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January 23, 2018

IMF released its staff report and selected issues report for the Arab Republic of Egypt. These reports are in the context of the 2017 Article IV consultation, the second review of economic reform program supported by an arrangement under the Extended Fund Facility, and the request for modification of performance criteria. The report highlights that the authorities are undertaking a comprehensive review of the Law of the Central Bank and the Banking System and their goal to bring the Law in line with the best international practices is welcome. However, the amendments must be carefully considered, as they could have profound implications for the banking system, among others.

The staff report reveals that aggregate capital adequacy ratio (CAR) improved from 14.1% in December 2016 to 14.5% in June 2017, helped by the decision of the Central Bank of Egypt (CBE) to allow banks to include current-year profits in the CAR calculation and prohibit dividend payments for all banks. CAR of 14.5% is well above the Basel-recommended floor of 9.25% and the CBE-mandated 11.25%. The stock of nonperforming loans (NPLs) increased by only 2.3% in the first half of 2017, with the NPL ratio improving to 5.5% due to strong credit growth during this period; moreover, specific loan-loss provisioning coverage is 91.1%. The report also highlights that the banking sector is resilient to moderate shocks and that capital and operating profits are sufficient to absorb possible loan impairments. Banks maintain solid liquidity buffers and execute active balance sheet management, to mitigate the interest rate and liquidity risks from large holdings of government securities. However, several smaller banks, whose capital adequacy, asset quality, and profitability are below the sector averages, remain vulnerable. Solvency pressures in these banks are often explained by the CBE’s stringent capital requirements for excessive loan concentrations. CBE supervision closely monitors implementation of these banks’ remediation plans. These banks do not pose significant risks to financial stability, considering their small market share. Going forward, CBE will continue to enhance systemic risk oversight and prudential supervision.

The efforts of authorities will be focused on a) strengthening the regulatory and supervisory framework, including consolidated supervision; b) phasing in the capital conservation buffer in line with the Basel timelines; c) promoting competition to enhance efficiency in the delivery of financial services; d) strengthening the crisis management and resolution framework to mitigate potential systemic risks; and e) promoting financial inclusion without compromising credit quality. CBE is upgrading the early intervention and resolution frameworks. It is developing a new regulation with clear differentiation between the early intervention and resolution triggers, matrix of enforcement actions, and provisions of the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions. The authorities and staff agreed that implementation of the resolution framework required incorporation of the Key Attributes in the Law of the Central Bank and the Banking System. The authorities have already taken actions to strengthen banking supervision and the regulatory framework. These include (a) implementation of the Internal Capital Adequacy Assessment Process (ICAAP) in the banking sector; (b) strengthening the supervisory early warning system; and (c) implementation of higher capital requirements for domestic systemically important banks.

The selected issues report covers issues such as unlocking higher and more inclusive growth, along with the modernization of the monetary policy framework and international tax regime in Egypt.

 

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Keywords: Middle East and Africa, Egypt, Banking, Article IV, Basel, NPLs, CAR, Resolution Regime, IMF

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