Egypt’s External Public Debt: Reasons for Current Situation and Ways of Dealing

The Egyptian economy transformed from directed one in which market prices are not considered a directed and guided drive to an open economy depends heavily on market forces and the resulting price indicators, which cast a shadow over the management of the government’s financial sector on the one hand, and monetary policies on the other.

Globally, public debt has exceeded $350 trillion, while the world’s gross domestic product is estimated at $97 trillion, which indicates a doubling of debt as a ratio to output.

Emerging economies have seen debt ratios range from 100% – 150% of GDP.  The ratio of public debt to the gross domestic product means the balances of domestic and foreign or external debt. Looking at the Egyptian case, we find that the public debt, both domestic and foreign, is still within the safe limits, as the ratio of external debt to GDP is about 37%, and about 85% for the internal debt in the fiscal year 2022/2023 – which was 91.1% in 2016/2017 – that is still less than 150% as an accepted average.

In the same context, when the value of the domestic product reaches 9 trillion Egyptian pounds (450 billion dollars), the current total external debt represents only one-third of the GDP, meaning that the Egyptian state is able to pay.. And the domestic public debt does not represent any danger due to the considerations that it represents one of the sectors that financed the budget deficit.

This report aims to highlight the developments of Egypt’s external public debt and to clarify its relationship with financial policies on the one hand, and its repercussions on exchange and trade relations on the other hand, as follows:

First. External public debt structure and sources of payment

1-    External public debt structure

2-    Features of the time distribution of external public debt

3- Sources of payment

Second: The reasons for the rise in the external public debt

1- Local reasons

2-External reasons

Third: Scenarios for dealing with recent changes

First: The structure of the external public debt and its severity:

Economic thought differed about the extent of the danger of public debt, both internal and external, but the majority of economic thinkers unanimously agreed that internal public debt does not represent a danger in the form that external debt might represent due to its connection to foreign trade on the one hand and its link to exchange rate policies on the other hand.

This axis aims to identify the reality of developments in the external public debt in Egypt in order to clarify whether there is a current danger or whether the situation is still in a state of stability fraught with risks as a result of what has occurred and is expected regarding the global economy:

1- Evolution of the external public debt:

The balance of external public debt amounted to about $157 billion at the end of the third quarter of the fiscal year ending on June 30, 2022, according to data from the Central Bank of Egypt, compared to about $137.8 billion for the fourth quarter of the previous fiscal year, an increase of 14%, exceeding $20 billion.

The real dilemma in the public debt crisis is the debt servicing burden. The volume of the allocations for the interest item in the public budgets is equivalent to one third of government spending; That is the government spends more than a third of its expenditures on paying the interests of what it borrowed previously, on the one hand, which means that the public debt will not stop growing as long as there is a budget deficit, and in general, the larger the public debt, the higher the interest payments.

The main danger of the external public debt is the convergence of debt terms, especially since the change in international monetary policies prompted the exit of hot money, which is estimated at about $22 billion during the last quarter of the fiscal year 2021/2022.

2-Features of the distribution of external public debt:

Long-term external debt accounts for 83.3% of the total debt value, while short-term debt accounts for 16.7% of its total value, which indicates the reassurance as much as possible regarding short-term obligations that do not exceed a year, according to the methodology of the Central Bank of Egypt. .

3- Sources of public debt repayment:

According to official data, foreign exchange resources witnessed an improvement during the fiscal year 2021/2022, as tourism revenues amounted to about 8.2 billion dollars, an increase of about 156 percent, while the proceeds of remittances from Egyptians working abroad amounted to about 31.9 billion dollars, compared to about 31.4 billion dollars during the fiscal year 2020 / 2021, with an increase of 1.6%.

Returns from exports also amounted to about 47.1 billion dollars, and the Suez Canal’s revenues amounted to about 7 billion dollars – the highest annual revenue in the history of the canal – compared to 5.8 in 2020/2021, and foreign direct investments amounted to about 7.3 billion dollars, an increase of 53.5% .

Second: The reasons for the rise in the external public debt

 The world’s economic conditions contributed to a severe turmoil in monetary policies, which prompted major central banks to raise interest rates to face inflation resulting from the cost of production, energy and food inputs. It also prompted the adoption of financial policies that contributed greatly to dependence on financing from abroad on the one hand, and the exit of hot money on the other hand

Local reasons:

– Adopting loose monetary policies (low interest) for periods prior to raising the US Federal Reserve, and interest rates are variable according to activity, due to the presence of interest rates dedicated to activities such as real estate development or other targeted sectors.

-The dependence of Egyptian exports on imports at rates ranging from 15% to 60% on average, which made canceling the documentary credit system to limit imports one of the main burdens in price pressures on foreign exchange and international reserves at the Central Bank.

– External reasons:

The Russian-Ukrainian crisis is one of the main reasons for the rise in global commodity prices, most notably energy, food and logistics, as well as the decline in revenues from tourism. The external factors and causes that affected the increase in Egypt’s foreign debt can be summarized as follows:

The rise in interest rates globally, which contributed to the exit of more than 23 billion dollars in less than three months.

-Disruption in the supply of energy, production requirements and food, which led to an increase in their prices, putting pressure on international reserves to drop from $44 billion to less than $33 billion.

Third: Scenarios for dealing with recent changes

1- First scenario: We can explore the scenario of dealing with the external public debt file through the success of the current financial policies, coinciding with the changes in the monetary and executive authorities in attracting more cash and capital flows from abroad, as the government relies on attracting financial surpluses in Arab countries, especially the Gulf, resulting from the increase in Oil prices, especially with the decline in real returns from investing in Western countries due to the wave of inflation.

Perhaps what makes this scenario likely is the entry of direct Arab investments estimated at about 7.3 billion dollars through a number of multilateral agreements between Egypt, the UAE and Jordan, and about 10 billion during the current year from the proceeds, resulting from Arab and foreign investments in assets and properties offered by the government through the exit program from some economic activities, in particular with the state declaration of the state ownership document in its initial form and put it for community dialogue since last May, and it is expected that it will be announced in its finale form to obtain the approval of the house of representatives at the beginning of the next session in early October 2022.

2- The second scenario:

This scenario is based on the faltering of international negotiations with the International Monetary Fund in conjunction with the intensification of the international conflict, which may indicate the possibility of formulating cooperative frameworks between Egypt and Arab countries on the one hand, and between Arab countries and new players in the global economy file on the other hand, especially with the increased possibility of entering European and American economy stagflation

The rise in the external public debt bill for Egypt as a result of rescheduling short-term receivables with the lending authorities is a possibility, in contrast to the continuation of the shift towards opening more space for the private sector, and forecasting the future period remains a very complicated matter due to the overlap of many economic and geopolitical variables that will affect many files related to the public debt file and the economic situation as a whole.