The Impact of External Debt on Economic

Growth in Egypt During (1990-2019)

 25 Oct 2022

Contents
1. EGYPT'S EXTERNAL DEBT.............................................................................................................. 2

3.1 Egypt’s External Debt Evolution (2)...................................................................................................2

3.2 Reasons Behind Egypt's Reliance on External Debt (2)....................................................................4

3.3 The External Debt Indicators........................................................................................................... 5

4.3.1 External debt to GDP ratio: (3)...................................................................................................6

4.3.2 External debt to Goods and Services Exports ratio: (3)..............................................................7

4.3.3 Average Percentage of External Debt Per Person (2)................................................................8

2. CONCLUSION (2).............................................................................................................................. 8

3. REFERENCES:................................................................................................................................ 9

List of Figures:

FIGURE 1: PERCENTAGE OF EXTERNAL DEBT TO GDP- EGYPT- BASED ON MACROTRENDS SITE...........................................12

FIGURE 2: PERCENTAGE OF EXTERNAL DEBT TO GOOD AND SERVICES EXPORTS- EGYPT - BASED ON MACROTRENDS
SITE.............................................................................................................................................................. 13

1. EGYPT'S EXTERNAL DEBT

3.1 Egypt’s External Debt Evolution (2)

As an introduction, Egypt first became aware of foreign debt in 1876 under the rule of Said Pasha.
Since then, foreign debt in Egypt has increased frequently for a variety of reasons, whether political
or economic. In the year 1987, Egypt began the structural stabilization program and debt schedule
with the International Monetary Fund, when it defaulted on its debts and was on the point of
bankruptcy, but soon slipped again, and the issue grew worse in 1990, and from this year until 2019,
it has been discovered that the foreign debt significantly affects the Egyptian national economy, as
well as its fluctuations in the economy and political events.

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The Egyptian economy is burdened by the country's rising external debt, which climbed during the
1990–2019 period from 33 billion dollars in 1990 to 115 billion dollars in 2019. This is an increase of
four times. The external debt was approximately $35 billion in 2007 with an annual growth rate of
1.9%, and it was $33.8 billion in 2008 with an annual growth rate of (-3.1%).

One of the most significant eras that saw a definite rise in the Egyptian external debt was the years
immediately following the January 25, 2011, revolution. The debt climbed from $34.9 billion in 2011 to
$79.33 billion in 2017, growing at an annual rate of 3.6%. In addition to the factional demands that
involved many sectors, Egypt's demand for loans during that time period coincided with the political
strikes that Egypt experienced after the January 25 revolution, the decline in the volume of foreign
investments, the decline in the volume of Egyptians' remittances abroad, and the decline in the
Egyptian tourism sector.

At the end of December 2019, the external debt balance was approximately 115 billion US dollars, up
almost 4 billion dollars (3.7%) over the previous month. There were around $0.3 billion worth of
foreign currencies borrowed against the US currency.

In terms of the costs associated with paying the external debt, they came to around 6.9 billion dollars
between July and December 2019/2020, with 4.9 billion paid in installments and 2 billion in interest.

Providing funds to stabilize the exchange rate, funding the import of essential commodities, and
financing projects with low rates of return are just a few examples from recent years.

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3.2 Reasons Behind Egypt's Reliance on External Debt (2)

There are a lot of factors that contributed to the recent rise in the external debt, some of them include
the following:

1- One of the main factors contributing to debt aggravation is the way loans are used. For example,
a large portion of loans are used to finance the budget deficit as well as the importation of
consumer goods, particularly food. regarding the economics of Egypt.
2- a reduction in capital flows as a result of using foreign reserves held by the central bank to
finance current activities instead of adding to them, which causes a steady loss in foreign
exchange reserves.
3- the dramatic rise in interest rates in global financial markets, which triggered a growth in debt.
4- Limited domestic resources to achieve the general budget's planned economic growth due to the
foreign exchange crisis brought on by the decline in export-related foreign exchange and the
inability of decision-makers to cut spending as a result of rising consumerism, which ultimately
resulted in a significant deficit in domestic revenue. Egypt's trade balance suffered in the early
1980s due to the oversupply of oil on the market, the economic stagnation in industrialized
nations, and a decline in the rates of trade exchange between Egypt and those nations. Due to a
large growth in Egypt's imports of consumer and recreational goods and a corresponding rise in
their pricing, Egypt had to turn to external borrowing to make up for this resource shortage.
5- In addition to the 1967 and 1973 wars, which cost the Egyptian economy enormous sums of
money from re-arming the army and building the Egyptian economy, which caused the external
debt to rise to 2.6 billion, Egypt's debts increased at a rapid rate between 1967 and 1975 as a
result of Egypt gaining its independence, prompting it to start looking for a way to raise living
standards. Prior to President Anwar Sadat's passing on October 6, 1981, Egypt's foreign debt had
increased by more than 8 times after the conflict and reached $22 billion.
6- As a result of the widening of the import door and the growing reliance on short-term external
funding resources, particularly banking facilities, there was an increase in foreign debt. Due to the
short term and high interest rate, which exceeded 20% and required enormous amounts of cash
to service its burdens, the increased access to short-term facilities caused the emergence of a
serious problem in the international liquidity of the Egyptian economy. In 1975, the value of the
receivables from these facilities (interests + installments) was approximately 2.184 billion dollars,
which is equivalent to 78% of the value of the proceeds. general.

Due to these and other factors, the external indebtedness increased from approximately 1.6 billion
dollars in 1971 to approximately 28.6 billion dollars in 1983. As a result, the period of economic
openness was characterized by the ongoing depletion of the state's limited resources in the form of
payments made to foreign creditors in repayment of loans. The amount of external debt climbed,

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going from 1.6 billion dollars in 1971 to approximately 2.1 billion dollars in 1973, then rising to 15
billion dollars in 1979, and finally reaching over 20 billion dollars in 1982, as a result of repaying those
loans' interests. It got to $28.6 billion in 1983.

Despite the fact that the arm of openness is to reduce the burdens on foreign loans and replace them
with foreign investments, the danger was that a sizable portion of the debt was spent on consumption
and was not directed to investment, that is, it did not generate a return that could be used to pay off
debts. The second phase between 1975 and 1980 witnessed a major boom in the increase in
indebtedness due to the benevolence of creditors after the transformation of the Arab countries, from
investments that did not exceed a total of $2 billion over the years from 1974 to 1979, at a time when
the volume of debts jumped dramatically. In relation to the eastern camp, Egypt's debts increased by
304.5% within five years due to internal imbalances and the unwillingness of Arab countries to reduce
public and private expenditures to the level of available resources, according to a study that attributed
this generosity to being a kind of implication and dependency on the capabilities of these countries.

3.3 The External Debt Indicators

The external debt indicators are among the crucial leading indicators used to track and direct
governments and nations at large. Most regional and global organizations place a high value on
these metrics. The relationship between external debt, exports, and GDP is all regarded to be a
useful indication in the process of evaluating foreign debt and the ability to pay. External debt
indicators are very sensitive to interest rates. potential and connected to the control of external debt.
These indications are typically used to determine whether or not the external debt has reached a
dangerous level or is still stable in a stage of safety. Additionally, how much of an impact it has on the
financial and economic position.

The most significant metrics used to assess Egypt's economy's capacity to service its foreign debts
are listed below:

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4.3.1 External debt to GDP ratio: (3)

This indicator is one of the most significant leading indicators that nations use to assess the debt in relation to economic activity and the capacity of the
government to repay it. Anytime the outstanding balance of external debt exceeds 40% of GDP, it is forbidden to increase it. And it is evident from Chart
No. 1 that between 2007 and 2016, the ratio of external debt to GDP averaged 16.84%, and that in recent years, this indicator has tended to drop by the
middle of 2018. 40%, indicating that the Egyptian foreign debt has reached a dangerous stage.

% External Debt to GDP

350 100%
87%

90%
Billion Of US $
or GDP

300
Debt77%

80%
74%

250
66%

70%
63%

% External Debt to GDP

56%

60%
200
47%

50%

40%
40%
38%

38%

150
38%

38%
36%
40%
35%
34%

34%
29%

29%

29%

27%
100 30%

21%

21%
19%

17%

16%
20%

15%
15%

14%

14%
50
10%

0 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

FIGURE 1: PERCENTAGE OF EXTERNAL DEBT TO GDP- EGYPT- BASED ON MACROTRENDS SITE

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4.3.2 External debt to Goods and Services Exports ratio: (3)

This metric reveals the nation's capacity to pay and provide foreign exchange and can be used as a sustainability indicator because rising levels show that the
state's debts have outgrown its basic foreign exchange reserves, which suggests potential challenges in the state's capacity to meet its debt commitments.
This measure classifies a state's indebtedness as moderate if the foreign debt balance to total exports is less than 200% and as high if the external debt
balance is between 200 and 350% of total exports. The state's debt is described as rising by the Foreign Ministry's high indebtedness balance of 350%. As a
result, Egypt's external debt was low between (2000 - 2016) and increased during (2017-2019). This shows that Egypt may have difficulties meeting its
obligations to creditors because the external debt has replaced other sources of hard currency and is necessary to maintain the stability of the exchange rate.

% External Debt to Goods and Services Exports

377%

140 400%
Debt or Exports
(Billion of US $)

350%
317%

120
277%

300%
262%

255%

100
247%

% External Debt to Exports

235%

228%

227%
225%

250%

217%
212%
203%

201%
80
190%
181%

174%
200%
168%

141%
60
150%

115%
112%

96%

96%
95%
40

88%

87%
79%
100%

75%

72%
63%
20 50%

0 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

FIGURE 2: PERCENTAGE OF EXTERNAL DEBT TO GOOD AND SERVICES EXPORTS- EGYPT - BASED ON MACROTRENDS SITE

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4.3.3 Average Percentage of External Debt Per Person (2)

Since most annual payments have not yet been due, due to the extended maturity periods (5-30
years), it is impossible to quantify the true burden on future generations with accuracy and clarity
because it depends on future political and economic developments (Abu Aida, 2012, p. 192). It is
presumptively true that each person's portion of the foreign debt is equal to the capabilities reflected
in their average share of the country's income. If a person's part of the external debt equals 50% of
his typical annual income, the proportionality is within the bounds of safety. As shown by Table No.
4's data, the average annual per capita income in 2019 was $3,105, or 33% of the total, while the per
capita external debt increased by a factor of two during the previous three years, reaching $1013.
average yearly salary for an individual.

Through the foregoing, it is noted that there is an increase in the size of the external debt, which
represents a crisis may facing the Egyptian economy in the future.

2. CONCLUSION (2)
To conclude, the issue of external debt is one of the contentious topics because it is unclear whether
it promotes or inhibits economic growth. External debt is a source of public revenue, and its
accumulation indicates a slowdown in the nation's economic growth because of the inability to meet
these debts' obligations. The total amount of public and private debts owing to non-residents is known
as external debt. They are redeemable for goods and services or in foreign currencies.

According to a World Bank analysis, Egypt is one of the developing nations with significant debt
issues (World Bank, 2018). The majority of its creditors are foreign governments and international
organizations, who give long-term loans for development projects. As a result, the following is
recommended:

 By fostering international investment and establishing a suitable environment for it, as well as
by implementing a national strategy to draw in foreign capital, efforts should be made to
reduce external borrowing.
 Extending the policies of transferring foreign debts for development investments to lessen the
burden of foreign debts; however, it is important to clarify the purpose of transferring foreign
debts in order to determine whether this policy aims to increase investments and raise
development rates or has detrimental effects on the independence of economic decisions.
 Foreign debts should be used to fund dollar-returning projects or those that don't require
importation.
 Work to keep inflation under control.

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 Establishing a legislative cap on central bank borrowing from abroad as a proportion of cash
reserves and on external central bank borrowing as a percentage of gross domestic product.
 Restructuring the debt to return to 90% of long-term obligations and to extend the repayment
terms. That is, over a five- to ten-year period of time.

3. REFERENCES:
(1) Reference: External debt and its impact on economic growth - the Arab Democratic Center
https://democraticac.de/?p=77228#_Toc74428040/

(2) Reference: The impact of external debt on economic growth in Egypt - A Standard Study- Manal
Moussa
https://journals.ekb.eg/article_132904.html#:~:text=%D8%B2%D8%A7%D8%AF
%20%D8%A7%D9%84%D8%AF%D9%8A%D9%86%20%D8%A7%D9%84%D8%AE
%D8%A7%D8%B1%D8%AC%D9%8A%20%D9%81%D9%8A
%20%D9%85%D8%B5%D8%B1,%D9%85%D9%86%2013%D9%85%D9%84%D9%8A
%D8%A7%D8%B1%20%D8%AF%D9%88%D9%84%D8%A7%D8%B1%20%D9%84%D8%AE
%D8%AF%D9%85%D8%A9%20%D8%A7%D9%84%D8%AF%D9%8A%D9%86
(3) Reference: Based on macrotrends site “
https://www.macrotrends.net/countries/EGY/egypt/external-debt-stock/

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