In an interview first published by the Al-Ahram daily newspaper on June 10, 2015 during Jim Yong Kim’s first visit to Egypt, the World Bank’s President reveals the purpose of his visit, the bank’s portfolio and view for Egypt’s economic reforms.
During your expected visit to Egypt, you will be meeting President Abdel Fattah al-Sisi, and Prime Minister Ibrahim Mahlab and other officials, so what is the main purpose of your visit?
This is my first visit to Egypt. I am looking forward to meeting President al-Sisi and Prime Minister Mahlab as well as all the other cabinet ministers and officials that I will meet during my short stay. I would like to confirm to them personally the World Bank Group’s deep commitment to our partnership with Egypt. This is a partnership that focuses its vision on helping the poor, especially outside the urban centers in regions that lag behind Cairo and Alexandria in development and access to opportunity.
I will be confirming to the President the World Bank Group’s commitment to double our annual support in the next four years to $1-1.2 billion.
MENA region is in the midst of a period of severe conflict and insecurity. Peace and stability are prerequisites for any growth that helps the poor. Egypt is central to regional stability and I am here to confirm to the GOE that the World Bank Group appreciates fully the challenges and wants to work with them to make sure that Egypt is economically well positioned to be the anchor for stability and growth.
What sectors does the Bank support in Egypt and what is the lending portfolio like?
Egypt is a priority country for the World Bank Group. Just on the financing side, the World Bank, with a portfolio of 26 projects worth $5.9 billion has the largest portfolio among all development partners currently active in Egypt. The International Finance Corporation, the Group’s private sector financing arm, has a portfolio that accounts to approximately $1 billion over 33 projects.
Financing is only part of the story. What we bring in our engagement is also technical expertise, global knowledge and ability to convene development partners towards a common agenda that helps the poor and promote inclusive growth.
Our focus are on projects that promote economic inclusion: providing greater opportunities for youth, insuring that women fully participate in the economy, supporting smallholder and family farmers, and helping develop poorer regions of the country like Upper Egypt.
Thus, we operate in many different sectors including energy, finance, transport, health, social protection and labor, agriculture and water, and environment.
How do you select and review the projects you support? And how do you support small and medium size enterprises?
The World Bank Group is currently in the process of preparing a new Partnership Framework with the Government of Egypt for the next five years. The strategy aims to support the government in achieving its objective of shared growth and greater social justice. In this new strategy we will increase our focus on the social sectors. In the coming five years we would like to focus on education, service delivery to the poor and lagging regions, as well as on creating jobs.
We will support the priorities of the Government of Egypt especially in areas of macroeconomic stability, improving governance, and building a solid social safety net.
Egypt had a very successful economic development conference in Sharm El-Sheikh in March, sending a clear signal that the country is open for business and welcomes more foreign investment. Reaping the fruits of the impressive political and investment support that Egypt received will require persistent action to ensure hospitable investment climate, rule of law, transparent and accountable public institutions.
Since January 2011, the Egyptian economy has gone through an unstable phase. What is your evaluation of the problems facing the economy? According to some international financial organizations, the Egyptian economy has slightly recovered, what does this economy need to gain back its strength and stability?
Egypt’s economy is showing signs of recovery after 4 years of subdued growth. Annual GDP growth spiked to 5.6% in the first half of Fiscal Year 2015. This is the highest growth rate realized since the global financial crisis in 2008, and is much higher than the muted 2% realized over the 3-years following the January 2011 revolution. Recent improvements in economic activity reflect the gradual restoration in confidence and higher investment spending.
However, the government is facing the dual challenge of nurturing economic recovery, while addressing long standing structural issues, including high unemployment rates especially among the youth and women, and a deteriorated infrastructure base. Unemployment, although still high at 12.8%, has started to slightly decline. Youth unemployment is a key challenge as 63% of the current 3.6 million unemployed are between 15-29 years old.
Egypt has adopted some bold fiscal consolidation measures in July 2014 which tackled both revenues and expenditures while enhancing social and capital spending. If this reform path and pace is maintained, macro stability can be restored, fiscal sustainability can be realized over the medium term, and the economy can maintain high growth. Efforts are also underway to step up social spending to comply with constitutional stipulations, however, better targeting and mitigation measures and a coherent policy to bring down the current high inflation rates are crucial to protect the poor and vulnerable.
Going forward, Egypt’s main priority is to enable a private sector led growth that benefits all segments and groups, by vitalizing the private sector capacity to create jobs that can absorb a growing labor force and to gradually bring down the unemployment rate. This requires polices that enhance investors’ confidence, promote labor intensive sectors, and mobilize adequate resources to finance Egypt’s medium-term economic development and growth strategies. Our private sector arm, the International Finance Corporation, has a strong presence in Cairo with a team of private sector experts who are well-placed to support growth and job creation.
What are the prospects for the future of the Egyptian economy with the problems facing the region such as lack of security and threat of terrorism?
Peace and stability in Egypt – and in the MENA Region at large – are global public goods. They are requirements for economic development and prosperity. The World Bank Group is focusing on supporting Egypt and the region at large in addressing the root causes of instability, at economic, social and institutional levels. We are ready to mobilize the necessary financial resources and technical assistance to support reforms in education and vocational training, partnering with the government and the private sector, to address the quality gaps and bridge the current skills mismatch, thus improving the employability of youth, women and the economically disadvantaged.
Social inclusion is key to anchor and promote inclusive growth including in lagging regions and we are providing support in this area including expanding social safety net program to reach the poorest households and mitigate impact of any reforms. We are also encouraging private investment in vocational and post-secondary education. A thriving private sector can contribute to reducing poverty and increasing shared prosperity in Egypt through job creation, investment and innovation.
Egypt recently passed a new investment law. How do you think this will help Egypt become an attractive market? And how do you find the current and future state of investments in Egypt? What do you think is the most attractive field for FDI in Egypt?
Passing amendments to the Investment Law was an important first step which signaled to investors that the Government is serious about improving the investment climate. Such reforms need to be a continuous process that rests on strong and inclusive dialogue with the private sector.
Today, Egypt has a unique opportunity to address severe constraints to businesses that have crippled the investment environment for far too long. Whether in terms of scrapping and simplifying outdated investment procedures; making access to industrial land easier and more transparent, or improving competition framework. It is time for Egypt to make a historic qualitative jump in its investment climate if it wants to boost investment and job creation. Moreover, if these obstacles remain intact, they will limit the impact of current economic policies and planned large public investment projects. What matters to investors is the actual implementation of regulations, not only what’s on the books: how predictable, simple and non-discretionary implementation is?—that’s what matters most to businesses. It will take a lot of political will to tackle these deeply entrenched issues. Yet, the payoff could be huge in terms of investments and job creation.
The good news is that Egypt has great potential. Not too many years ago, Egypt increased its FDI to around US$13 billion, the region’s highest at the time. However, Egypt needs to attract the right type of investments. Those that create jobs, reduce poverty and boost shared prosperity. It can become an attractive area for business again given its many strengths. Egypt has an enormous human capital base with its close to 90 million population, largely urbanized with an entrepreneurial tradition and talented youth eager to work. Egypt’s geographical location at the crossroads of three continents could be most attractive for both local and foreign investors. The industrial tradition offers a strong base to build upon and various sectors can leverage on this large internal market and take advantage of the strategic location. The recent opening of infrastructure to the private sector with spillover into the construction sector, could contribute significantly to job creation. But investors’ confidence needs to be boosted through transparent and clear investment policies, along with improved stability in the domestic economic, political, and security environment.
Some major economies like the USA believe that offering incentives to foreign investors could harm the national economy, so why do you think the poor countries try to offer more incentives? What could be another option to attract FDI?
Although we understand that countries try to compete to attract multinational investments by offering them tax breaks, cheap land or subsidized inputs, these come at a cost and can do more harm than good. Incentives are only a marginal part of what determines FDI attractiveness. A lot of research around the world, some conducted by the World Bank Group, has shown that incentives rank very low among the factors that influence international companies’ decisions to invest in a particular country. What matters most is the size of the market, the quality of the investment climate—its predictability, the extent to which property rights are protected, etc.— and the availability of skills. For Egypt, what is paramount is to significantly improve the environment in which businesses invest and operate. In the current context, incentives alone will not make a major difference. Many other countries around the world have made substantial progress to improve their attractiveness. Egypt can do the same. It will require a serious overhaul of its regulatory business environment. I understand this is the ambition of the Government of Egypt and it has set itself a high bar. This is good news, and the World Bank Group will support these reforms.
Egypt just issued a US$1.5 billion Dollar Bonds in the European countries, does this help in enhancing the trust in the Egyptian economy?
We would like to congratulate the Egyptian authorities for successfully raising US$1.5 billion in international bonds on June 4th 2015, their first international issuance in five years. Egypt drew more than US$4.5 billion of investor orders, three times the amount issued. This indicates a gradual restoration in confidence by international investors in Egypt’s economic prospects in light of recent economic reforms implemented and improved macroeconomic indicators.
Economic reforms that create conditions for a stable macroeconomic framework (including the reduction of the fiscal deficit) will enhance trust in the Egyptian economy, make the business environment more conducive to private sector development and private sector-led job creation, and lay the foundations for more inclusive growth in a country where past growth was not accompanied by shared prosperity.
What role can the World Bank play in reducing the negative effects of the plans that the IMF applies to countries with hard economic situations including Egypt?
Generally, countries go to the International Monetary Fund when facing macroeconomic instability and difficult external vulnerabilities. In order to secure the IMF’s support, these countries come up with a program of reforms that entails difficult stabilization measures. On the other hand, the World Bank Group is concerned with ending extreme poverty and promoting shared prosperity by fostering the income growth of the bottom 40% of every country. We are not a bank in the ordinary sense but a unique partnership to reduce poverty and support development.
The World Bank is a vital source of financial and technical assistance to developing countries around the world. We, at the World Bank Group, provide advice and financial support for complementary policies and investments aimed at enhancing the consumption and investment capacity of the poor and vulnerable populations so they can cope better with the instability. Our role also involves supporting government policies and investments that lay the foundation for shared prosperity and long term growth.
To what extent does the WB support the economy of countries dealing with crises like inflation, unemployment, and the like?
The World Bank was very effective in helping countries, especially low income countries, during the 2008 food price crisis. We are prepared to provide a similar response to counter the impact on the poor and most vulnerable members of society. Similarly, in our new operating model, jobs is one of the key drivers of shared prosperity. So we do pay attention to countries facing high unemployment, especially among the youth and women.
More generally, many projects supported by the World Bank Group which includes private sector and risk-insurance projects by the International Finance Corporation and the Multilateral Investment Guarantee Agency, are aimed at expanding the production capacity and enhancing the efficiency of the economy and improving the functioning of markets. These include infrastructure projects, trade and logistics projects or investments in specific sectors. As such these projects enhance the supply side of the economy and/or the intermediation between supply and demand of goods and services, including labor. This helps reduce inflation and unemployment.
What are the political and economic policies that the Bank follows when dealing with countries facing economic deterioration?
When countries face economic deterioration, you have to determine whether it is a short-term or short-lived event or if it is a longer term, more permanent trend. Internal and external factors as well as structural policy distortions are all taken into account. The World Bank Group’s support is based on our understanding of the nature of the deterioration and is formulated in agreement with the Government. Our response can range from support to projects and policies aimed at boosting the short-term capacity of the economy to dealing with the root causes of the structural distortions that caused the economic deterioration. In all cases, we pay close attention to mitigating the impact of the economic deterioration on the poor and boosting shared prosperity in the short and long term.
What are the Bank’s policies when it comes to countries in conflict like Syria, Libya and Yemen? How does the Bank deal with these countries?
Tackling the challenge of fragility, conflict and violence is fundamental to achieving the World Bank Group’s twin goals, to end extreme poverty and promote shared prosperity by 2030. The World Bank Group is committed to help countries meet this challenge, which requires transformative engagement to address development risks and deliver solutions.
Given the World Bank’s mandate and authorizing environment, our strategy is to lessen the impact of the spillover from the Syrian crisis on the neighboring countries, mainly Jordan and Lebanon. We also helped the Kurdistan Regional Government (KRG) assess the impact of the Syria/Iraq crisis on its economy in light of the flows of internally displaced persons (IDPs) and refugees. The Bank is taking an incremental approach and responding to Governments’ requests and the situation as it evolves.
In Libya, the Bank’s engagement is strictly technical, and there is no dialogue/engagement at the policy level with either of the two factions pending a resolution of the governance crisis. However, we have developed important relations with technical staff of line ministries and the Central Bank of Libya that we are maintaining and strengthening. We also maintain close relations with the UN, who are taking the lead in ongoing peace talks. We look forward to a resolution to the political and security crisis in the country which would allow Libyans to come together to define a vision and strategy for a more prosperous and peaceful future.
The security situation in Yemen had deteriorated to the degree that we have suspended our operations there. We organized an evacuation flight to Cairo for our Yemen staff and their independents, where they will stay until the security situation improves. We are well aware of the large number of Yemenis that rely on the projects supported by the World Bank,. We have a US$1 billion portfolio and we are monitoring the situation closely and will resume operations as soon as the situation allows.
Does the WB play a role in combating the corruption that affects the budgets of the countries?
Absolutely. The World Bank has a unique global expertise when it comes to helping governments around the world in their fight against corruption. The World Bank provides knowledge and best practices based on success stories from other countries to help governments make their laws and policies corruption-proof. At the policy implementation level, the World Bank supports governments in making budgets more transparent, and more participatory, and to disclose additional financial information to the public on the internet in a way that is accessible and user-friendly. Egypt has made progress in this area in the past few years, for instance by publishing the financial statements of its Economic Authorities and Public Companies on the Ministry of Finance website. Transparency and broad disclosure of information to the public could reduce opportunities for discretion and corruption. The World Bank also helps countries, including Egypt, modernize their financial management systems, their financial control systems, and their procurement systems. This allows governments to better track how budgets are executed and how money is spent.
Finally, at the policy and budget monitoring level, the World Bank supports state accountability institutions in their efforts at auditing how their money was spent, and whether it went to the right place. It also provides other oversight institutions, like Anticorruption Agencies, with capacity building, expertise, and experience from other countries.
How does the World Bank deal with corruption in companies implementing Bank projects?
The World Bank Group has zero tolerance for corruption in projects it finances. We have corporate procurement guidelines including integrity guidelines that need to be met by companies doing business with the World Bank Group. Our procurement staff and due diligence team at IFC work closely with project teams to ensure these guidelines are followed.
We have recently created a new Global Governance Practice to promote a variety of governance and risk prevention tools and to detect red flags early on and empower project teams to address these risks.
Companies engaged in misconduct impacting Bank-financed projects will be sanctioned. Debarred companies by the World Bank Group will also be cross-debarred by other multilateral development banks including the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development and the Inter-American Development Bank. When a company is debarred by any of these Banks, it cannot engage in any business with the other four banks.
We also work with companies on our debarment list to improve their integrity compliance standards and ensure that their operations in developing countries follow the same integrity standard that they apply elsewhere.
Our approach with smaller companies is to engage with them early on and promote our procurement standards which cover integrity risks. The objective here is to create a level-playing field where companies that advocate for clean business have the opportunity to engage in development projects.
Does the Bank report the corruption to national governments and do these countries face international sanctions?
The World Bank conducts investigations relating to misconduct impacting Bank-financed projects. Upon the completion of an investigation by the World Bank’s Integrity Vice Presidency, a Final Investigative Report is referred to concerned national authorities to determine whether or not their national legislations have been violated. The World Bank Integrity Annual report includes a list of all Referral reports and countries that these reports have been referred to.
Do these countries face international sanctions?
No. The World Bank Group can only impose sanctions on companies where evidence of misconduct has been substantiated as part of an investigation. The severity of the sanction on a company is determined by the World Bank Group’s Independent Sanctions System and may range from a letter of reprimand to lifetime debarment depending on the type of misconduct and case specifics. An updated list of companies sanctioned by the World Bank Group is publicly disclosed on our webpage (www.worldbank.org/integrity).
The political leadership in Egypt has aspirations that the Egyptian economy will soon be stabilized and the national income will recover specially after the economic conference that was held in Sharm El Sheikh and the coming inauguration of the new Suez Canal. Do you think those aspirations will materialize?
The Egyptian economy will stabilize and resume strong growth. The outcome of the Sharm El Sheikh conference and the new Suez Canal will contribute to Egypt’s economic stability and growth. But two other developments will have an even stronger impact. The first is stabilization of the macroeconomic imbalances, especially the fiscal deficit, which will in turn make Egypt a more attractive investment destination. Second, an improvement in the investment climate for private-sector growth, since it is the private sector that will be the engine of productive jobs, especially for young people. And among the many features of the investment climate that need improvement, the most important is competition in the domestic economy, so small firms can compete on an equal footing with larger firms, and foreign and domestic investors can enter into a level playing field.
What are the risks that will be facing the international economy in the near future? Could we be facing another economic crisis as in 2008 which negatively affected amount of aid given to poor countries?
The main risks facing the global economy are continued stagnation (and possibly deflation) in Europe, a slowdown in the U.S. economy, and a “hard landing” or sharp decline in growth in China. The only way we will be facing another economic crisis is if all three of these downside risks materialize at the same time, something that is not very likely.
What is your forecast concerning the world economy? There are various economic groups like the G8 and G 20, how does the World Bank deal with such entities?
The global economy is expected to grow by just under 3 percent in 2015. This is slightly better than the 2.6 percent rate achieved in 2014. The footprints of sharply lower oil prices on the global economy have become more visible with private consumption picking up and inflation falling across major oil-importing economies. At the same time, oil exporters are facing increasing headwinds with financial market and exchange rate volatility increasing. Low-income countries in Sub-Saharan Africa will remain buoyed by robust investment while activity in some fragile states should recover as the Ebola epidemic abates, security improves, or peacebuilding efforts progress. A gradual recovery is expected as the United States, Euro Area, and oil-importing emerging economies gather strength. We will be releasing a very detailed report on global economic prospects tomorrow.
The World Bank Group supports the G20 with analytical work based on our on-the-ground experience and our regular dialogue with countries on their development challenges, plans and goals. Just as we bring insights from this experience to the G20 we try to bring the perspectives of the low income countries. We also work closely with other international organizations and coordinate very closely with our MDB colleagues on issues such as infrastructure.
We appreciate the invitations to the G7 outreach sessions and welcome the opportunity to contribute to this process, again bringing our global knowledge and perspective.
