A prominent businessman has proposed transferring government debt from the Ministry of Finance to the Central Bank of Egypt (CBE), thereby shifting debt responsibility from the former to the latter.
The businessman says that his proposal is the only viable solution to the country’s debt crisis, as the debt has become unsustainable. The proposal has faced sharp criticism, with some describing it as an economic gamble that could jeopardise the country’s national security. With the row now settling down, it is time to assess the possible outcomes of implementing the proposed plan, both for the country’s financial health and for the CBE.
Central banks are often referred to as the bankers’ bank and the government’s bank. They serve as the main monetary authorities responsible for issuing money, maintaining economic stability, controlling inflation, and regulating the banking system. In their role as the government’s banker, they manage its financial accounts, process receipts and payments, and handle public debt. They act as fiscal agents by issuing government securities, providing short-term loans, and giving financial advice to promote economic stability.
Within this framework, central bank financing of government deficits, commonly referred to as monetary financing, occurs when the central bank purchases government debt directly or extends overdraft facilities to the treasury. While this provides short-term relief, economic theory and historical experience show that it also carries substantial risks. Chief among these are higher inflation, erosion of central bank independence, and the emergence of fiscal dominance, where monetary policy becomes subordinated to the government’s financing needs rather than oriented toward price stability.
The economic impact of this financing is significant because it increases the money supply, which can lead to demand-pull inflation and currency devaluation. It can also result in “fiscal dominance”, in which monetary policy is constrained to prioritise government borrowing over economic stability, thereby raising interest rates.
The proposal on hand is equivalent to a one-off comprehensive monetisation of the domestic public debt stock. This would not just be a neutral book entry but would be a drastic change in fiscal-monetary relations. The consequences would be many for the Egyptian pound, inflation, fiscal space, and the broader macro-financial system. Implementing the proposal would make the CBE the sole holder of government debt, and, hence, interest payments would be recycled to the Ministry of Finance (or cancelled).
From a macroeconomic perspective, this is not debt management but fiscal dominance by design.
In standard macroeconomic analysis, government debt does not disappear when it is moved from one pocket of the state to another; it must eventually be backed by something real. That backing can come from, for example, future primary surpluses and economic growth exceeding interest costs. Transferring the entire debt to the central bank does not eliminate these constraints but just alters expectations. By removing market discipline and signalling that fiscal adjustment and growth are no longer credible anchors, it leaves inflation, or restructuring, as the only credible adjustment mechanism for the debt. Once that perception takes hold, inflation shifts from a risk to a policy outcome.
The argument that the proposal would be a single exceptional operation fails because the debt maturity would remain short, deficits would persist, fiscal rigidities would remain, and political incentives would be unchanged. Once the precedent was set, future deficits would be treated in the same way, inflation expectations would become adaptive upward, and monetary policy would lose effectiveness. Hence, inflation would become persistent rather than transitory.
The main appeal of the proposal, namely the fiscal space it appears to create, is thus an illusion. On paper, interest payments would seem to vanish, and the deficit would look smaller. But economies do not operate in isolation; they operate in general equilibrium (in economic terms). Once the full picture is considered, the gains disappear.
Higher inflation would increase nominal government spending; subsidy costs would rise automatically; wage pressures would intensify; and expenditures linked to the exchange rate would increase sharply. What might appear to be budget savings would re-emerge elsewhere, often in less visible but more damaging forms. Meanwhile, nominal interest rates on new instruments would rise, and external financing would dry up. The end result would be a shrinking of the net fiscal space — in other words, quite contrary to the original aim.
The banking sector would also suffer, as it would lose a core asset class (treasury bills) and experience surges in excess liquidity. Fewer loans would be provided, and monetary control would weaken further. The CBE would then face a stark choice: either sterilise the excess liquidity by issuing new instruments, thereby recreating public debt under a different name, or refrain from sterilisation and accept higher inflation. Either path negates the supposed benefits of the proposal.
From an international perspective, the operation would be treated as monetary financing. This would jeopardise existing and potential International Monetary Fund (IMF) arrangements, eliminate external policy anchors, and sharply reduce market access. For a country structurally reliant on portfolio inflows and multilateral support, such a development would be destabilising.
The exchange rate would come under immediate pressure, reflecting a loss of confidence and capital outflows. The parallel market would re-emerge, inflation expectations would jump, and the monetary transmission mechanism would weaken further.
The other counterargument against this proposal is that its impact on the CBE’s balance sheet would be huge, and its ability to perform its core duties would also be affected. The initial accounting effect on the CBE balance sheet would be a large stock of government securities (T-bills and bonds) on the asset side. An offsetting increase in the liabilities side would take place. On paper, net worth would appear unchanged, and the interest paid by the government would return to the government. But this accounting neutrality is irrelevant to a central bank’s operational capacity because central banks do not fail arithmetically but operationally. A distinction must be drawn between accounting solvency and functional solvency.
Asset quality would deteriorate because the central bank’s assets must be liquid, marketable, low-risk, and usable for signaling and sterilisation. Concentrating all assets in non-marketable sovereign claims undermines this function. Monetary control would weaken as excess reserves flooded the system. To regain control, the CBE would need to sterilise, but without tradable government securities, it would be forced to issue its own debt, recreating the problem it sought to eliminate.
The CBE’s interest-rate policy would become self-defeating because higher rates would increase its own losses, which could lead to pressures to cap rates. Thus, interest-rate policy would become fiscally constrained within the central bank itself in a classic case of fiscal dominance.
Banking supervision would be compromised as well, as the CBE’s role as the dominant holder of sovereign debt would conflict with its supervisory responsibilities.
Open market operations would lose their meaning because they rely on a tradable stock of securities, market pricing, and voluntary participation. If all debt is held by the CBE, there would be no market, no yield curve, and no benchmark pricing. The CBE would lose a core operational tool as a result.
Perhaps the greatest loss would be to the CBE’s reputational capital, which is irreversible. Central bank credibility is slow to build, fast to lose, and extremely costly to rebuild. For an emerging market like Egypt, such losses are not easily reversible. Transferring all local-currency public debt to the CBE would transform it from a monetary authority into a fiscal balance-sheet manager.
Having said that, the proposal should be understood not as a technical fix, but as an accounting manoeuvre that substitutes appearance for substance while deepening the underlying economic problem rather than solving it.
* A version of this article appears in print in the 19 February, 2026 edition of Al-Ahram Weekly
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