Egypt's Public Debt: Under Control

The government’s strategy to lower Egypt’s public debt to 80 per cent of gross domestic product (GDP) by 2022 has now started, after the country’s domestic and foreign public debt stood at around 97 per cent of GDP in June 2018.

Two key components of the strategy are a greater shift towards long-term debt maturities and the public-sector companies’ share-offerings programme. The first phase of the latter was launched when the government offered 4.5 per cent of Eastern Tobacco shares for sale on the stock market recently.

Annual increases in GDP on the back of higher state revenues from value-added tax (VAT), real estate tax, and a growing number of projects mean that the country’s debt-to-GDP ratio will drop, said Sami Khallaf, a former advisor to the Finance Ministry.

The debt-to-GDP ratio was less important than lowering the debt in absolute terms, Khallaf said, adding that both foreign and domestic debt had increased over the past few years and this could be harmful to the economy.

The Finance Ministry targets lowering the debt-to-GDP ratio to 93 per cent by June 2019, 88 per cent by June 2020, and 80 per cent by June 2022. It is targeting an annual primary surplus of two per cent of GDP and achieving annual growth rates higher than six per cent in the medium term.

The primary surplus is current government spending minus current revenues and excludes interest paid on government debt.

Egypt’s total budget deficit fell in the first seven months of the current fiscal year from July 2018 to January 2019 to 4.2 per cent of GDP, down from 4.9 per cent during the same period last year, the Finance Ministry’s bulletin for February said.

The budget saw a primary surplus of LE24 billion, or 0.5 per cent of GDP, in the first seven months of this fiscal year, and a primary deficit of LE13 billion, averaging 0.3 per cent of GDP, during the same period.

The decrease in the deficit came as a result of increases in revenues by around 30 per cent from July 2018 to January 2019, exceeding growth in expenditure and more than the 19 per cent during the same period the year before, the bulletin said.

Revenues rose to around LE460 billion from July 2018 to January 2019, up from around LE354 billion during the same period the year before, recording an increase of 29 per cent driven by the increase in tax receipts, which made up around 78 per cent of total revenues, according to the report.

For the first time in 15 years, the Ministry of Finance achieved a primary surplus of LE4 billion in fiscal year 2017-2018, at which time economic growth rates rose to 5.2 per cent.

According to Minister of Finance Mohamed Maait, there are plans to lower external debt, which has already seen a slight improvement, falling from 41.1 in June 2017 to 36.8 per cent of GDP in June 2018.

The figure is targeted to further decrease to 34 per cent of GDP by June 2019. Maait said that according to these numbers Egypt’s external debt was starting to fall within the safe range of between 30 and 50 per cent of GDP.

The ministry has taken measures to slow down increases in the debt-servicing bill and improve the government debt structure. They include introducing new financing tools to investors in the local market, such as issuing zero-coupon bonds with maturities of one and a half or two years. Zero-coupon bonds are bonds that do not pay interest. They are sold at a discount, and the bond-holder receives the full face value upon maturity.

Moreover, the ministry’s expansion of long-term maturity debt instruments will facilitate the inclusion of Egyptian government securities in the JP Morgan Index, which could double demand.

The Ministry of Finance announced on 20 February that it had completed a $4 billion Eurobond issue that had attracted $21.5 billion in bids from 250 investors with maturities of five, 10 and 30 years with good yields. The sale was five times oversubscribed.

Ahmed Kouchouk, deputy finance minister for financial policies, said the long-term bonds ensured the longer maturity of government debt and reduced the risks of refinancing.

Egypt sold $750 million in five-year bonds at a yield of 6.2 per cent, $1.75 billion in 10-year bonds at 7.6 per cent, and $1.5 billion in 30-year bonds at 8.7 per cent.

The challenge of foreign debt is the value of the pound against the dollar, Khallaf said, who suggested putting a ceiling on domestic and foreign debts so that debt-servicing does not become “exhausting for the budget”, the largest portion of which goes on paying debts.

Debt-service payments on domestic and foreign loans are estimated at LE541 billion, or 38 per cent of expenditure and up from LE437 billion last year. This year’s debt-servicing is almost double the amount allocated to subsidies and social grants, which together make up 23 per cent of expenditure.

Hani Farahat, a senior economist at CI Capital, believes that the Finance Ministry’s plans to lower public debt are achievable, particularly with Egypt’s growing economy.

The ministry is targeting a growth rate of 5.8 per cent this fiscal year, raising the ceiling of expectations from 5.6 per cent when the budget was approved, and 6.5 per cent in the following year, with an eye on increasing the growth rate gradually to eight per cent in 2021-22. What matters is not so much replacing short-term debt instruments as lowering the deficit-to-GDP ratio, Farahat said.

The Ministry of Finance is aiming for a 0.6 per cent reduction on last year’s budget deficit to reach 8.4 per cent this year.