The International Monetary Fund (IMF) has said that the recently-approved automatic fuel price mechanism will protect Egypt’s budget from movements in the global oil markets, Egypt Oil & Gas reports.

The fund said in a staff-level report that the mechanism will adjust the prices of most types of fuel to reflect changes in global oil prices, the value of the Egyptian pound, and the proportion of imported fuel in national consumption.

The reform will lessen the fluctuations in Egypt’s fuel subsidies expenditure caused mainly by increases in global oil prices. Estimates of fuel subsidies as a percentage of GDP in fiscal year 2018/19  almost doubled to 2.1%, up from 1.2% following the rise in global prices.

The decision to implement the mechanism was approved by the prime minister in June 2018, and will be introduced by the end of 2018.

The IMF also advised the Central Bank of Egypt (CBE) to maintain its tight monetary policy to avoid further increases in the inflation rate.

Following the government’s latest round of subsidy cuts, headline inflation increased by more than 3% to 14.4% in June, data from the CBE showed.

“The Central Bank of Egypt should maintain its restrictive stance to contain second-round effects of fuel and electricity price increases, with future policy changes guided by inflation expectations and demand pressures,” IMF First Deputy Managing Director David Lipton stated.