IMF Survey: IMF Outlines $3 Billion Support Plan for Egypt

IMF News, June 5, 2011

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Egypt reached agreement with the International Monetary Fund on a draft 12-month $3 billion financing package to support the country's program of economic reforms during its transition to democracy.
Announcement date: June 5, 2011.
The proposed one year stand-by arrangement contains measures aimed at supporting economic recovery, generating jobs, and assisting low-income households, while maintaining economic stability.

Overarching objective: promoting social justice through a home-grown economic program (as stated by Ratna Sahay, Deputy Director of the IMF’s Middle East and Central Asia Department).
Program aims:
- Support economic recovery.
- Generate jobs.
- Assist low-income households.
- Maintain macroeconomic stability.
- Lay the foundation for a more-inclusive program that encourages private sector-led growth.

New fiscal year begins on July 1; the revamped budget makes possible additional spending for job creation and protection of the poor while limiting the widening of the deficit.
Egypt’s budget deficit has widened in recent months owing to extraordinary spending measures taken as a result of the protests.
Financing strategy for the larger deficit:
- Partly financed through foreign grants and loans from bilateral and multilateral development partners, including the IMF.
- Strategy aims to ensure sufficient domestic resources remain available for credit to the private sector, and to help reduce borrowing costs and lengthen the maturity profile of the public debt.
Expenditure focus:
- Human capital and social investment.
- Labor-intensive public works to generate job-intensive growth.
Revenue-side measures:
- 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.
- Efforts to strengthen tax administration and improve compliance.

Government plan foresees fundamental structural reforms, including:
- Transition to a VAT-like consumption tax.
- Reform of the inequitable and costly system of subsidies to improve efficiency of public spending and help reduce the fiscal deficit in the medium term.
Sequencing and safeguards:
- Immediate implementation of such reforms was judged not feasible within the context of this arrangement; additional preparatory work is needed to ensure an effective safety net is in place to protect low income households (statement attributed to Ratna Sahay).
- The government intends to prepare a road map to facilitate implementation of these reforms in the future.

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 competitiveness:
- Create a more competitive business environment with a particular focus on supporting small- and medium-sized enterprises.

Egypt is the first recipient of IMF financial assistance in the Middle East and North Africa since the Arab Spring movement began earlier in the year.
At a Group of Eight summit 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.
The IMF is working closely with the World Bank and other multilateral development banks under the “Deauville Partnership for the Middle East.”
The World Bank pledged $4.5 billion in support to Egypt over the next two years to address budget and reserve shortfalls and to finance reforms.
Additional bilateral promises of assistance were noted from Saudi Arabia, Qatar, the United States and others.

John Lipsky, Acting IMF Managing Director, said: “I welcome the commitment of the Egyptian authorities to lasting change and structural reform at this historic moment for the country. 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.”
Press conference attendance: around 50 local and international journalists.

IMF Survey: IMF Outlines $3 Billion Support Plan for Egypt