Much of Egypt's economic crisis is centred around foreign and domestic debt. Foreign debt stood at $168 billion in January 2024 before declining to $152.9 billion at the end of June after the Ras al-Hikma land sale deal with an Emirati company which was used to pay off some of the national debt. The average Egyptian citizen's share of this debt was around $1,275 in June 2024.
During the rule of former President Hosni Mubarak, short-term debt was only used sparingly, because of the risk of having to repay with interest within a year, and the likelihood there would not be enough revenue to repay it, leading to default and further borrowing. Long-term, low-interest debts on the other hand do not risk causing major debt crises if they are within safe limits. Unfortunately, Egypt had resorted to short-term debt over the past 10 years, reaching $30.3 billion in September 2023, and after partial repayment following the sale of the Ras al-Hikma land, coming back down to $26 billion in June 2024, which is equivalent to about 17% of the total foreign debt burden. Back in June 2014, the figure stood at only $3.7 billion, or about 7.9% of total external debt in that year. As of June 2020, short-term debt accounted for 8.8% of total external debt. In June 2014, external debt represented 15.1% of GDP, but that proportion has risen sharply to 38.8% in June 2024. The external debt service burden was 7.4% of the value of Egypt's exports of goods and services in 2013-14, but that has risen to 58.8% of exports in June 2024.
Egypt's external debt began to rise as a direct result of governments’ failure since the January 2011 Revolution to address the economic situation and the imbalances in external and internal accounts with an emergency plan. In other words, it stems primarily from the level of efficiency in managing the economy and the imbalance in the priorities of successive governments, which managed the economy with the same old policies and self-propelled power at first, before implementing a more aggressive IMF program starting in the autumn of 2016. This contributed to exacerbating the external debt in an unprecedented manner in Egypt's modern economic history.
The Supreme Council of the Armed Forces (SKAF) government began by draining international reserves, which fell from $35 billion in January 2011 to $15.6 billion at the end of its rule in June 2012. It is true that by the end of military rule, foreign debt stood at $34.4 billion, slightly below the level at the end of the Mubarak era, but this was achieved by using up foreign exchange reserves to the tune of $19.4 billion. During the year of President Mohamed Morsi's rule, who was ousted in July 2013, external debt rose to $43.2 billion by June 2013, a 25.6% increase.
During the year under interim President Adly Mansour, external debt rose only modestly to $46.1 billion in June 2014, thanks to $11.9 billion in aid grants received by the government.
At the beginning of President Sisi's rule, the external debt rose again modestly to $48.1 billion by June 2015, but there was a sharper rise to $55.8 billion in the year to June 2016. The figure began to jump with the implementation of the economic programme agreed with the IMF in the autumhn of 2016. It rose by 41.6% in the first year of that programme to reach $79 billion in June 2017, and continued to rise until it reached the aforementioned levels in 2024, $152.9 billion, the cost of paying off that debt getting harder to manage compared to how much the country earns from selling goods and services abroad.
Egypt suffers from a large gap between its low rate of savings rate and much higher rate of investments, although the latter is also low compared to the international rate and the developing countries rate particularly. In 2023, globally, about 26.6% of the total value of all goods and services produced was either saved or invested. In developing countries, the savings rate was about 32.7% while the investment rate stood at 32.2%. In Egypt, the savings figures were only 10.2% of GDP in 2021-22, 14.6% in 2022-23, and 6.1% in 2023/2024 and the investment rate was 17%, 16.5%, and 13% respectively. This means Egypt's domestic resource gap amounted to about 6.8% in 2021-22, about 1.9% in 2022-23, and rising again to 6.9% of Egyptian GDP in 2023-24. This gap is bridged through borrowing, which gradually builds up indebtedness.
The five-decades-long trade deficit is the Achilles heel of the Egyptian economy. This deficit is caused by production falling short of consumption, and consequently, the dwarfing of exports relative to imports. The total trade deficit during the 10 years from 2014 to 2024 reached about $383.2 billion.
This is in addition to the large deficit in the investment income balance of $106.3 billion dollars in the same period. This large deficit in the balance of trade and investment income exceeds the combined sum of remittances from workers abroad, Suez Canal revenues, and tourism, which ultimately leads to a large deficit in the current account balance, including trade in goods and services and remittances. In the 10 years to 2024, the current account deficit averaged about minus-3.9% of GDP per year. The inevitable result is borrowing from abroad to cover this deficit in external transactions, which cumulatively leads to an unprecedented external debt overhang in terms of size, growth rates, and servicing costs.
The coronavirus crisis contributed to a worsening of the external debt situation owing to a decline in revenues from the tourism sector, which was paralysed in 2020. The genocidal Zionist war against the Palestinian people of Gaza also affected the Suez Canal's foreign exchange revenues in 2024 after international shipping companies diverted their tankers to the Cape of Good Hope route, punishing Egypt for its refusal to take part in the anti-Yemeni coalition, against the Houthi-led support front that blocked the Bab al-Mandab Strait to Zionist shipping and ships heading to the port of Umm al-Rashrash (Eilat). If they hadn’t taken this action, canal's revenues would hardly have been affected as Eilat-bound sea traffic uses the Red Sea-Gulf of Aqaba route and should not have to enter the Suez Canal.
However, these contingencies are only secondary and temporary factors. The trade deficit, the net investment income deficit, and the unfortunate involvement in short-term loans remain the main factors in Egypt's need to borrow from abroad and the escalation of external debt.
Possible remedies
In general, it can be said that Egypt needs to rationalize imports, especially for luxury goods, put a freeze on infrastructure spending, which has witnessed remarkable and sufficient development in the current circumstances, and focus instead on agricultural and industrisaal production projects, especially in industries that produce import-substituting products, in accord with an import substitution strategy in an integrated cycle of consumer, intermediate and capital goods, high-tech industries, and high-yield creative industries such as music, performing and visual arts (plastic arts, cinema, drama, etc.); in other words, industries whose products derive most of their value from the talents and mental and creative abilities of humans rather than from the value of the materials used industries in which Egypt has great advantages through its human capital of talented individuals in the aforementioned fields, who at the moment are exploited by other countries as the basis for their own creative industries!
The state could sponsor major IPOs to build private shareholder-owned enterprises managed by executives under state supervision and with state participation to reassure minority investors, preferably by ensuring them a minimum return through guaranteed bonds for these companies, which could operate in the agricultural, mineral, chemical, quarrying, high-tech, and creative sectors. As part of the mechanisms to address the large deficit in the investment income balance, it is necessary for Egypt to completely stop accepting foreign investment in the real estate sector, as this transfers profits abroad, instead of benefitting local companies that could carry out all the potential activities in this sector without draining Egypt's dollar balance.
Egypt also needs the national monetary authorities to give confidence to the markets by explicitly declaring the Egyptian pound will not be devalued against the dollar again for at least three years, in order to encourage local and foreign investments geared towards import substitution or exports as a necessity to improve the trade balance, because such investments are built on future calculations that cannot be controlled under a volatile and rapidly deteriorating currency.
Domestic debt
Egypt's domestic public debt, as outlined in the draft state budget, grew from about Egyptian pounds (EGP) 1.8 trillion in mid-2014 to EGP 8.3 trillion in the 2023-24 fiscal year. Projections show it reaching 88.2% of the estimated EGP 17 trillion GDP for the 2024/2025 fiscal year, or about EGP 15 trillion. In other words, this debt has increased by 728% over the last 10 years.
Domestic debt is mainly the result of the state's budget deficit and the high interest rates on that debt, which the state borrows through treasury bills and bonds. The total deficit in the state's general budget from FY 2014-15 to FY 2024-25 totalled EGP 5.7 trillion.
The state's general budget could have been close to being balanced and could have been balanced if there had been a unity of the state's general budget that included all public civilian and military bodies and companies. The deficit could have been reduced and could have been closer to balance if the Ministry of Finance had received the revenues from the sale of land for the new administrative capital, which was, after all, state land whose sale revenues were supposed to go into the general budget. The area of the administrative capital is about 166,645 feddans of land located south of the Cairo-Suez road and east of the peripheral road. Less than 11,000 feddans of that land were used in the first phase, which means that if revenues from the sale of the lands of the next phases enter the state's general budget, it could reduce the overall deficit and possibly reach balance. It would also be possible to improve revenues and the balance if tax law was amended to impose corporate income taxes on the civilian activities of national service organisation companies. All of this could reduce the need for domestic borrowing and stop the escalation of debt.
The draft state budget for FY 2024-25 estimates the amount of interest and instalment payments on internal and external debts at EGP 3.4 trillion, equivalent to about 20% of the estimated GDP for the same year.
These massive payments of interest and instalments on domestic and foreign debts deplete public revenues and national income, and constitute an important factor in the continued generation and perpetuation of the deficit in the Egyptian state budget and the need for more borrowing from home and abroad, with all the negative economic and political conditions of borrowing from abroad in particular.
The external balance deficit cannot be addressed by monetary measures only, such successive devaluations of the Egyptian pound exchange rate, most of which are illogical and far from the purchasing power parity rate according to the International Monetary Fund, but the solution comes from the measures mentioned above as a mechanism to address the debt.
