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Analysing domestic debt
Published in Al-Ahram Weekly on 05 - 07 - 2018

Egypt's domestic debt rose by LE100 billion during the second quarter of the 2017-18 fiscal year. The increase, registered from October to December 2017, put more weight on the government's shoulders and has concerned commentators.
“The rise in domestic debt could impede the state's ability to meet its commitment with the International Monetary Fund (IMF) to reduce the budget deficit,” said Alia Al-Mahdi, a Cairo University professor of economics.
The government is targeting an 8.4 per cent budget deficit in the 2018-19 fiscal year.
“The total public debt, domestic and external, constitutes the biggest tranche of expenditure in Egypt's budget. The increase in debt makes the government unable to close the gap between revenues and expenditures, resulting in more deficit,” she added.
The recent hike in global oil prices as well as a number of commodities was against the government's expectations, hiking government expenses in the 2017-18 fiscal year. The government had factored in a price of $55 per barrel of oil in its 2017-18 budget, but towards the end of the year global prices escalated to around $70 per barrel.
The added expenses prompted the government to request that parliament approve “a documentary credit” that will allow it an increase over last year's budget of LE70 billion.
Figures released by the Central Bank of Egypt (CBE) indicate that public domestic debt reached LE3.414 trillion by the end of December 2017, up from LE3.16 trillion in June the same year, recording an eight per cent increase in six months.
“The eight per cent increase in domestic debt shows that Egypt is not committed enough to its reform programme and may jeopardise the government's agreement with the IMF,” commented Al-Mahdi.
In 2016, Egypt embarked on an economic reform programme backed with a $12 billion extended fund facility from the IMF. Under the programme a number of measures have been put in place, including imposing a value-added tax (VAT) and cutting energy and fuel subsidies with the aim of lowering the budget deficit.
The problem is not the increase in the domestic debt as such but rather how to prevent it escalating further in the future, said Omar El-Shenety, founder and managing director of the Multiples Investment Group. He believes this will be difficult to attain, considering the present high interest rates on bonds and treasury bills.
Between November 2016 and February 2018, the CBE raised interest rates by seven per cent to encourage more people to hold onto their pounds. However, since February 2018 it has cut overnight deposit and lending rates twice to reach 16.75 per cent and 17.75 per cent.
The CBE's Monetary Policy Committee met last Thursday and kept rates unchanged. Experts had expected the CBE to keep rates constant for the moment to counter the expected rise in inflation following last month's cuts in fuel subsides.
In the light of rising interest rates put in place by the US Federal Reserve “the CBE will also maintain high interest rates to attract foreigners to invest in debt instruments offered by the government in the form of bonds and treasury bills,” continued El-Shenety.
In December 2015, the US Federal Reserve began raising interest rates after seven years of keeping them at 0.25 per cent following the 2008 recession. The current federal funds rate is around two per cent, and the Federal Reserve has signalled it will raise rates to 2.5 per cent in 2018, three per cent in 2019, and 3.5 per cent in 2020.
Increased interest rates will impede the government's ability to control the domestic debt and the deficit will remain, even if the government manages to achieve a primary surplus, El-Shenety believes. A primary surplus means that budgetary revenues outpace expenditures before accounting for debt-servicing.
According to the Ministry of Finance's May monthly report, interest payments on Egypt's debt have reached LE251 billion, or 7.4 per cent of GDP.
The total budget deficit decreased in the first eight months of fiscal year 2017-18 to reach LE258.9 billion, constituting six per cent of GDP and down from 6.5 per cent during the same period of the 2016-17 fiscal year, according to the ministry's report.
It added that the retreat in the deficit was the result of the government's increased revenues. From July 2017 to February 2018, state revenues increased by 38.7 per cent to reach LE430.7 billion.
“We are on the safe side as long as the government can continually pay the debt servicing,” said Riham Al-Desouki, an economic expert. It is important to look at the sum of domestic debt not as a number, but “rather in relation to GDP. Currently the domestic debt has not reached 100 per cent of GDP,” she added. Domestic debt came to around 75 per cent in 2017-18 according to IMF data.
Ali Al-Idrissi, professor of economics at the Zewail City of Science and Technology, nodded in agreement with Al-Desouki. “No problem will arise as long as the government is able to pay back the debt. At the same time, the state is already working on decreasing the debt-to-GDP ratio,” he said.
From where the government stands, in the new fiscal year “revenues are estimated at around LE1 trillion and expenditures at LE1.4 trillion. The remaining LE400 billion will be made up for through borrowing,” said Al-Idrissi.
The government is working on a number of national projects and is constitutionally committed to increasing spending on healthcare, education and social security programmes, he added. “The government has to borrow to make up for the gap between revenues and expenditures” as a result, he said.
With the new fiscal year, which began on Sunday, expenditure rose by LE200 billion compared to last year's budget. The wages of employees in the administrative sector rose by LE30 billion to reach LE270 billion, while the budget allocated for healthcare and education increased to LE257 billion, up from LE222 billion last year.

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