabilities and. although a deterioration in credit qual i ty remains a risk. the planned second wave o f batikitig refoni is should help contain risks. The Ion- loan-to-deposit ratio suggests that the banking sector i s highly liquid and i s able to meet the govenmient's f i ~ r i c i n g needs.

Maintaining the reform momentum and redwing fiscal vulnembilirier remnin rite ke,y medittm-rerm challenges. Fiscal adjustment and striictural r e f o m s liave so far pa id off in generating robust ecorioniic growth. Generating filrzher gron.th wil l also be crxicial to r e d w i n g tlie st i l l high level o f uneiiiplopment,

- 61 -

I n this regard? tlre gowrntnet~fFs plans to resume mediwn-term fiscal consolidation RS the globnl economy reboclnds are well-placed. Sustained high fiscal deficits and public debt coaId uideimine investors' confidence and put upward pressure on the yietd exme. with attendant risk5 to gol*enunent fimiicing costs and economic activity. The authorities are aware that a credible fiscal consolidation strategy wil l be c i w i a l to support investor confidenee arid foster private sector-led growth. This 5hOllld be supported by pol icy actioiis to strengthen revenues. and increase die efficiency and control o f government spending.

Status of IAIF relations with Egypt

e Most Recent IMFMissim: A staff team visited Cairo in July 2009.

e UliF-Suppoiaed Program : N o Fund arrangenieiit ,

e FinanciaI Sectar Assessment Program (FSAP): Finalized in October 1002. with the FSAP Update completed in November 2007.

- 62 -

ANNEX 9: RESULTS FRAMEWORK AND MONITORING

PDO The main developmental objective of the DPL i s to reform the current system o f inefficient and poorly targeted supply-side subsidies for housing for the broad low and middle income sector and replace them with a transparent and economically efficient demand side subsidy system.

INTERMEDIATE O~ITCOME Component 1: Strengthening the Legal, Regulatory and Institutional Framework for the Mortgage Finance Subsidies Program

Component 2: Developing an Effective and Efficient Mortgage Finance Subsidy Mechanism

Component 3: Improving the Institutional Framework to Enhance Transparency and Targeting of Housing Subsidies

OtJTCOhlE INDICATOR . . Increase in market-based mortgage loans. Increase in the proportion o f market-based mortgage loans with a demand side subsidy provided to households with monthly incomes below LE 2500, relative to the total number o f such mortgage loans made. Decrease in average amount o f housing subsidy per unit for middle income households. Annual update o f program parameters. .

Transparent Mortgage-linked subsidy scheme for eligible home buyers. Improved governance structure, efficiency and accountability of GSF. A new mortgage default insurance program that replaces the current missed payment guarantee

.

. A new, long-term mortgage linked subsidy program for low and middle income households. Fully operational subsidy unit in GSF with timely processing of subsidy applications.

'

An improved environment for land supply, housing development and property registration to strengthen the implementation of the demand-based subsidy program. Transparent targeting o f mortgage linked subsidies. A Real Estate Observatory providing quality and timely information and data on the housing and mortgage market.

. .

. Monitor progress on overall Affordable Mortgage Finance Program, with particular reference to legal, regulatory, and institutional framework. Increase in the ratio o f mortgage linked subsidy loans-to-total housing subsidies.

.

USE OF RESWTS MONITORING

Timely and accurate time-series data points (CBE, CAPMAS, and Real Estate Observatory) to revise the main parameters o f the mortgage subsidies program Number o f GSF staff dedicated to the mortgage subsidy program Number o f subsidies-to-number o f GSF staff dedicated to the mortgage subsidy program Number o f institutions using mortgage insurance

9 .

Disbursement o f subsidized loans per year (minimum) Number and variety o f financial institutions participating in program Number and variety o f private developers Average turnaround time to process a mortgage subsidy application Submission o f quarterly reports on process and program indicators

. . .

. . Time to register a real estate title Size o f reallocated land, relative to total size land that i s s t i l l unutilized past contract deadline Reliable and periodic household income indicator to ensure adequate targeting

.

- 63 - ANNEX 10: MONITORING INDICATORS, BASELINE, AND EXPECTED OUTCOMES

Frequency and Reports

Annually

Results indicators Data Responsibility Collection for Data Instrument Collection Semi-annual CBE and Annual CAPMAS

Reports Real Estate Observatory

Timely and accurate time-series data points to revise the main parameters of the mortgage subsidies program

30 Number of GSF staff dedicated to the mortgage subsidy program (staffl

Number of GSF staff dedicated to subsidies program (stafn

Disbursement of subsidized loans per year (minimum) (number of subsidized loans per year)

variety of financial

participating in program (number of banks and MFCs)

60

Average turnaround time to process a mortgage subsidy application

Submission of quarterly reports on process and program indicators

Annually

Time to register a real estate title

GSF Annual GSF Report

Improved housing sector information leading to house-price index for selected urban areas.

Annually

Semi- annually

Semi- annually

Semi- annually

Semi- annually

Annually

Baseline (June 2009)

N o data points

GSF GSF Financial

Management Department

CBE Annual CBE Report

Report MFAAnnual MFA

GSF Semi- GSF annual Report

GSF Semi- GSF annual Report

Annual Ministry o f Report State for

Administrative Development

12

2

330

3 4

4,000

Quarterly Report

2 months

etter housing market

information

1

2

6 weeks

Quarterly Report

3 months

'etter housing market

information

Quarterly Quarterly Report Report

2 months 1 month

Better housingBetter housini market market

information information

subsidies program

Annually Annual Real Estate Report Observatory

YR3 2012

Revising the main

parameters ol the mortgage

subsidies program

80

330 ~ 330 375

10,000 I 20,000 1 30,000

YR4 2013

Revising the main

mameters o the mortgagi

subsidies program

90

720

65,000

5

6

3 weeks

Quarterly Report

1 month

House-price ndex 2 urbar

areas

GSF

E

E E

E

E

E

E

E

E

E

- 66 - ANNEX 12: COUNTRY AT A GLANCE

Key D e v e l o p m e n t Ind i ca to rs

12007)

Population, mid-year (millions) Surface area (thousand sq. km) Population growth ( O h )

Urban population (%of total population)

GNI (Atlas method, US$ billions) GNI percapita (Atlas method, US$) GNI percapita (PPP,intemationai5)

GDP growth ( O h )

GDP percapita growth ( O h )

( m o s t r e c e n t est imate, 2 0 0 0 - 2 0 0 7 )

Povertyheadcount ratio at $1.25aday(PPPV%) Povertyheadcount ratio at$Z.OOaday(PPP,%) Life expectancy at birth (years) Infant mortality(per 1000 live births) Child malnutrition (%of children under 5)

Adult literacy, male (%of ages 15 and older) Adult literacy, female (%of ages 15 and older) Gross primaiyenrollment. male (%of agegroup) Gross primaryenrollment,female (%of age group)

Access to an improved watersource (%of population) Access to improved sanitation facilities (%of population)

Egypt

80 1 io01

19 43

a0 0 2500 5,400

7 1 5 1

71 30

5

83 59

a 7 a 2

98 66

M . East &North

Africa

3 0 8,778

27 57

876 2,794 7,40

5.8 4.0

5 19

70 34

83 63 a8 a 3

89 75

Lower middle

income

3,437 35,510

10 42

6,485 fa87

4,544

9 7 8 6

69 41 25

93 85 It? TI9

88 54

Age distr ibut ion, 2007

Female

75-19

60-84

4549

30-34

15-1 8

0 4

percent I 15 lo lo 15

Under-6 mortality rate(per 1,000) I loo . 80 80 70 60 50 40 30 20 10 0

1990 1995 2000 2008 I I OEgypl, Arab Rep OMlddle East 8 Noah AfnEQ

N e t A i d Flows

(US$ millions) Net ODA and official aid Top 3 donors (in 2006):

European Commission United States Germany

Aid (%of GNI) Aid per capita (US$)

Long-Term E c o n o m i c Trends

Consumer prices (annual %change) GDP implicit deflator(annua1 %change)

Exchange rate (annual average, local per US$) Terms o f trade index(2000 = a0)

Population, mid-year (millions) GDP (US$ millions)

Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports o f goods and services Imports o f goods and services Gross savings

M anufactunng

1980

1,381

32 834 a 7

5 9 31

B O

0 7

44 4 23,567

183 36 8 a 2

45 0

69 2 157

27 5

30 5 42 9

1990 2000

5,426 1.328

48 73 2,346 635

347 65

6.1 23 94 T3

2 1.2 2.8 "7.6 4.9

11 3.4 a8 a0

57 8 70 2 89.80 99,839

(%of GDP) 194 8 7 28 7 33 1 578 194 529 50 1

719 75 9 114 122

28 9 196

20 4 8 2 32 6 22 8 199 8 6

2 0 0 7 a

873

228 196 141

0 8 11

110 'E6

5 7 IT2

80 1 00,475

141 36 3 157

49 6

72 4 113

20 9

30 3 34 8 22 6

Growth of GDP and GDP per capita (%)

95 05

I --9-" GOP - GDP per caplla

19 8 0-9 0 19 9 0 -2 0 0 0 2 0 0 0-0 7 (average annual growth %)

2.6 1.9 19 5.6 4 4 4.3

2 9 3 1 3 3 5 8 4 5 4 5

8 4 4 1 4 0 6 6 4 4 4 8

4 0 3 6 2 8 2 4 4 6 2 6 19 5 7 5 7

4 3 3 5 167 -1 1 3 1 a5

Note Figures in italics are for years otherthan those specified 2007 data are preliminary % Aiddata arefor2006

Development Economics. Development Data Group (DECDG)

indicates data are not available

- 67 -

EGYPT AT A GLANCE (CONTINUED)

Egypt, Arab Rep.

B a l a n c e o f Payments and Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services

Current account balance as a %of GDP

Workers' remittances and compensation of employees (receipts)

Reserves, including gold

Centra l Government F inance

(%of GDP) Current revenue (including grants)

Current expenditure

Overall surplus/deficit

Highest marginal tax rate ( O h )

Tax revenue

Individual Corporate

External D e b t and R e s o u r c e Flows

(US$ millions) Total debt outstanding and disbursed Total debt service Debtrelief(HIPC,MDRI)

Total debt (%of GDP) Total debt service (%of exports)

Foreign direct investment (net inflows) Portfolio equity(net inflows)

2 0 0 0

6,388 77,860 -6,774

- 1 e 3 -12

2,852

t3,629

216 I 4 .8

20.5

-3.9

32 40

29,015 1832 - 29.1 8.8

1235 289

2 0 0 7

22,018 38,308 -5,969

2,269 17

5,865

31374

23.2 15.4 26.4

-7.3

20 20

30,444 2,424 -

23.3 5.0

11578 -3,89

Composltlon oftotal external debt, 2007

W USSrnillio~

P rlvate S e c t o r D e v e l o p m e n t

Time required to start a business (days) Cost to start a business (%of GNI per capita) Time required to register property(days)

Ranked as a major constraint to business (%of managers surveyed who agreed)

r' Taxrates Economic and regulatory policy uncertainty

Stock market capitalization (%of GDP) Bank capital to asset ratio ( O h )

2 0 0 0 2 0 0 8

- 7 - 18.3 - 72

2 0 0 0 2 0 0 7

,. 80.0 .. 63.8

28.8 06 .8 5.6 5.5

Governance indicators, 2000 and 2007

vacernd aCcWnt&llty

Pditlcal stabilltv

Control d cwruvia,

0 25 50 75 100

02007 Cantry's prcentlle rmk (DlCO) 02000 hrghervtlluss ,m@y bdter ratnp

I Soume' Kaufmann-Knay-MaStN~, Wolld Bank

Technology and Infrastructure 2 0 0 0

Paved roads (%of total) Fixed line and mobile phone

High techno logy expo rts subscribers (per 0 0 people)

(%of manufactured exports)

76.1

0

0.3

E nvlro n m e n t

Agricultural land (%of land area) Forest area (%of land area) Nationally protected areas (%of land area)

Freshwater resources per capita (cu meters) Freshwaterwithdrawal (%of internal resources) 3,794 4

3 0 1

CO2 emissions per capita (mt) 2 1

GDP per unit of energy use (2005 P P P $ per kg o f oil equivalent) 6.1

Energyuse par capita (kg o f oil equivalent) 683

2 0 0 7

810

55

0.5

4 0.1 5.3

25

2.2

5.4

84 1

(US$ millions)

IBRD Total debt outstanding and disbursed 639 1lBI Disbursements 6 723 Pnncipal repayments 87 97 Interest payments 41 47

IDA Total debt outstanding and disbursed 1266 1490 Disbursements 49 t3 Total debt service 32 58

IFC (fiscal year) Total disbursed and outstanding portfolio e3 500

o f which IFC own account e 3 255 Disbursements for IFC own account 25 78 Portfolio sales, prepayments and

repayments for iFC own account 14 18

M IGA Gross exposure 0 0 New guarantees 0 0

Note: Figures in italics are fo r years other than those specified. 2007 data are preliminary ..indicates date are not available. -indicates observation is not applicable.

8/25/09

Development Economics, Development Data Group (DECDG)

- 68 - EGYPT AT A GLANCE (CONTINUED)

I

Millennium Clevefopment Goals Egypt, Arab Rep.

Goal 1: halue the rates for extreme pouerty and malnutrition Poverty headcount ratio at $1 25 a day [PPP. Z of population] Poverty headcount ratio at national poverty line [ X of population] Share of income or consumption to the poorest qunitile ( Z ) Prevalence of malnutrition [ X of children under 51

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment [net. Z ] Primary completion rate [ X of relevant age group] Secondary school enrollment [gross, Z ] Youth literacy rate [z of people ages 15-24)

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education [ X I Women employed in the nonagricultural sector (X of nonagricultural employment] Proportion of seats held by women in national parliament (X)

Goal I: reduce under-5 mortality by two-thirds Under-5 mortality rate [per 1.000] Infant mortality rate [per 1,000 live births] Measles immunization (proportion of one-year olds immunized. X I

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio [modeled estimate. per 100,000 live births] Births attended by skilled health staff [A of total] Contraceptive prevalence ( Z of women ages 15-49]

1990

7I

m 21 4

93 68 86

.?7 47

Goal 6: halt and begin to reuerse the spread of HIYtAIDS and other maior diseases Prevalence of HIV [ X of population ages 15-49] Incidence of tuberculosis [per 100,000 people] Tuberculosis cases detected under DOTS [ X I

37

Goal 7: halue the proportion of people without sustainable access to basic needs Access to an improved water source [A of population] Access to improved sanitation facilities [Z of population] Forest area [A of total land area] Nationally protected areas [A of total land area] C02 emissions [metric tons per capita] G D P per unit of energy use [constant 2005 PPP $ per kg of oil equivalent]

94 50 0.0

1.4 5.7

Goal 8: develop a global partnership for deueloprnent Telephone mainlines [per 100 people] Mobile phone subscribers [per 100 people] Internet users [per 100 people] Personal computers [per 100 people]

2.9 0.0 0.0

Education indioatur+(%)

I I I

1995

AIL9 95 M,P

E.?

19 2

72 54 89

46 48

34 50

96 55 0.1

1.6 6.1

4.5 0.0 0.0 0.4

2000

16.7 9.0 4.3

93 98 85

92 19 2

51 40 98

61 56

R I 27 54

97 61

0.1

2.1 6.1

8.2 2.0 0.7 1.2

2007

$17 5 4

96 98

b f 8

S 3

.f?i 2 J

2

36 30 9T

La? 7# 5.Q

0.1 21 72

.w 6s R I 5.7 &?A9

5 4

14.9 39.8 11.4 (I 3

ICT indicabrs (per 100 people)

=‘.I

Note: Figures in italics are for years other than those specified. ..indicates data are not available.

Development Economics, Development Data Qroup [OECDG].

8f24109

W e s t e r n

D e s e r t

L i b y a n P l a t e a u

Li

by

an

D

es

er

t

QattaraDepression

Ea

st

er

n

D

es

er

t A L WA D I

A L J A D I D

MARSA MATRUH

ASWAN

QENA

SOHAG

ASSIUT

SOUTHERNSINAI

NORTHERNSINAI

SUEZEL FAYOUM

BENI SUEF

AL MINYA

AL BAHR

AL AHMAR

Luxor

Kom Ombo

Halaib

Siwa

Qara

Mut.

Ras Gharib

Taba

Abu Zenima

Qena

Suez

Aswan

Sohag

Assiut

Benha

Tanta

Damietta

El Tur

Zagizig

Al Minya

Ismailia

Damanhur

El-Kharga

Beni Suef

El Fayoum

El Mansura

Shibin el Kom

Kafr elSheikh

CAIRO

LakeNasser

Nile

River

G I Z A

Giza

1

89

1011

12

2

3

4

5

6 7

Luxor

Kom Ombo

Halaib

Marsa 'Alam

Salum

Siwa

Qara

Mut.

Quseir.

Bir Seiyala

Ras Gharib

Taba

Abu Zenima

Giza

Marsa Matruh

Qena

Suez

Aswan

Sohag

Assiut

Benha

Tanta

Damietta

El Tur

Zagizig

Al Minya

Ismailia

Damanhur

El'Arish

El-Kharga

Beni Suef

El Fayoum

Port SaidEl Mansura

Alexandria

Al Ghurdaqah

Shibin el Kom

Kafr elSheikh

CAIRO

A L WA D IA L J A D I D

MARSA MATRUH

ASWAN

QENA

SOUTHERNSINAI

NORTHERNSINAI

SUEZ

G I Z A

AL BAHR

AL AHMARASSIUT

EL FAYOUM

BENI SUEF

AL MINYA

SOHAG

1

89

1011

12

2

3

4

5

6 7

S U D A N

SAUDIARABIA

JORDANISRAEL

LIBYA

WEST BANKAND GAZA

Aswan Dam

Nile

River

LakeNasser

Gulf of Suez

Gul

f of

A

qaba

Red

Sea

M e d i t e r r a n e a n S e a To Tel Aviv

To Port SudanTo

BerberTo

Dongola

To Jalu

To Darnah

W e s t e r n

D e s e r t

L i b y a n P l a t e a u

Li

by

an

D

es

er

t

QattaraDepression

Ea

st

er

n

D

es

er

t

25°E 30°E

30°N

25°N

20°N

30°N

25°N

20°N

35°E

25°E 30°E 35°E

ARAB REPUBLICOF EGYPT

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 33400

NOVEMBER 2004

ARAB REPUBLIC OF EGYPTSELECTED CITIES AND TOWNS

GOVERNORATE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

GOVERNORATE BOUNDARIES

INTERNATIONAL BOUNDARIES

GOVERNORATES IN NILE DELTA:

123456

KAFR EL SHEIKHDAMIETTAPORT SAIDALEXANDRIABEHEIRAGHARBIYA

DAGAHLIYAMENOUFIYASHARGIYAHQALIUBIYAISMAILIACAIRO

789

101112