Egypt is one of many countries in the world that are trying to pick up the pieces of the many consequent shocks that have recently hit the world. But not many countries are also carrying the hefty burden of a wild devaluation, outrageous inflation rates, and massive debts waiting to be repaid – only at a much higher rate, at that very same time. The situation of Egypt’s external debts was the focus of an in-depth session named ‘How should Egypt’s external debt be perceived?’ moderated by the chair of the department of economics and assistant professor at the AUC School of Business, Dina Abdelfattah. The session was part of the Business Forward 2022 annual event carrying the title and theme ‘Egypt’s economy 2023: Structural reform amidst a volatile global outlook’, and it brought together a group of economists who shed light on ways this extremely challenging time can be navigated.
Egypt’s external debt was estimated at $155.7 billion by June 2022, according to Central Bank of Egypt data and also depicted in our 2022 Economy Snapshot video. For the past months, Egypt has been dealing with extremely high inflation rates, as inflation came in at 16.2 percent in October of this year, which was up from September’s 15.1 percent, moving further above the upper bound of CBE’s 5.0–9.0 percent target band, according to CBE report. And in November, annual inflation reached 18.75 percent, according to Reuters. The higher inflation would put pressure on the central bank to raise interest rates when it next meets on December 22.
All these unstable indicators have greatly contributed to making Egypt’s external debts much less likely to decrease or improve. We know that Egypt has been a borrowing country since the mid-1970s, and of course, there were times when our debts as a country dropped, and many other times when they’ve grown. Since 2015 until today, our debts have only been growing, according to Alia El Mahdy, professor of economics at the Faculty of Economics and Political Science of Cairo University, and one of the speakers at the panel of the session.
So why exactly does Egypt keep falling into this pitfall of being chronically indebted with little to no debt decreases year after year? Ahmed Galal, one of the panelists at the session, economist, and former Minister of Finance, says “there’s a major mismatch in timing. We borrow today and repay later, when the repayment value is much higher; however, that is only part of the problem.” He explained by saying that debt management could be done well, but is not truly the main issue here. Galal argues that debt is not a bad thing in itself. It is even necessary especially when you have such low private savings and low incomes. The problem, he says, is that the reasons why Egypt had to borrow in the first place do not get addressed at the roots. He noted that there are solutions for these problems, among which is generating foreign currency. “The government should use the money it borrows wisely. If you [the government] borrow, then you should seek to increase exports and savings relative to investment, as well as reduce the budget deficit,” he says, and adds, “When you do that, you’ll attract more investments. Business owners in Egypt are smart and they go where they make money. If the policies provided by the government make it attractive for them to sell domestically, they will not need to export. Start with a competitive exchange rate, reduce tariffs, or penetrate new markets and make all sorts of trade agreements. There’s a set of policies that you need to address problems at their roots.”
Agreeing with Ahmed Galal, Alia El Mahdy explains that the increasing debts are attributed to the fact that the Egyptian economy is not structurally advanced or competitive, and this manifests in low investment and saving rates. “The government tries to make up for this by more borrowing; however, it’s important to say that Egypt’s debt indicators aren’t the absolute worst, so where’s the problem? Over the past six or seven years, all these indicators were growing together at a fast rate. This is what’s alarming. It poses pressure on our economy, budget, and resources from abroad, etc.”
Another important element to consider when you look at Egypt’s debts to understand why the problem is getting worse, according to El Mahdy, is short-term debts. “In 2013, short-term debts represented seven percent of total external debts. Now they represent 17 percent or more. Why is that alarming? Short-term debts have to be repaid quickly, so their burden is higher and heavier. It is a trend that I find disturbing. Now, the grace period of many loans is over, and we have to start repaying. We used to pay $7 billion dollars a year. This year alone we repaid $26 billion dollars for our debts,” she said.
For his part, Vice Minister for Fiscal Policies and Institutional Reform at the Ministry of Finance, Ahmed Kouchouk, believes that in terms of size, Egypt’s external debt has a currency mix of euros and dollars as well as many other currencies. He also noted that measuring Egypt’s debt as a percentage of GDP will show that it makes up around 34 percent of GDP.
He explains that 30 percent and below is considered safe, from 30 to 40 percent is considered moderate, while above 50 percent is high risk. Kouchouk states that Egypt’s debt percentage of GDP is not an alarming indicator. What he finds to be alarming, though, is the debt service coverage ratio (DSCR) [the amount of export earnings needed by a country to meet annual interest and principal payments on its external debt]. “Anything between 20-30 percent of debt service as a percent of export proceeds is safe; however, anything above that is a bit alarming. We, in Egypt, are above 40 percent. This is what is alarming in my opinion,” Kouchouk said. He also noted that around 65 percent of Egypt’s debt is at a fixed rate. “We’re de-risking a bit from refinancing and protecting ourselves from tightening that could happen, whether now or later,” he noted.
A nourished economy would not be one without the much-needed balanced involvement of both the public and private sectors, and that rings true for Egypt. In this regard, Alia El Mahdy warned that infrastructure alone would not be enough for the private sector to be a bigger contributor to the Egyptian economy. “You need to start with giving the private sector access to the financial market and banks. The share of the private sector now doesn’t exceed 30 percent of the economy. That’s because a lot of regulations hamper the private sector. The government has to sit with the private sector, discuss their issues, and take measures as quickly as possible, and by quickly, I mean today or tomorrow. There’s no more time to waste,” she added. El Mahdy noted that focusing on first making the investment environment friendlier for local investors will eventually bring in more foreign investors.
The solution to the debt dilemma according to Kouchouk is by sustaining a growing economy. “For this to happen, you need the private sector to be in the driver’s seat,” he says and adds that the government, as a regulator and enabler, should spend more efficiently on infrastructure and use the outcome to reduce debt or improve its structure, and set the right framework and clarity for the private sector to be in the lead. “In addition, over the past five or six years we have been investing in a lot of sectors. We have good assets,” Kouchouk said. He added that the state should make sure that the money generated from these assets go to repaying debt or debt service.
Commenting on the situation of the currency and the consequent devaluation, Ahmed Galal said, “We keep repeating the same mistake and hoping for different results. We have devaluated the currency several times because we keep going back to the same circumstances that required this devaluation in the first place. The real solution lies fundamentally with monetary policy.” Galal also emphasized that on the fiscal side, the country needs a ‘unity of budget’. “In the past few years, we had a tendency to create various scattered pockets as different authorities had different budgets. You cannot have a fiscal policy that is sound without enforcing the principle of unity of government budgets.”
Seeing Egypt take a different path and break the cycle of over-dependance on loans is a gradual process that starts with supporting sectors that have capacity to export and generate foreign currency, and we might be seeing change in a few years, concludes El Mahdy.