Since 2020, Egypt has faced several economic challenges, most notably, high levels of public debt, hyperinflation rate, exchange rate crisis and slow economic growth. These factors, among others, have placed significant pressure on the overall economic stability of the nation.
In the absence of a well-defined master plan to address this unprecedented economic situation, the need for a more comprehensive and coordinated economic strategy is crucial to have clear sequences and priorities for formulating the overall economic policies of the country.
Primary concerns should include managing state assets or national wealth, restructuring external sovereign debts and resolving the chronic exchange rate crisis. These three priorities are deeply interconnected and influence each other. Nevertheless, there is a prevailing belief that restoring stability to the Egyptian economy is improbable without a substantial debt relief initiative.
External sovereign debt challenges
Globally, there are growing concerns about the dangers and repercussions of the debt crisis in developing countries, which are now coming to the forefront. Many international institutions and organizations believe that the external debt of developing countries has reached ”alarming” levels and a ”critical” stage, threatening global economic stability. As a result, calls for swift action to restructure external debt have recently intensified.
For Egypt, external debt stands at approximately $152 billion. While some argue this level is manageable relative to the size of the economy, the combined burden of external and domestic debts significantly hampers efforts to place the economy on a sustainable path. Rising debt service costs further strain the country’s fiscal capacity, creating concerns about debt sustainability.
Historically, although the Egyptian economy has suffered significantly from external debt, the focus of successive Egyptian governments has always been on obtaining external support, with little emphasis on seeking debt forgiveness, unlike the approach taken in the early 1990s. Many countries, including Latin America, have managed similar challenges by negotiating debt reductions, which helped them overcome financial distress.
The situation is further complicated by rising debt service costs and recurrent global crises. The COVID-19 pandemic, the Russia-Ukraine war, and ongoing geopolitical tensions—such as the conflict in Gaza—have worsened Egypt’s vulnerabilities, disrupting trade routes like the Suez Canal and straining foreign exchange reserves. These crises have deepened Egypt’s economic instability, further complicating its ability to manage its external debt and left the Egyptian economy increasingly exposed to geopolitical and financial risks.
The global context of debt
The issue of external debt extends beyond Egypt, as many developing economies are grappling with worsening debt situations. Following the COVID-19 pandemic and heightened geopolitical tensions, the global economy experienced a wave of monetary tightening and trade disruptions.
External debts of developing countries have reached levels described by the G20 as a “major risk,” with 60 percent of these nations “already in default.” Studies indicate that 54 developing countries, including Egypt, home to 50 percent of the world’s poorest citizens, urgently require debt relief to address the impacts of consecutive crises. They warn of risks to global economic stability in general, and extreme poverty rates in particular if the crisis is not addressed quickly.
Opportunities for debt relief
With all due respect to the efforts by Egyptian policymakers to stabilize the economy, particularly through initiatives aimed at managing public debt, attracting foreign investment and diversifying the economic base, the ongoing challenges—exacerbated by external shocks and global crises—continue to hinder progress and complicate the path toward long-term stability
In fear of the repercussions of these crises, international institutions have launched initiatives to alleviate the external debts of developing countries. These initiatives have succeeded in dropping nearly $90 billion in debts over recent years, in addition to over $500 billion since the 1980s.
However, Egypt has not significantly benefited from these initiatives, as they often focus on the poorest countries, whereas Egypt is classified as a middle-income country. The international community has recently emphasized expanding debt relief initiatives to include middle-income countries, recognizing the serious implications of their debt burdens on development and poverty alleviation. The latest calls for this inclusion came from the recent G20 summit (The G20 Common Framework for Debt Treatments).
As a matter of fact, the global economic challenges could be turned into an opportunity for the Egyptian economy. This global focus presents a window for Egypt to capitalize on international concerns about the risks faced by developing economies to fulfill their debt obligations. Egypt must leverage its strategic role in the region and its diplomatic relations to advocate for inclusion in various debt relief initiatives and/or programs. Proposals could include dropping a substantial portion of external debt, deferring payments, or replacing debt with green projects aimed at mitigating climate change—a pressing global priority.
Green financing as a debt solution
The Egyptian government estimates the cost of climate change mitigation programs at around $202.5 billion over 28 years, substantially exceeding the size of its external debt. Thus, replacing a significant part of external debt with green projects offers a viable solution.
Debt-for-climate swaps could align with Egypt’s commitments under the Sustainable Development Goals 2030 and the Paris Agreement on climate change. Engaging in debt restructuring talks with international institutions, advanced economies, and China could yield partial or full exemptions from debt obligations in exchange for implementing reforms and policies that prioritize sustainable development.
Conclusion
The Egyptian economy faces significant challenges stemming from its external debt burden, exacerbated by geopolitical and global economic crises. Addressing these challenges requires a multifaceted approach that prioritizes debt restructuring, green financing initiatives, and leveraging international partnerships.
By aligning with global priorities such as climate change mitigation, Egypt can position itself to secure the necessary relief to stabilize its economy and lay the groundwork for sustainable development.
Mohammed Omran is a Professor of Financial Economics at the Graduate School of Business, Arab Academy for Science and Technology, Egypt, former Sonoco Visiting Fellow, Darla Moore School of Business, University of South Carolina.
