Project assistance completion report : private investment encouragement fund

Eight loans, totaling $17.8 million, were made under the PIEF; recipients included GM Egypt, Fayrouz Hospital, Pioneer Seed, Berzi Confectionary and Food Co., Arab Aluminum Co., Arab Medical Food Co., MISR Poultry Grandparents, and South Egypt Drug Company. Six banks participated in the PIEF, and 50 million Egyptian Pounds (LE 50 million) were leveraged (if some lending which might have taken place anyway is included). Average loan length was 5 years, which, while not long-term by U.S. standards, is long-term in the Egyptian context. Nevertheless, the project cannot be considered to have achieved its overall goal of encouraging financial institutions to make longer-term investments in the private sector. The failure is primarily due to the restrictive climate created by both Egyptian regulatory practices and USAID lending requirements which were applied early in the project, including administratively set financial variables (i.e., credit allocations, interest rates, and exchange rates), and excessive regulations governing loan approvals which precluded banks from engaging in normal, market based financial intermediation. Further, there is no indication that the project fostered greater collaboration among financial institutions, another of its stated objectives. About $15.2 million of the funds were disbursed through the PSCIP mechanism (adopted to circumvent delays in loan approvals), reflows from which were to accrue to a Local Currency Special Account; as of June 30, 1992, the account was still $3.74 million short of the required $15.2 million. A number of lessons were learned concerning credit projects. USAID should, as a rule, avoid directed credit projects, except in cases of serious market failure or to redress past discrimination in lending. Recommended is analysis of a host country's policy, legal, and regulatory framework as it affects the financial sector, coupled with policy-based non-project assistance to encourage liberalization of the economy and financial system; projectized assistance should be used mainly as a catalyst in a favorable policy environment. USAID's regulations and administrative requirements compounded the burden of host country regulations; given the unpleasant experiences in adhering to and negotiating the complex web of rules and regulations which attended this project, USAID should stick to the maxim "keep it simple."