Navigating Egypt’s external debt trap: Global pressures and pathways to stability— goodie-two-shoes or back to the bone?

Since 2020, Egypt has faced multiple economic challenges, most notably including high public debt, rampant inflation, a currency crisis, and slowing economic growth. These factors have collectively placed tremendous pressure on Egypt's overall economic stability.

In the absence of a clear master plan to address this unprecedented economic situation, it is crucial to formulate a more comprehensive and coordinated economic strategy to establish a clear order and set of priorities for Egypt's overall economic policies. Key focuses should include managing state-owned assets or national wealth, restructuring external sovereign debt, and resolving the long-standing currency crisis. These three priorities are closely interconnected and mutually influential.

However, it is widely believed that restoring Egypt's economic stability is impossible without a large-scale debt relief program. Globally, there is growing concern about the dangers and impacts of developing country debt crises, which are becoming increasingly apparent. Many international institutions and organizations believe that developing countries' external debt has reached "alarming" levels and a "critical" stage, threatening global economic stability. Consequently, there has been a recent surge in calls for swift action to restructure external debt.

In the case of Egypt, external debt is approximately $152 billion. While some argue that this level is manageable relative to the size of the economy, the combined burden of external and domestic debt severely hinders Egypt's efforts to embark on a sustainable development path. Rising debt servicing costs further exacerbate the country's fiscal pressures, raising concerns about debt sustainability. Historically, despite the severe impact of external debt on the Egyptian economy, successive Egyptian governments have consistently focused on obtaining external support, rarely seeking debt relief as was done in the early 1990s.

Many countries, including those in Latin America, have addressed similar challenges by negotiating debt relief, which has helped them overcome financial difficulties. The situation is complicated by rising debt servicing costs and recurring global crises. The COVID-19 pandemic, the Russia-Ukraine war, and ongoing geopolitical tensions, such as the conflict in Gaza, have exacerbated Egypt's vulnerabilities, disrupting trade routes like the Suez Canal and depleting foreign exchange reserves. These crises have deepened Egypt's economic instability, further complicating its ability to manage external debt and making the Egyptian economy increasingly susceptible to geopolitical and financial risks.

The external debt problem is not limited to Egypt, as many developing economies are struggling to cope with worsening debt situations. Following the COVID-19 pandemic and heightened geopolitical tensions, the global economy has experienced a wave of monetary tightening and trade disruptions. The Group of Twenty (G20) has described the level of external debt in developing countries as a "major risk," with 60% of them "already in default." Studies indicate that 54 developing countries, including Egypt, urgently need debt relief to cope with the impact of successive crises. They warn that if the crisis is not addressed promptly, global economic stability will be at risk, with extreme poverty rates being particularly severe.

Despite efforts by Egyptian policymakers to stabilize the economy, particularly through initiatives aimed at managing public debt, attracting foreign investment, and diversifying the economic base, external shocks and global crises have exacerbated current challenges, continuing to hinder progress and complicating the path towards achieving long-term stability. In light of the impact of these crises, international institutions have launched initiatives to alleviate external debt in developing countries. In recent years, these initiatives have successfully relieved nearly $90 billion in debt, in addition to over $500 billion in debt relief since the 1980s.

However, Egypt has not significantly benefited from these initiatives, as they typically focus on the poorest countries, while Egypt is classified as a middle-income country. The international community has recently emphasized expanding debt relief initiatives to include middle-income countries, recognizing the serious impact of their debt burdens on development and poverty reduction. Recent calls to include middle-income countries have come from the recent G20 summit (G20 Common Framework for Debt Treatments).

In fact, global economic challenges can be translated into opportunities for the Egyptian economy. Global attention provides Egypt with an opportunity to leverage international concern about the risks faced by developing economies in fulfilling their debt obligations. Egypt must leverage its strategic role in the region and its diplomatic relations to advocate for its inclusion in various debt relief initiatives and/or programs. Recommendations might include forgiving a significant portion of external debt, deferring payments, or replacing debt with green projects aimed at mitigating climate change, which is a pressing global priority today.

The Egyptian government estimates that the cost of climate change mitigation programs is approximately $202.5 billion over 28 years, significantly exceeding the size of its external debt. Therefore, replacing a significant portion of external debt with green projects offers a viable solution. Debt-for-climate swaps could align with Egypt's commitments under the 2030 Sustainable Development Goals and the Paris Climate Agreement. Negotiating debt restructuring with international institutions, developed economies, and China in exchange for implementing reforms and policies that prioritize sustainable development could secure partial or full debt forgiveness.

The Egyptian economy faces significant challenges from its external debt burden, which are exacerbated by geopolitical and global economic crises. Addressing these challenges requires a multifaceted approach that prioritizes debt restructuring, green financing initiatives, and leveraging international partnerships. By aligning with global priorities such as climate change mitigation, Egypt can secure the necessary relief to stabilize its economy and lay the foundation for sustainable development.