In a move that marks the first adjustment since the COVID-19 pandemic disrupted economies worldwide—specifically since 2020—the US Federal Reserve has begun to ease its five-year monetary tightening policy by lowering the benchmark interest rate by 0.5 percent (50 basis points)
The step comes in preparation for two additional cuts before the end of the year and four more expected in 2025, which will clearly impact the global debt landscape, particularly in medium- and low-income developing countries.
The global monetary tightening policy primarily aimed to contain the unprecedented inflation wave that swept the world, resulting in the highest interest rates in the last four decades. What does initiating US monetary easing mean for the debt dilemma in developing countries?
Amid global and regional tensions and their repercussions on neighbouring economies, the need for borrowing from international financial institutions and governments has become essential to address domestic challenges, especially for medium- and low-income developing countries.
The borrowing option is crucial for meeting local demand, complementing priority projects, and providing the necessary liquidity for goods and services amid unprecedented price rises, which triggered a global inflation wave not seen in over four decades.
The need for borrowing also required liquidity in foreign currency to service debts and their interests, imposing financial constraints and pressures on countries, particularly due to the high cost of debt services resulting from rising interest rates and the strengthening of the US dollar.
According to the latest World Bank report tracking global debt figures for 2022, published at the end of 2023, developing countries spent $443.5 billion on debt servicing and guarantees, with debt payments rising by 5 percent across all developing nations. These nations paid $88.9 billion in debt service costs from 75 countries eligible for borrowing from the International Development Association of the World Bank, which provides funding to the world's poorest economies.
The report indicated that interest payments for these countries quadrupled over the past decade, reaching an all-time high of $23.6 billion in 2022. Debt servicing costs also are expected to jump by approximately 39 percent between 2023 and 2024.
This projection is based on the continued cycle of monetary tightening, whether through increasing or maintaining benchmark interest rates, rather than reducing them. Therefore, these estimates are expected to shift downward with the easing measures initiated by the Federal Reserve in September.
The report highlighted that the rising cost of debt led to 18 defaults between 2020 and 2022 across 10 developing countries, marking the largest number recorded by the World Bank in the past two decades. Updated World Bank figures on global debt are expected to be released in December regarding debt levels in 2023.
Debt Levels in Egypt
According to data from the International Monetary Fund (IMF), the public debt ratio in Egypt for the fiscal year 2022/2023 (July 2022 – June 2023) reached 98 percent of total GDP, which later decreased to 89 per cent by the end of the fiscal year.
The government has set a plan to reduce this debt to below 80 percent by June 2027.
The rising cost of global borrowing and the strength of the US dollar have increased Egypt's debt burden since FY 2020/2021.
Data from the Central Bank of Egypt (CBE) reveal a surge in the country’s external debt; for instance, it rose from $137.8 billion at the end of the 2020/2021 fiscal year to $155.7 billion at the end of the 2021/2022 fiscal year and further to $164.7 billion at the end of the most recent fiscal year (2022/2023).
This amount increased to over $168 billion in the second quarter of the 2023/2024 fiscal year but then decreased to $160 billion in the third quarter following the signing of a direct foreign investment agreement in the coastal area of Ras El-Hekma with the Emirati side, which provided Egypt with $24 billion in dollar liquidity.
Additionally, $5 billion of the $11 billion in Emirati deposits at the CBE were transferred for local investment, with the remainder of these deposits being converted as they mature.
It is worth noting that the Ministry of Finance is set to receive the equivalent of $12 billion in Egyptian pounds to address the high debt levels in line with Egypt's commitments to the IMF under the current extended credit facility agreement valued at $8 billion, which will expire in September 2026. This is consistent with the finance ministry's strategy aimed at rapidly reducing the debt ratio of the state budget agencies to less than 80 percent of GDP by June 2027.
The Egyptian cabinet has set a debt ceiling for state budget agencies in the current fiscal year 2024/2025 at 15.1 trillion Egyptian pounds, accounting for 88.2 percent of GDP. This ceiling can only be exceeded in cases of national emergencies and necessities with the prior approval of the president, the cabinet, and the parliament.
The strategy also aims to improve debt management and reduce refinancing risks by decreasing the budget deficit, enhancing state resources through prudent spending, maintaining an increasing primary surplus, recording high growth rates, and directing half of the revenues from the government offerings program to directly reduce government indebtedness and its servicing burdens.
The strategy also targets reducing interest payments by diversifying financing sources across internal and external instruments and markets, lowering deficit-related financing needs, extending debt maturities, and setting limits on guarantees issued by the finance ministry while monitoring the volume of sovereign guarantees.
Additionally, Egypt is committed to utilizing 50 percent of the proceeds from the government offerings program, a key government initiative that is set to resume soon, to lower the debt ceiling.
The government's current program extending to the fiscal year 2026/2027 has adopted a policy of not relying on borrowing to finance its needs and projects, with the parliament recommending that borrowing be limited to the strictest necessities.
However, the global decline in interest rates will help reduce borrowing costs for a developing country like Egypt should it opt to borrow to implement program priorities, thus easing its debt burden and alleviating financial pressures on an economy expected to be the second largest in Africa by 2024, after South Africa, with an estimated GDP of $348 billion by the end of the year, according to IMF projections.
The head of the IMF mission to Egypt overseeing the current credit facility program confirmed that despite Egypt implementing a new phase of fair pricing for fuel with increased service prices, inflation will not rise to the levels witnessed over the past two years and will instead begin a downward trajectory.
The prime minister has also confirmed that the government's target for inflation is 10 percent for the upcoming year 2025, compared to levels exceeding 25 percent currently.
The global reduction in interest rates, combined with the gradual expected decline in inflation in Egypt, may prompt the CBE to ease the tightening of its monetary policy.
This policy began in March 2022 during the start of negotiations with the IMF for the current credit facility program and aimed to contain the high inflation wave.
This inflation surge coincided with the global inflation surge, the third wave of fair pricing for the local currency, and global supply chain disruptions caused by—one of the main repercussions of the Russia-Ukraine war.
This expected shift is anticipated to have a positive impact on the private sector in Egypt, particularly concerning the anticipated decrease in borrowing costs, which will invigorate the private sector, especially the industrial sector, which has suffered greatly from high interest rates.
This aligns with the Purchasing Managers' Index reading for August, which surpassed the neutral level for the first time in years, indicating an improvement in the non-oil private sector since November 2020.
These expected trends will undoubtedly contribute to achieving the government's program targets and fulfilling Egypt's commitments to the IMF, ultimately achieving higher growth rates and leading to job creation, market stability, and increased foreign and domestic investment.
*The writer is the Head of Business and Economic Affairs Desk at Ahram Online and a Researcher at the Economy and Energy Studies of the Egyptian Centre for Strategic Studies (ECSS).
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