The new agreement, an expansion of the $3 billion, 46-month Extended Fund Facility (EFF) the IMF struck with Egypt in December 2022, was reached following three-month negotiations.

The new agreement was announced a few hours after the Central Bank of Egypt floated the local currency, depreciating it by around 62 percent, and raising the interest rates by six percent.

In a statement on Wednesday evening, the IMF said it has reached staff-level agreement with Egypt on a set of comprehensive policies and reforms needed to complete the first and second reviews under the EFF arrangement.

Egypt could not complete the two reviews of the initial loan amid the severe repercussions of the global and regional tensions that weigh heavily on its economy.

As per the IMF statement, the reforms revolve around six factors, including a move to a flexible exchange rate system and tightening monetary and fiscal policies. They also include a slowdown in infrastructure spending to reduce inflation and preserving debt sustainability, while fostering an environment that enables private sector activity.

These policies, the fund added, will help preserve macroeconomic stability, restore confidence, and allow Egypt to manage the challenges associated with recent external shocks.

IMF Mission Chief for Egypt Ivanna Vladkova Hollar said moving towards a flexible exchange rate will help increase the availability of foreign exchange and  eliminate the current backlog of unmet foreign exchange demand and also help re-establish a well-functioning interbank market for foreign exchange.

“There was agreement that a flexible exchange rate regime would help Egypt manage external shocks and would support the authorities’ decision to move towards a full-fledge inflation targeting regime over time,” she noted.

Egypt is committed to apply additional monetary policy tightening to reduce inflation and reverse the recent dollarization trend, according to Hollar.

She welcomed the CBE’s hiking of the interest rates by 600 basis points, in addition to the 200 basis points undertaken last month.

Hollar said Egypt also agreed to maintain fiscal prudence over the medium-term and step-up efforts to mobilize additional domestic revenues, including through the rationalization of tax exemptions as well as to use a substantial part of divestiture proceeds to reduce debt.

Under the deal, Egypt is committed to slow down infrastructure spending, including on projects that have so far “operated outside regular budget oversight,” the statement added.

Hollar referred to the government’s decision of limiting the total amount of public investment from all sources, including the budget, state-owned enterprises, economic authorities, and other entities.

Egypt also agreed to provide adequate levels of social spending to protect vulnerable groups.

Days before the deal, Egypt announced an additional EGP 180 billion social protection package for FY2024/25, in addition to the expansion of the Takaful and Karama cash transfer programme in 2023.

Egypt, Hollar added, indicated it would continue to provide support to ensure adequate living conditions for low and middle-income households that have been hit particularly hard by rising prices.

Finally, Egypt expressed its commitment to unleash private sector growth, she added, making a reference to Egypt’s State Ownership Policy — a government-drafted roadmap for expanding the private sector’s role in a number of economic activities.

“Recent reforms eliminating preferential tax treatment and exemptions for state-owned enterprises are a step in the right direction. The accelerated pace of FDIs and divestiture programmes since mid-2023 is a positive development that should contribute to improved confidence by markets and investors,” noted the statement.

This agreement is subject to approval by the IMF Executive Board.