Debt Crises as a Symptom of Structural Economic Imbalances - Mohamad Ramadan
Debt Crises as a Symptom of Structural Economic Imbalances:
Egypt as an Example - Mohamad Ramadan
Egypt is experiencing one of the most severe debt crises in its modern history, a crisis that has extended from 2022 to the present day. Pressure has accumulated on Egypt's domestic balance of payments due to large external debt payments. Despite financial rescues through borrowing from the International Monetary Fund (IMF) and large asset sales, particularly in Ras El Hekma, this liquidity does not guarantee structural solutions to the structural crisis. Rather, it could contribute to deepening the crisis in Egypt's development model by increasing the concentration of overall investments in the infrastructure and real estate sectors.
The roots of the Egyptian economic crisis lie in structural imbalances in the economic growth pattern. Since 2014, the state has relied on extensive borrowing to finance infrastructure projects, the administrative capital, and new cities, while investment in productive sectors such as agriculture and manufacturing declined. Thus, loans have become a tool for buying time rather than building productive capacity that generates hard currency or sustainable job opportunities. These policies contributed to a doubling of external debt from approximately $44 billion in 2014 to $168 billion by the end of 2023, more than tripling in less than a decade. On the domestic front, domestic debt continued to swell, with interest payments rising to record levels, devouring more than 47% of total expenditures in the 2024/2025 budget, compared to only 25% in 2014.
The crisis deepened due to Egypt's reliance on hot money as a means of financing the dollar gap. Despite three major shocks to the exit of these investments (2018, 2020, and 2022), the government continued to attract them through high interest rates and tax exemptions for foreigners, while Egyptian citizens bear the cost of these policies in the form of indirect taxes and inflation. At the same time, Gulf deposits in the Central Bank accounted for approximately 83% of foreign reserves by the end of 2023. This pattern of short-term financing transforms the relationship with the Gulf into a tool of geopolitical pressure, as renewals or conversions are linked to major asset sales deals such as Ras Al-Hikma.
Regarding the risks of refinancing this debt, there is a clear increase in the share of short-term debt in total external debt, rising to 16% in 2022, up from only 6% in 2014. This trend increases refinancing risks and makes public finances more vulnerable to any shock in interest rates or capital flows. Instead of addressing these risks, the government has continued to issue international bonds and sukuk with high yields reaching 11% in 2023, deepening the debt crisis and, consequently, the economic crisis in Egypt.
The Financial Crisis and Austerity in Social Spending
The IMF and the Egyptian government focus their rhetoric on debt management on the primary surplus, a frequently touted achievement. However, the general budget deficit continues to widen due to increased interest payments. Interest payments in the latest 2024-2025 budget are estimated at EGP 1.83 trillion, representing approximately 11% of GDP. The direct result of these large debt service payments has been a steady decline in allocations for wages, subsidies, and social protection. Wages accounted for 26% of expenditures in 2014, but this fell to just 15% in 2023. Subsidy allocations also declined from 30% to 17% over the same period. This effectively means that the "economic reform" program has cut social spending by more than half over the course of ten years. This has been accompanied by a collapse in the value of the currency, with the pound losing 81% of its value since 2016, leading to successive waves of inflation, particularly in food and energy prices, which has directly impacted the erosion of living standards for Egyptian families.
Recommendations and Solutions to Exit the Crisis
Exiting the current debt crisis, meaning escaping the cycle of debt repayments and exchange rate devaluations in Egypt, requires numerous structural measures that must form the core of a domestic economic reform program, independent of pressures from international institutions such as the International Monetary Fund. The National Debt Report on Egypt argues that these measures must be based on the following basic steps:
1. Parliamentary approval of legislation that sets a ceiling on borrowing and debt servicing, requiring various Egyptian government agencies to allocate foreign funding to productive projects with technological and export returns, rather than unproductive real estate and infrastructure spending. This fiscal discipline is a prerequisite for halting the recurrence of the crisis.
2. In order to reduce the burden of debt payments in the short and medium term, the Egyptian government must pursue early restructuring of its external debt and convert a portion of it into long-term investments. This strategy is already being implemented by the government, and was previously part of the Ras Al-Hikma deal with the UAE.
3. Egypt needs a comprehensive and fair tax reform aimed at expanding the tax base by imposing taxes on idle real estate and a capital gains tax, which has been deferred for more than a decade, while adjusting income tax brackets to reflect the real income of upper income brackets.
4. The government can negotiate with local banks or adopt the principle of special tenders from the Central Bank, which can reduce interest on domestic debt. The IMF often criticizes these special tenders because of the government's heavy reliance on them to provide liquidity, but these measures appear necessary to reduce the debt service bill in the short term.
5. A different structural program is needed to support productive growth, beyond the traditional IMF conditions. It should focus on stimulating industry and agriculture through financial incentives and soft loans, with strict governance to ensure that funding reaches already productive sectors, rather than sectors where overall investment in the economy is concentrated, such as real estate.
6. Austerity priorities must be reconsidered, focusing on reducing unnecessary spending on mega-national projects while increasing spending on health, education, and social support. Continued weakening of these sectors will impoverish human capital, deepening the economic crisis in the long term.
7. Enhancing food and energy security is a necessary approach to reducing dependency. Food and energy account for more than a third of Egypt's annual imports. Therefore, investing in local agriculture and renewable energy can reduce the chronic trade deficit and ease pressure on foreign exchange reserves.
8. The principle of a unified general budget must be implemented, integrating the budgets of economic entities and special funds into the budget, enhancing transparency and increasing the efficiency of resource use. Continued budget fragmentation deprives the state of the surpluses of major institutions, such as the New Urban Communities Authority, and artificially increases the overall deficit.
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