Fear of falling subject to conditional loans prompted much public pressure to curb Egypt’s reliance on funding from institutions such as the International Monetary Fund (IMF) and World Bank. As a whole, Egyptians generally associate the neo-liberal economic policies often imposed by these international lenders as a means of Western imperialism.

Many believe they provide terms that are not in the best interest of the Egyptian economy, and that such policies and conditions are already to blame for the harsh economic conditions currently found in Egypt that serve the rich without helping the poor.

At a time when feelings of patriotism and nationalism are at an all-time high, it is no surprise that such concerns, whether they are warranted, are being loudly voiced. However Egypt’s public debt is not only foreign — the greater bulk of it is actually domestic and it is the domestic portion that is putting such a heavy strain on the economy.

As of March, domestic public debt stood at LE 890 billion. That is in addition to the outstanding $34 billion (LE 202.85 billion) of foreign public debt, which amounts to a total of LE 1.09 trillion. This figure is equal to 79% of the country’s revised GDP of LE 1.37 trillion for FY2010/11.

In the months following the January 25 Revolution, the Ministry of Finance under the management of ex-minister Samir Radwan, issued the country’s first post-revolution budget. The initial drafts presented for discussion contained an alarming deficit of LE 170 billion or 11% of GDP.

The ministry later succumbed to public pressure and issued a revised budget with a smaller deficit of LE 150.7 billion and scrapped billions of dollars worth of loans from both the IMF and World Bank.

However when adding that revised deficit to the already existing public debt, assuming that 100% of it will be rolled over, the grand total for the country’s public debt for FY2011/12 actually stands at LE 1.24 trillion.

In an optimistic scenario where projected GDP growth for the same period is between 2–3%, the total public debt to GDP ratio could rise to 85%, a level which should sound the alarm bells.

First, as public debt increases, annual payments to service it increase as well. The state budget projects total interest expenditures at LE 105.9 billion, which is equal to 21.5% of total expenditures and is a 23% rise over the previous period. This increase in interest spending limits the amount of resources otherwise available to finance development projects.

Second, as the government resorts to local banks to finance its deficit, the overall liquidity available in the market shrinks and consequently so does the level of available credit for the private sector.

Economist Magda Kandil, the executive director of the Egyptian Center for Economic Studies, was recently quoted in Al-Masry Al-Youm, saying: “Banks can easily refrain from lending to the private sector and capitalize on attractive and less risky government securities.”

With the fallout of the US and eurozone debt crises gripping the global economy, many economists are becoming more wary of high government debt levels. In a recent study conducted by Harvard economist Kenneth S. Rogoff, he found as debt levels pass the threshold of 90% of GDP, the prospects for GDP growth becomes weaker.

This is something that Egypt should pay attention to. With an ever growing population and millions becoming eligible to work every year, the economy must maintain a high level of GDP growth in order to absorb these new entrants.

Analysts have also highlighted that it is not only the amount of the debt that is important but also how that debt is utilized. If the government is borrowing to invest in development projects to create employment and stimulate the overall economy, then all is well and good. However, when debt is borrowed to cover a hefty subsidies bill, then much of it goes to waste. 

Unfortunately this is the case with Egypt’s public debt, much of which has been accumulated to fill yearly deficits resulting from high subsidies and social expenditure — little or nothing is directed to proper investment.

What the country needs now is a strategy that will see Egypt’s deficit levels start to dramatically decrease over the next couple of years, thereby limiting government borrowing. The country also needs to work on reducing the overall public debt and simultaneously propel GDP growth so that public debt-to-GDP ratios start to fall and hopefully hover around the 30% to 50% mark.

If this doesn’t happen, Egypt risks becoming yet another country crippled by its loans. bt