Egypt is joining a major World Bank initiative – the Sustainable Finance Facility (SFF) – to improve domestic capital markets. Together with recent policy initiatives by the government, this comprehensive program can draw more private investment into sectors needed for building a resilient economy while helping the government improve the efficiency and cost of its own domestic financing needs.
SFF, as part of the World Bank Group’s Joint Capital Market Program (J-CAP), supports efforts in a select group of developing economies to realize the benefits of strong local capital markets. Funded by Switzerland’s State Secretariat for Economic Affairs (SECO), the SFF helps sectors that require long-term financial investments in local currency to tackle pressing global challenges and to create jobs. The work reflects the importance of creating the right domestic conditions, including policy and regulatory certainty, as well as appropriate financial instruments to attract private capital.
macroeconomic challenges remain in the North African country. Gross domestic product (GDP) growth remains moderate, though it is projected to increase from 2.4 percent in FY24 to 4.6 percent by FY27. Poverty remains stubbornly high. Unemployment has ticked lower, but Egypt’s labor force participation rate remains low. International financial flows are uncertain at a time of geopolitical risk and disruptions to world trade.
The initiatives for improving Egypt’s capital markets include more liquid and efficient government bond markets to finance public debt at lower cost, and a broader base of long-term institutional investors, including private pension funds and insurance companies, and select market innovations such as carbon markets, stronger securitization markets, and real-estate investment trusts (REITs). These changes can open opportunities for financing Egypt’s development in the areas of infrastructure (especially water), housing, and support for innovative small- and medium-sized enterprises (SMEs).
The World Bank and the International Finance Corporation launched the J-CAP program in 2017 to help developing countries realize the benefits of strong local capital markets, which can help dampen the effects of volatile international conditions and contribute to financing key strategic sectors. World Bank staff worked with Egyptian authorities in mid-2024, carrying out a diagnostic of Egypt’s capital market to identify issues and opportunities, and suggest areas of reforms that can support a sustainable development plan for its capital market.
Government Bonds
A priority for the World Bank Group has been supporting the Ministry of Finance in improving price formation and greater predictability in the government securities market to create a reliable yield curve as the basis for the development of other capital markets instruments.
Highlights of the progress made by the Ministry of Finance include a new decree on primary government bond dealers – banks – that it issued in June 2024. Measures that encourage greater secondary market liquidity will increase competition for government bonds, and thus lower borrowing costs. The World Bank will support the ministry and the Central Bank of Egypt in these efforts.
Investor Demand
Currently, Egypt has a very narrow institutional investor base. While the state social security fund has assets of roughly 15 percent of GDP, other institutional investors – insurance companies and pension funds linked to unions or professional groups and some money market mutual funds linked mostly to banks – amount to less than 1 percent of GDP. By contrast, peer countries generally boast an institutional investor base of 10 to 20 percent of GDP.
The World Bank will support Egyptian authorities in exploiting the opportunity to improve the functioning of the state social security fund while maintaining a safe risk profile, as well as assess opportunities in collaboration with the International Finance Corporation (IFC) on potential demonstration projects, funds, and transactions that can help to encourage more diversification of assets and investments.
The government of Egypt’s recent enactment of the new Unified Insurance Law 2024 will create a legal framework for the development of voluntary private pension funds. The initial feedback from insurance companies and asset managers shows an interest in offering these types of pension funds. World Bank work under the SFF aegis will include advice on the design of a voluntary private pension fund pillar that is suitable for the Egyptian context.
Investible Assets
The work planned under the SFF envisions a variety of initiatives aimed at generating opportunities for Egyptian institutional investors. The work would include developing alternative funding avenues for SMEs, especially via non-bank financial institutions and securitization funds. In Egypt, SMEs are a cornerstone of the economy, playing a vital role in driving growth, job creation, and economic diversification. They represent a significant portion of the private sector and contribute substantially to the GDP. Other work may include supporting Egyptian authorities as they improve the legal framework for real estate investment trusts (REITs).
Conclusion
The launch of the SFF in Egypt – a new phase in J-CAP work – represents an exciting new phase in efforts to support the development of its domestic capital markets. The challenges not small. But the World Bank now has an important opportunity to support the government of Egypt in jumpstarting capital markets to the benefit of the Egyptian people.