WASHINGTON: The Executive Board of the International Monetary Fund (IMF) approved a three-year extended arrangement under the Extended Fund Facility (EFF) for the Arab Republic of Egypt for an amount equivalent to Special Drawing Right (SDR) 8.597 billion (about $12 billion, or 422 percent of quota) to support the authorities’ economic reform program.

The EFF-supported program will help Egypt restore macroeconomic stability and promote inclusive growth. Policies supported by the program aim to correct external imbalances and restore competitiveness, place the budget deficit and public debt on a declining path, boost growth and create jobs while protecting vulnerable groups. The executive board’s approval allows for an immediate purchase of SDR 1.970 billion (or about $2.75 billion). The remaining amount will be phased over the duration of the program, subject to five reviews.

Following the executive board’s discussion, Managing Director and Chair Ms Christine Lagarde said: “The Egyptian authorities have developed a homegrown economic program, which will be supported under the IMF’s Extended Fund Facility, to address longstanding challenges in the Egyptian economy. These include: a balance of payments problem manifested in an overvalued exchange rate, and foreign exchange shortages; large budget deficits that led to rising public debt; and low growth with high unemployment.”

“The authorities recognise that resolute implementation of the policy package under the economic program is essential to restore investor confidence, reduce inflation to single digits, rebuild international reserves, strengthen public finances, and encourage private sector-led growth. The liberalisation of the exchange rate regime and the devaluation of the Egyptian pound were critical steps toward restoring confidence in the economy and eliminating foreign exchange shortages,” she added.

“The new exchange rate regime will be supported by prudently tight monetary policy to anchor inflation expectations, contain domestic and external demand pressures, and allow accumulation of foreign exchange reserves. Reducing fiscal deficits considerably and thereby placing public debt on a clearly declining path is an important objective of the authorities’ program. To this end, the key policy measures are the introduction of a VAT (Value-added tax), a reduction of energy subsidies, and the optimisation of the public sector wage bill.”

She further said: “To mitigate the impact of the reforms on the poor, the authorities intend to use part of the fiscal savings to strengthen the social safety nets. The planned fiscal consolidation is projected to reduce public debt by almost 10 percentage points of GDP (Gross Domestic Product) by the end of the program. Structural reforms are critical for the success of the program. The aim is to address deep-seated structural impediments to growth and job creation, and create an enabling environment for private sector development.”

“The main areas of reforms include business licensing and insolvency frameworks; public financial management, including state-owned enterprises; energy sector and subsidy reforms; and labour market reform to create jobs and increase labour market participation, especially among women and young people. Risks to program implementation are significant, but are mitigated by the strength of the policy package, frontloading of major measures implemented as prior actions, and broad political support for the objectives of the program and ambitious policy efforts.”