The public debt increased in 12 months from EGP 1.8tn, 90.4% of the gross domestic product (GDP) in March 2014, to EGP 2.1tn, 93.8% of GDP, according to the Ministry of Finance.
Banking analyst Ahmed Adam expressed his concern about the increase of public debt during the current year, saying: “It will be a big problem during covering the budget deficit, especially that the banks funded the deficit over the last four years.”
The risk, according to Adam, lies in the banks’ inability to fund the budget deficit, which will push the government to borrow from abroad. He believes that it will have catastrophic consequences on the Egyptian economy, as well as leading to a decrease in Egypt’s credit rating.
The government is targeting recording a 10% budget deficit during the current fiscal year (FY) 2014/2015. However, Adam believes the deficit will exceed 10.5% by the end of the year.
Egypt acquired $6bn from the UAE, Kuwait, and Saudi Arabia, or $2bn each, in order to support the cash reserves at the Central Bank of Egypt (CBE).
The cash reserves reduced by $1bn at the end of last May, to record $19.5bn compared to $20.5bn by the end of last April.
The public debt is divided into internal and external debt – the external debt decreased by the end of March this year to reach $39.9bn, compared to $45.3bn during March 2014, with a decrease of $5.4bn.
The external debt represents 13.1% out of Egypt’s GDP, according to the Ministry of Finance.
Conversely, Fakhry El-Fiky, Professor of Economics at Cairo University, believes external debt will not increase, since the government only takes loans from banks to make up for the budget deficit.
At the start of June, the government issued dollar bonds worth $1.5bn, with an interest rate of 6%, according to Adam, who said that the rate is very high in light of Egypt’s situation.
Adam expects that external debt will rise again by the end of July, which will be another burden on the spending of the debt service in the state’s public budget.
Local debt also increased to EGP 1.9tn, or 86.1% of GDP, compared to EGP 1.6tn in the same period last year.
Egypt cannot continue funding the budget deficit through bank loans forever, especially since the country is keen to improve industrial growth indicators. This would help decrease unemployment rates, according to Basant Fahmy, Financial Adviser at Al-Baraka Bank Egypt.
Banks prefer to give loans to the government instead of investors due to the current situation, says Fahmy, which makes the private sector unable to fund its projects.
According to Hisham Ezz Al-Arab, Director of the Union of Banks, the government is not wasting the private sector’s chances in the industrial sector, since industrial activity witnessed a significant slowdown during the last four years.
Fahmy believes external loans will harm Egypt’s economy – even former president Hosni Mubarak used to oblige his prime minister not to take external loans of more than $33bn.