Oct 2022

The Impact of External Debt on Economic

Growth in Egypt During (1990-2019)

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Contents
1. INTRODUCTION (1)........................................................................................................................... 3

2. DEFINITION OF EXTERNAL DEBT (1)..................................................................................................3

3. THE CAUSES OF THE EXTERNAL DEBT CRISIS'S ESCALATION (1)..........................................................4

3.1 Internal Factors............................................................................................................................... 4

3.2 External Factors.............................................................................................................................. 5

4. THE NEGATIVE EFFECTS OF EXTERNAL DEBT (1)..............................................................................6

4.1 Economic Effects of External Debt..................................................................................................6

4.1.1 Impact on economic growth......................................................................................................6

4.1.2 Impact on exports:.................................................................................................................... 6

4.1.3 Impact on leveraging domestic savings....................................................................................7

4.1.4 Impact on inflation.................................................................................................................... 7

4.2 Political Effects of External Debt......................................................................................................8

4.3 Social Effects of External Debt........................................................................................................8

5. EGYPT'S EXTERNAL DEBT.............................................................................................................. 9

5.1 Egypt’s External Debt Evolution (2)...................................................................................................9

5.2 Reasons Behind Egypt's Reliance on External Debt (2)..................................................................10

5.3 The External Debt Indicators......................................................................................................... 11

5.3.1 External debt to GDP ratio: (3).................................................................................................12

5.3.2 External debt to Goods and Services Exports ratio: (3)............................................................13

5.3.3 Average Percentage of External Debt Per Person (2)..............................................................14

6. CONCLUSION (2)............................................................................................................................ 14

7. REFERENCES:.............................................................................................................................. 15

List of Figures:

FIGURE 1: PERCENTAGE OF EXTERNAL DEBT TO GDP- EGYPT- BASED ON MACROTRENDS SITE...........................................12

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FIGURE 2: PERCENTAGE OF EXTERNAL DEBT TO GOOD AND SERVICES EXPORTS- EGYPT - BASED ON MACROTRENDS
SITE.............................................................................................................................................................. 13

1. INTRODUCTION E RROR: REFERENCE SOURCE NOT FOUND

The third world countries have been declining for more than twenty years despite having unlimited
natural and human resources that could elevate them to the ranks of wealthy nations and prevent the
repayment of debts, which have grown significantly, from allowing their peoples to meet the most
basic needs.

In order to impede any economic development in third world nations, religion has evolved into a
complex system of dominance and a modern tool of colonialism. The creditors frequently have more
influence over the governments of debtor nations than do the parliaments of those nations.

Management of debt is crucial for economic expansion. Stability in the macro- and micro-economies
can be facilitated by effective debt management. Due to the record-high levels of public debt at the
global level, it is now necessary to evaluate how governments' current borrowing practices will affect
their economies in the long run as well as how well they will be able to pay back the principal and
debt obligations. Creditors must also plan ahead for potential risks and modify their financing
requirements accordingly. Make sure that debt stays within a manageable range in order to promote
economic expansion.

In order to achieve economic growth to better people's lives, the issue of external debt in Egypt will
be studied in the context of Egypt's economic history from (1990–2019) in order to throw light on the
degree of its impact on economic growth.

2. DEFINITION OF EXTERNAL DEBT E RROR: REFERENCE SOURCE NOT FOUND

Throughout their development processes, most nations encounter a variety of issues that are unique
to each nation and depend on its circumstances and capacity, which brings them to the issue of
external funding. This is because of a number of factors, some of which led to its development and
others of which increased its complexity. A tool for filling the resource gap is external debt. domestic,
including those caused by a decline in the value of exports compared to the value of imports.

External debt is not regarded as a recent phenomena; rather, it is an old phenomenon that dates
back to the first half of the nineteenth century, and resorting to external borrowing was not a
phenomenon that was exclusive to third-world nations. in the 19th century.

The International Monetary Fund, the World Bank, the Organization for Economic Cooperation and
Development, and the Bank for International Settlements formed a working group in 1984 to develop

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a unified definition of external indebtedness, which was published in its annual report and is as
follows: "The total external debt on a given date is equal to the amount of the current contractual
obligations of the country.

3. THE CAUSES OF THE EXTERNAL DEBT CRISIS'S ESCALATION E RROR: REFERENCE SOURCE NOT FOUND

Developing nations attempt to use external debt to finance the public budget deficit and achieve
economic development without creating strategies that will allow them to be ready for repayment. The
external debt crisis is caused by the interruption of capital flows from the borrowing countries to the
creditors, and this interruption is caused by the borrowing countries' inability to meet their external
obligations. The majority of these nations used an industrialization strategy that focused on
developing industries producing leisure-related consumer goods that benefited high-income
individuals as well as serving the interests and goals of global foreign corporations rather than
producing goods to replace imports of necessary and productive goods.

It causes a deficit in the balance of payments of these countries, which ultimately causes their
external debts to rise and may cause a delay in their economic growth. Additionally, internal and
external factors interact to exacerbate the external debt problem. The following are those of these
factors that stand out the most:

3.1 Internal Factors

 Borrowing for economic development and reform

Developing nations aspire to stay up with progress and create an infrastructure that can support the
national projects required for economic success. Poor planning, which is one of the most significant
failures of projects and consequently the inability to pay the instalments and interest of those debts, is
the main subject of this article's discussion of payment methods, which may cause a worsening of the
external debt problem.

 Ineffective handling of external debt

The result is an increase in loans beyond their own needs, the lack of a long-term strategy for
borrowing from abroad, and the absence of an appropriate timetable for repaying the instalments of
these debts. Countries dither into borrowing without coordination with their competent bodies and
flounder in how to direct these funds.

 The lack of available local funding alternatives

Selling bonds on the local market is a crucial tool for financing expenditure deficits, but developing
nations have trouble accumulating domestic savings since the bond market is ineffective at covering
the high rates of fiscal deficits these nations experience

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 Ignorance about the agricultural industry

Agriculture plays a big role and an effective impact on the dimensions of sustainable development,
contributes significantly to the gross domestic product, and attracts investments. Imports rise as a
result of emerging nations' disregard for this sector in order to provide agricultural needs. The
industrial sector in developing countries may get the majority of their loans, as it demands enormous
resources. Whereas an increase in external indebtedness results from the issue of financing
agricultural imports and devoting a sizable portion to the industrial sector and a lack of interest in the
agricultural sector.

 Deficit in the balance of payments

When industrial imports exceed exports, there is a balance of payments imbalance, which forces
countries to borrow to close the gap and attempt to restore the trade balance. This is an obvious
cause of the rise in these countries' external debt.

3.2 External Factors

 LOW DEMAND FOR RAW MATERIALS WORLDWIDE

The terms of trade for the nations exporting these goods deteriorated due to the drop in raw material
prices, which worsened the balance of payments deficit and increased the propensity for external
borrowing. as a result of the decline in the value of exports of goods, in the balance of payments.

 INCREASED COST OF OIL IN 1973

As a result of the rise in oil prices between 1974 and 1973, more non-oil producing countries received
net loans from international financial markets to help close their current account deficits, and starting
in 1976, their net debt to foreign banks and bond markets also rose. Its drop since 1985 has also
contributed to the worsening of the economic crisis in emerging nations, particularly in those that
produce oil, as the majority of them are burdened with substantial foreign debts. paying off her unpaid
debt service

 REDUCED SUPPORT FROM DEVELOPED NATIONS

Due to their reliance on rich nations' aid, developing nations are more likely to need to borrow money
to pay back the soft loans these nations have given them.

 CAPITAL FLIGHT
The crisis of developing countries' external indebtedness emerged as a result of the capital flight to
international financial centers in the form of various deposits, which left local banks short of funds.
While resources accumulated in these centers, they are now lending them to emerging nations with
pricing restrictions, and in many cases, commercial invoices are fabricated as a means of smuggling
capital.

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 IMPORTED INFLATION AS WELL AS STAGFLATION

The industrialised countries' stagflationary crisis forced them to lower the rates on their soft loans to
developing nations, and the monetary and financial steps they took to address the crisis resulted in
an increase in the developing nations' dependency on private sources of financing. The unusually
high interest rates on savings deposits have contributed to the rise in loan interest rates. which
caused the burden of debt service to gradually and noticeably increase, which in turn caused several
nations to reschedule their loans. Imported inflation significantly contributes to the escalation of the
debt issue; In economic crises where developing countries tend to follow the nations from whom they
import goods and services, inflation in the prices of those imports leads to the escalation of the
external imbalance, which increases their demand for external funding.

4. THE NEGATIVE EFFECTS OF EXTERNAL DEBT E RROR: REFERENCE SOURCE NOT FOUND

External debts have a variety of effects; however, they differ from one country to another. Perhaps
the nature of the debts and the terms of payment, in addition to the state's handling of debts, account
for the disparate outcomes brought on by these loans. But in general, debts that exceed the state's
ability to control them and that they accumulate along with turn all points and effects negatively,
adding to the state's debt load.

4.1 Economic Effects of External Debt

4.1.1 Impact on economic growth

The excessive debt theory emphasizes how debt has a negative effect on growth by slowing capital
accumulation. As debt increases, investors' expectations of returns decrease because they anticipate
tax increases to pay off debts. This deters both domestic and foreign investors and reduces capital
accumulation. Due to the ambiguity surrounding which portion of the debt will be paid using the
resources of the state, investors in highly indebted countries rescind their investment decisions. A tiny
portion of the export profits will be left over for investment and economic growth if a significant portion
is needed to pay off the foreign debt.

Debt significantly impacts public spending, which includes social, health, and educational services,
which in turn negatively impacts human capital and, in turn, investment decisions and economic
growth. This is how debt indirectly affects economic growth.

4.1.2 Impact on exports:

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In reality, debt servicing is a deduction made from the loan's proceeds and principle that will later be
repaid to the creditors. As a result of this heavy load, the surplus balances of payments are put under
further strain, the foreign debt to GDP ratio rises, and the rising debt service ratio may eventually
force domestic economic sectors to transfer money from abroad. The most significant portion of these
industries will not receive investment, which will have a direct negative impact, as a result of not
saving it due to the future worry of paying off this debt.

4.1.3 Impact on leveraging domestic savings

A portion of the income is reduced by leakages that do not increase this national income to cover the
costs of debt service, which are represented by debt payments. As a result, this burden reduces
overall savings and prevents the most crucial sector of the economy, investment, from benefiting from
it. The marginal sufficiency of capital will be weakened by taking out an external loan with a high
interest rate, which will reduce the demand for capital and run counter to what is intended. With
respect to the needs of development, domestic savings, or the ability of the state to meet its
obligations abroad, will sometimes be positively impacted by an increase in interest rates, but this will
also have a negative impact on local economies.

4.1.4 Impact on inflation

Numerous studies support the notion that there is a direct link between foreign debt and the large rise
in the average level of prices in the debtor countries. Given that there are other objective variables
like structural imbalance and monetary and financial policies, the rise in these countries' external
indebtedness may therefore only partially account for the sharp rise in the general level of prices.
One of the variables that explains the phenomena of inflation is expansion. Following is the link
between inflation and external debt:

- When the process of reimbursing external debt services begins, prices often increase, particularly if
the projects that were funded by external loans are not performing to their full potential, which is often
in developing nations.

- Many studies and reports confirm that the prices of these products sometimes increased by more
than 100%, given that the supplier finds himself in a state of monopoly, which results in a decrease in
power, because most loans are conditioned on the supply of semi-manufactured or capital goods
from the lending country. acquisition of the loan.

- Since it results in a reduction in the supply of goods, the state's limited ability to import due to the
rising cost of servicing its external debt has the biggest influence on the growth in the prices of
essential commodities and the upkeep and renewal of its production equipment.

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4.2 Political Effects of External Debt

Even though political colonialism may have subsided, its economic form is growing more and more
powerful. The need for financial resources and monetary liquidity in these countries has been
exploited by the creditor countries and international financial organizations, who have found a clear
way to meddle in the affairs of the poor debtor countries. This opens the door for the rich to exert
control over the poor in order to enact policies that serve their interests.

The intervention has started in state affairs as a means to protect the interests of the colonial
capitalist states and their citizens abroad. The intervention is by actual pressure exerted by one or
several countries on another country, with the intent of forcing it to do an action, refrain from doing or
to desist from certain behaviours that are against the special interests of countries or their subjects.

The risk of exacerbating foreign debts does not stop at the economic and social borders, but rather
extends beyond exposing the freedom of the maker. This is one of the most significant negative
effects of foreign debt in developing countries because it worsens the extent of foreign interference in
those countries, negatively impacts political decision-making, and exposes it to more pressures. The
political choice results in increased pressure and outside involvement.

4.3 Social Effects of External Debt

Foreign debts have an impact on more than just the economic and political spheres; they also have
an impact on how people relate to one another socially, since they have an impact on
intergenerational fairness. The following generation must shoulder the costs of servicing these loans
without access to new resources, thus in order to pay for the services they require, in addition to
investing and boosting growth rates, deductions must be made from the available money. This is in
contrast to the conditions imposed on the countries borrowed by some organizations, including the
International Monetary Fund, which have strictly economic objectives and affect social aspects if
countries do not develop policies to protect those with low incomes. These conditions include harsh
financial policies on citizens to service the debt from high taxes, raising subsidies without regard to
social aspects, and the deterioration of living standards.

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