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IMF Outlines $3 Billion Support Plan for Egypt

Market in Luxor, Egypt: The new program enables additional spending for job creation and protection of the poor at an historic moment (photo: Newscom)

ARAB SPRING

IMF Outlines $3 Billion Support Plan for Egypt

IMF Survey online

June 5, 2011

  • Program aims to promote social justice, support economic recovery
  • New budget foresees additional spending for job creation, social spending
  • IMF part of broad international effort to assist transformation of Middle East

Egypt has reached agreement with International Monetary Fund (IMF) on a draft 12-month $3 billion financing package to support the country’s program of economic reforms at a crucial period as the country transitions to democracy.

“Following a revolution and during a challenging period of political transition, the Egyptian authorities have put in place a home-grown economic program with the overarching objective of promoting social justice,” said Ratna Sahay, Deputy Director of the IMF’s Middle East and Central Asia Department.

The proposed one year stand-by arrangement, announced in Cairo on June 5, contains measures aimed at supporting economic recovery, generating jobs, and assisting low-income households, while maintaining economic stability. It will help Egypt lay the foundation for a more-inclusive economic program that encourages private sector-led growth.

Egypt is the first recipient of IMF financial assistance in the Middle East and North Africa since the Arab Spring movement began earlier this year. At a Group of Eight summit last month in Deauville, France, the IMF announced that it could make available as much as $35 billion in financial assistance to the region over the next few years.

Enhanced social spending

“I welcome the commitment of the Egyptian authorities to lasting change and structural reform at this historic moment for the country,” Acting IMF Managing Director John Lipsky said in a statement issued in Washington. “We are optimistic that the program’s objectives of promoting social justice, fostering recovery, maintaining macroeconomic stability, and generating jobs will bring positive results for the Egyptian people. I look forward to recommending it to the IMF’s Executive Board next month.”

The authorities’ economic program sets out a revamped budget for the next fiscal year, which begins on July 1. This new budget makes possible additional spending for job creation and protection of the poor, while limiting the widening of the deficit, Sahay said.

Egypt’s budget deficit has widened in recent months, owing to extraordinary spending measures taken by the government as a result of the protests. This larger deficit will be financed in part through foreign grants and loans from bilateral and multilateral development partners, including the IMF. This strategy ensures that sufficient domestic resources remain available for credit to the private sector, and helps reduce borrowing costs and lengthen the maturity profile of the public debt.

Expenditure in the new budget will focus on human capital and social investment, as well as labor-intensive public works to generate job-intensive growth.

On the revenue side, the budget includes a number of tax reforms to generate resources for additional social spending and enhance fairness through a moderate increase in the progressivity of the tax system. These reforms will complement efforts to strengthen tax administration and improve compliance.

The government’s plan also foresees a number of fundamental structural reforms, including the transition to a VAT-like consumption tax and reform of the highly inequitable and costly system of subsidies, which are needed to improve the efficiency of public spending and help reduce the fiscal deficit in the medium term.

Speaking at a Cairo press conference at the Egyptian Ministry of Finance, Sahay said the IMF shared the government’s view that immediate implementation of such reforms was not feasible in the context of this arrangement as additional preparatory work was needed to ensure that an effective safety net is in place to protect the low income households. “The government announced that it intends to prepare a road map to facilitate implementation of these reforms in the future,” she stated.

The press conference was attended by around 50 local and international journalists, including several television and radio stations.

Other features of the program include:

• monetary and exchange rate policies aimed at maintaining macroeconomic stability—including by preserving a comfortable level of reserves to provide a buffer against shocks—and at reducing inflation over the medium term.

• financial sector policies geared toward preserving the strength of the banking system and safeguarding domestic financial stability.

• measures to enhance transparency and create a more competitive business environment, with a particular focus on supporting small- and medium-sized enterprises.

Broad international effort

The IMF is working closely with the World Bank and other multilateral development banks on an integrated approach to stabilizing and modernizing the economies of the region. This collaboration—known as the “Deauville Partnership for the Middle East”—was launched at the Group of Eight summit in late May.

The World Bank has pledged $4.5 billion in support to Egypt over the next two years to address budget and reserve shortfalls and to finance reforms that strengthen its credit and investment prospects. In recent weeks, Saudi Arabia, Qatar, the United States and others have also promised large amounts of assistance to the country.


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