Opinion

What Does the Egyptian Government Debt Service Rising to EGP 406.2 bln Mean?

What Does the Egyptian Government Debt Service Rising to EGP 406.2 bln Mean?

Photo credit: Mohamed Abd El Ghany / REUTERS

On Wednesday, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced that Egypt’s government debt service has risen to EGP 406.2 bln. This is an increase of EGP 45.5 bln from 2016/17, which saw a government debt service of EGP 370.7 bln.

The government debt service is the payment required of the government to pay off its debt for a particular period. As a consequence, why has the government’s debt service increased so dramatically? The most likely answer is that the government issued new bonds locally, to fund projects of its own, at higher interest rates. Additionally, when the government made the eurobond sale back in February, it issued new bonds to be paid in foreign currency. Thus, the majority of this increase in the government debt service can be attributed to the new issuance of bonds made at higher interest rates both locally and abroad.

Sure enough, the interest on domestic and international loans increased from EGP 159.2 billion in 2016/17 to EGP 247 billion in 2017/18. Why is the government issuing so many bonds to raise capital? The simple answer is that the government needs to raise cash in order to fund the ventures it has currently set into motion to encourage economic growth.

The cash it is borrowing is being injected into the economy for the most part. It is normal for the government to run a large deficit in an economic downturn as it attempts to encourage economic growth by spending more. Though this increase in spending contrasts strongly with austerity measures the government has already put in place such as increasing taxes and slashing subsidies.

More terrifying still, is that in the future, we could see the government take on even more debt in order to fund the megaprojects it has its eyes set on. Most likely, this increase in debt isn’t sustainable, and soon enough, we might see tighter austerity measures in an effort to balance the deficit.

A model of a planned new capital for Egypt is displayed for investors during the final day of Egypt Economic Development Conference (EEDC) in Sharm el-Sheikh, in the South Sinai governorate, south of Cairo, 28 March, 2015. Photo credit: Reuters

This isn’t necessarily the case nor is it set in stone; indeed, the cuts in gas and other subsidies could be a way to ensure that the government can afford to take on this much debt in the future, by cutting spendings now. Regardless, the debt poses a significant burden on the government’s balance sheet in the foreseeable future.

We shouldn’t look at debt as a measure of the government’s economic success: if the government is using the money it has been borrowing well, then it could increase the country’s GDP and decrease the overall deficit as a percentage of GDP. If this the case, as the government injects more money into the economy, Egyptians’ real income increases and the government collects more money in tax, decreasing its overall deficit.

Whatever the case, we will have to wait and see whether or not the government decides to take on more debt, and whether it will withstand the effect of such debt due to further cuts in subsidies.

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Opinion

My name is Mohamed Mohsen, I am - of course - Egyptian. For the last three years I've lived abroad (in Budapest,Hungary), in an international school, there I was blessed with the opportunity to be exposed to a multitude of cultures and nationalities. Outside of my nurtured (and largely contained) international community, I was also witness to a sharp shift in perception of the Muslim community in Hungary. This sparked my interest for the topic of my article. Currently I am a high school student residing in Cairo, and a budding writer.

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