What are the Drivers of Egypt’s Government Debt?

Is government debt solely a fiscal phenomenon? This paper aims to understand what drives government debt in Egypt. Towards this end, a debt decomposition exercise is undertaken, using annual data for FY2001/02—FY2016/17 to disentangle and quantify the cumulative impacts of the primary deficit to GDP ratio, movements in the exchange rate, the real interest rate, and real growth. Additionally, a Vector-Autoregression analysis is conducted, using quarterly data for FY2004/05—FY2016/17, including the same variables of interest, but also accounting for the borrowing by the public business sector (that is, to capture extra-budgetary obligations).

The findings from both the debt decomposition as well as the VAR estimation show that the primary deficit and the exchange rate depreciations have been the leading causes of debt accumulation in Egypt. Importantly, the analysis also points to extra-budgetary (below-theline) items that have been contributing to higher-than-warranted government debt accumulation. Further, this research provides evidence that the domestic debt is partially inflated away, as the real interest rates have been negative for the larger part of the periods under study.

The bottom-line of this research is that Egypt’s government debt is a multi-faceted problem, finding its roots not only in fiscal policy, but also in exchange rate policy, as well as in key fiscal transparency issues.