Egypt is one of the countries that pay the highest interest rate in the world for borrowing, and despite this, the so-called hot foreign money escapes out of Egypt.
According to a report issued by the Alternative Policy Solutions Project of the American University in Cairo, Egypt pays the highest interest rate in the world to borrow and keep hot money due to the growing reliance on short-term debt – whose percentage of total external debt increased from 7% in 2013 to more than 17% in 2013. 2021 – amidst a fragile economic reality.
What enhances the fragility of the situation, according to the same report, Egypt’s increasing dependence on short-term debt, through foreigners buying government securities in the form of bonds with high interest rates, which are by nature fast-moving funds that are highly vulnerable to global conditions, and therefore are called hot money – from which about 22 billion came out. Dollars from Egypt suddenly in the aftermath of the Russian-Ukrainian war – which, together with the US interest rate hikes in 2022, put great pressure on limited dollar resources.
Egypt’s default swap contracts, which are used to insure against non-payment risks, registered the largest rise in the world in March 2023, after Ecuador’s, showing the decline in foreign investors’ confidence in Egyptian bonds.
The report added that Egypt expanded during the last ten years in external borrowing, with an increase of about 277%, and it currently ranks as the second largest customer of the IMF after Argentina, the country that borrows the most from the Fund.
Government data showed an increase in the Egyptian external debt, reaching a historic level of $162.9 billion at the end of December 2022, compared to $145.5 billion at the end of 2021, an increase of about $17.4 billion, or 11.9%, in just one year.
The report of the Alternative Policies Project of the American University in Cairo stated that Egypt must pay foreign debts of about $9 billion due in fiscal year 2023, which ends next July, and needs $41 billion to cover debt payments and the current account deficit until the end of 2023.
Despite the obligation to publish information on the development of external debt on a regular basis, it usually comes months late, which often makes reality exceed it. The last published figure for external debt is equivalent to 5 times the foreign exchange reserves of the Central Bank of Egypt, which amounted to $ 34.4 billion in February 2023, and given the expected increase in external debt at the present moment – as the government obtained new external loans in 2023, which includes issuing Islamic sukuk worth $ 1.5 billion – The ratio of external debt compared to foreign exchange reserves currently has exceeded the 5 times mentioned.
Amr Adly, an assistant professor at the Department of Political Science at the American University in Cairo, believes that the main justification for the expansion of external borrowing in Egypt was to rehabilitate the macroeconomic environment to re-attract foreign capital in the form of investments, in a manner that would launch growth and raise employment, while bridging the gap. However, official data showed that the growth rates of external debt were much higher than the growth of foreign direct investment since 2016, which did not witness significant growth in the past decade.
This article was originally published by RT.