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Egypt commits to the IMF to slow down projects and increase fuel prices

Show expert report International Monetary Fund It was issued today, Tuesday, that Egypt was committed to currency flexibility, a greater role for the private sector, and a set of monetary and financial reforms, when it reached an agreement on a $3 billion financial support package with the Fund.

In a letter of intent to the International Monetary Fund dated November 30, the Egyptian government said it had requested support after the war in Ukraine exacerbated existing vulnerabilities in light of increasingly difficult global financial conditions and rising commodity prices.

Among the government’s pledges is to slow down the pace of investment in public projects, including national projects, in order to reduce inflation and preserve foreign currency, without specifying which projects will be subject to this.

The government has spent generously on infrastructure over the past few years, including on building an extensive network of roads and bridges, as well as new cities. It also began work on a high-speed rail project and a nuclear power plant, each costing tens of billions of dollars.

The IMF’s Executive Board on December 17 approved the 46-month Extended Fund Facility.

Under the letter of intent, Egypt said it would allow prices of most fuel products to rise in order to align with the country’s fuel index mechanism, to offset a slowdown in such increases during the past fiscal year.

read more: The Monetary Fund: We look forward to the flexibility of the exchange market in Egypt after the end of December

It also pledged not to interfere in foreign currency markets to achieve stability or to guarantee an exchange rate, except in cases of extreme volatility. The Egyptian pound has been allowed to fluctuate more than ever since its third devaluation in less than a year last week.

Egypt also agreed to enhance the efficiency of its monetary policy by abandoning most subsidized lending programmes, and ensuring that interbank rates remain “closely linked” to the range of interest rates decided by the central bank.

Under the facility, the International Monetary Fund will provide Egypt with about $700 million in the fiscal year ending in June.

The letter stated that the World Bank will cover $1.1 billion of the remaining funding gap for this year of $5.04 billion, the Asian Infrastructure Investment Bank $400 million, the African Development Bank $300 million, the Arab Monetary Fund $300 million, and the China Development Bank $1 billion. While the general asset sales will cover two billion dollars.

Egypt said it had obtained assurances that deposits from Gulf countries in the Central Bank of Egypt, worth $28 billion, would not mature before September 2026, and would not be used to buy shares or debt.

read more: Egyptian Cabinet: The IMF package aims to reduce government debt

The IMF documents revealed the new tax policy measures, which include the phasing out of corporate exemptions in free zones, the introduction of withholding tax on long-term foreign debt, capital gains taxes on listed companies, and property tax reform.

The documents also revealed the simplification of the value-added tax by subjecting all goods, with the exception of basic foodstuffs, to the standard value-added tax and adjusting exchange rates as needed, as well as increasing the annual license fee for cars to about 1% of the value of the car.

read more: The World Bank approves financing of $500 million for Egypt to expand social protection

The documents stated that addressing poverty and inequality requires targeted additional spending on health, education and social protection.

She indicated that the Egyptian authorities will expand the Takaful and Karama cash support program to include 5 million families by the end of January 2023, and allocate no less than EGP 153 billion for social spending in the fiscal year 2022-2023.

She added that the Egyptian authorities will also expand coverage of the social registry to 50 million people by the end of December 2023, with the aim of introducing targeting into other social protection schemes, building on lessons learned from the recently completed public spending reviews on social assistance, health and education.

The documents revealed that the Egyptian authorities will enact by the end of June 2023 the executive regulations of the Public Finance Management Law, including:

1- The main elements in evaluating the budget, starting with the submission and approval of the financial strategy document.

2- The process of updating and publishing the medium-term budget framework.

3- Require all entities to separate the baseline from new policy initiatives.

4- A climate section to provide a clear mandate for climate-related activities.

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