This Selected Issues paper on the Arab Republic of Egypt examines the dynamic relationship between the nominal exchange rate and prices during Egypt’s exit from a managed exchange rate regime. The exit from the peg went through several phases, including a series of step devaluations between 2000 and 2002, a first attempt at a float in January 2003, and the successful transition to a unified, flexible exchange rate system in late-2004. From 2000 to 2004, the Egyptian pound experienced a cumulative depreciation of 68 percent against the U.S. dollar.

Abstract

This Selected Issues paper on the Arab Republic of Egypt examines the dynamic relationship between the nominal exchange rate and prices during Egypt’s exit from a managed exchange rate regime. The exit from the peg went through several phases, including a series of step devaluations between 2000 and 2002, a first attempt at a float in January 2003, and the successful transition to a unified, flexible exchange rate system in late-2004. From 2000 to 2004, the Egyptian pound experienced a cumulative depreciation of 68 percent against the U.S. dollar.

III. Public Debt23

37. This chapter describes the main features of Egypt’s public debt. The first section reviews the evolution of gross and net public debt since the early 1990s, and compares Egypt’s debt level and structure to those in other emerging market countries (EMCs). The second and third sections describe the main features of Egypt’s external and domestic public debt, including its composition and structure.

A. Gross and Net Public Debt

38. Gross public debt in Egypt is defined as the sum of domestic and external debt of the consolidated general government.24 This definition includes government guaranteed external debt, but excludes the contingent pension liabilities of the social insurance funds (SIFs) and the outstanding stock of arrears. Net public debt is calculated by subtracting government deposits in the banking system from the stock of gross debt. These deposits include: (i) resources to service the debt rescheduled under the 1991 Paris Club agreement (foreign currency–denominated deposits held in “blocked accounts” at the Central Bank of Egypt (CBE) until the repayment falls due); and (ii) large cash surpluses by revenue–generating government agencies held at commercial banks and the CBE—mostly denominated in local currency. Net external debt is defined as gross external debt minus the blocked accounts, while net domestic debt is equal to gross domestic debt minus government deposits (Figure 1 and Table 1).

Figure 1.
Figure 1.

Composition of Public Debt—June 2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 179; 10.5089/9781451811858.002.A003

Source: Ministry of Finance; Central Bank of Egypt; and IMF staff estimates.
Table 1.

Egypt: Gross and Net Public Debt

(Stocks as of end–June, in percent of GDP)

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Sources: Ministry of Finance; CBE; and IMF staff estimates.

Refers to debt of the general government: budget sector, the GASC, the NIB, and SIFs. Includes government guaranteed external debt, but excludes the contingent pension liabilities of the SIFs.

Net of government deposits with banks. Deposits include the blocked accounts on rescheduled Paris Club debt held at the CBE.

Securities issued by the Ministry of Finance, long term saving deposits, and certificates issued by the NIB and postal offices.

39. After declining during the 1990s, Egypt’s public debt started increasing in 2000. At end–June 2004, the outstanding stock of gross and net public debt amounted to 112 percent and 66 percent of GDP, respectively, close to the levels recorded in 1994 (Figure 2).25

Figure 2.
Figure 2.

Public Debt, 1994–2004

(in percent of GDP)

Citation: IMF Staff Country Reports 2005, 179; 10.5089/9781451811858.002.A003

Sources: Ministry of Finance; Central Bank of Egypt; and IMF staff estimates.

40. Higher domestic borrowing and valuation changes on external debt account for the increase in Egypt’s public debt ratio since 2000. Egypt’s external public debt has remained broadly stable in U.S. dollar terms since 1991 (Figure 3); as a share of total public indebtedness, external debt has fallen steadily.

Figure 3.
Figure 3.

Egypt: Total External Debt, 1981–2004

(In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2005, 179; 10.5089/9781451811858.002.A003

Source: World Bank debt tables; and IMF staff estimates.

41. Compared to a sample of emerging market countries (EMCs), Egypt’s recent gross public debt levels appear high.26 Table 2 shows that the gross public debt–to–GDP ratio in Egypt has been consistently above the average and median for EMCs for the last 15 years, although it has been close to the ratios recorded in other countries in Europe and the Middle East. In terms of five–year trends, the differences between the EMCs average and Egypt’s public debt ratio appear smaller: both experienced a decline in the mid–1990s followed by a rise after 2000.

Table 2.

Public Debt in Selected Emerging Market Countries

(In percent of GDP)

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Source: World Economic Outlook (September 2003); and IMF staff estimates.

Includes 33 countries listed in footnotes 2–6; groups are unweighted averages; the number of countries in parentheses.

Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Panama, Peru, Uruguay and Venezuela.

Includes Bulgaria, Croatia, Hungary, Russia, Ukraine and Poland.

Includes China, India, Indonesia, Korea, Malaysia, Philippines and Thailand.

Includes Cote d’Ivoire, Nigeria and South Africa.

Includes Israel, Jordan, Lebanon, Morocco, Pakistan and Turkey.

42. The composition and structure of Egypt’s public debt, however, differs from those of typical EMCs. Egypt has a smaller share of foreign currency–denominated debt in total debt, and a significantly larger ratio of domestic government bonds to GDP than the average for EMCs. In addition, Egypt’s borrowings from international capital markets are almost nil, and issues mostly nominal (non–indexed) domestic debt with relatively long maturities (Tables 3 and 4).

Table 3

Structure of Government Debt in Emerging Market Countries 1/

(In percent of total debt, unless indicated otherwise)

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Sources: IMF (2004), Reinhart et. al (2003); J.P. Morgan (2003); GFS; and IMF staff estimates.

All data are for the central government, except the share of foreign currency debt, which is for the general government. Egypt data is for the general government. Number of countries are in parentheses.

Sovereign debt contracted or denominated in foreign currency.

Long term is all debt with initial maturity longer than one year.

Average of 2001 data for Argentina, Brazil, Chile, Mexico, and Venezuela.

Average of 2001 data for China, India, Indonesia, Korea, Malaysia, the Philippines, and Thailand.

Average of 2001 data for Hungary, Israel, Poland, Russia, South Africa and Turkey; 2004 data for Egypt.

Table 4.

Features of Domestically–Issued Government Bonds 1/

(In percent of total domestic debt, unless indicated otherwise)

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Sources: IMF (2004), and IMF staff estimates.

Short term is defined as an initial maturity of less than one year; all other maturities are considered long term.

Refers to the 16 countries in footnotes 3 to 5; averages are unweighted; number of countries are in parentheses.

Average of 2001 data for Brazil, Chile, Mexico, and Venezuela.

Average of 2001 data for India, Indonesia, Malaysia, the Philippines, and Thailand.

Average of 2001 data for the Czech Republic, Egypt, Hungary, Poland, Slovak Republic, South Africa, and Turkey.

Stocks as of June 2004.

B. External Public Debt

43. As noted, Egypt’s external debt (in U.S. dollars) has remained relatively stable since the debt rescheduling of the early 1990s, largely reflecting a prudent approach to foreign borrowing by the government. With the exception of a $1.5 billion sovereign bond issued in June 2002 (the Eurobond), new public foreign borrowing has largely been matched by amortization payments. The rise in the external debt–to–GDP ratio recorded during 2002–2003 was entirely a result of valuation changes related to the large depreciation in the Egyptian pound.

44. Egypt’s external public debt is mostly owed to official creditors and has long–term maturities. The composition of this debt has remained remarkably stable for the last decade (Table 5).

Table 5.

Egypt. External Public Debt Composition

(Stocks as of end–June, in percent of total)

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Sources: Central Bank of Egypt; and IMF staff estimates.

C. Domestic Public Debt

45. The increase in Egypt’s domestic public debt since 2000 has been mostly in the form of government securities. Bank loans to the government have fallen steadily and are now very small. Net bank credit to the government has been negative since February 2001.

46. The bulk of Egypt’s government securities are denominated in local currency, carry fixed interest rates, and have long–term maturities. As of June 2004, roughly half of the total stock of government securities was held by the CBE, mostly in the form of nontradable paper. Of the rest, 20 percent was held by state–owned banks; and the remaining 30 percent was held directly by households in the form of 10–year, nontradable savings certificates issued by the NIB and the postal offices. Less than 25 percent of the stock of government securities is fully tradable, with another half having only limited tradability—i.e., they are only tradable among financial institutions (Figure 4).

47. Most domestic securities are issued by the Ministry of Finance (MoF). Other than to finance recurrent government spending, the MoF has issued bonds to recapitalize state banks, compensate the CBE for exchange rate valuation losses, and, more recently, for monetary purposes—since the CBE does not issue its own securities to conduct open market operations (Table 6).

Table 6.

Egypt. Domestic Public Debt Composition

(Stocks as of end–June, in percent of total)

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Sources: Ministry of Finance; and IMF staff estimates.

Savings certificates issued by the NIB and the postal offices.

Figure 4.
Figure 4.

Egypt: Structure of Domestic Debt—June 2004

Citation: IMF Staff Country Reports 2005, 179; 10.5089/9781451811858.002.A003

Source: Ministry of Finance and IMF staff estimates.1/ Bonds and bills issued by the Ministry of Finance on behalf of the CBE.

48. The domestic interest bill has increased by about 1.5 percentage points of GDP since 1998/99, to 5.3 percent of GDP in 2003/04, mainly as a result of the increase in the debt stock. The average interest rate paid on domestic debt, however, has actually declined in recent years, from 10.2 percent in mid–2001 to 8.4 percent in mid–2004 (Table 7).

Table 7.

Egypt: Interest on Domestic Public Debt, 200 1–2004

(Data as of end–June)

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Sources: Ministry of Finance; and IMF staff estimates.

Flow increase in securities issued by the Ministry of Finance.

Interest payments on domestic debt divided by previous period debt stock.

APPENDIX III. 1

Measures of Public Debt

There are some differences in the components of public debt reported in official documents and those used by staff to compute Egypt’s public debt. The source of the differences are weaknesses in official public debt statistics. Among these, the partial cancellation of transactions and reciprocal stock positions among the government entities that are being consolidated is an important factor. Also, external debt statistics and domestic government debt statistics are reported separately, and no aggregated figure is published. Furthermore, publications from different official agencies appear to use different methodologies to calculate gross and net domestic public debt (Figure A).

Figure A.
Figure A.

Net domestic public debt

(Stock as of end–June, in percent of GDP)

Citation: IMF Staff Country Reports 2005, 179; 10.5089/9781451811858.002.A003

Source: Ministry of Finance (MOF); Ministry of Foreign Trade (MoFT); Central Bank of Egypt (CBE); and Fund staff estimates.

Official domestic debt statistics tend to reflect inaccurately the liabilities of the general government with nongovernment entities. In general, official statistics tend to overestimate some components of gross domestic public debt, and underestimate banks’ loans to the general government. In numerical terms, the recording of NIB liabilities is one key source of discrepancy between official debt statistics and staff estimates. Official statistics include as “NIB debt” the loans the budget sector has received from the NIB. For the consolidated general government, however, those loans do not represent liabilities with nongovernment entities. The “NIB debt” included in the staff’s calculation of domestic public debt comprises, instead, the liabilities of NIB with the nonpublic sector—i.e., the certificates of deposits which provide the funding for a fraction of the NIB’s lending operations. Since this figure has tended to be smaller than the NIB loans outstanding with the budget sector, staff estimates of gross domestic debt are generally lower than the estimates of domestic debt reported in official publications.

References

  • IMF, 2003, “Public Debt in Emerging Markets: Is it too high?”, World Economic Outlook, September.

  • IMF, 2004, “Sovereign Debt Structure for Crises Prevention, IMF Research Department, July (available at http://www.imf.org/external/np/res/docs/2004/070204.htm)

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  • J.P. Morgan, 2003, 2003 Guide to Emerging Markets, New York.

  • Reinhart, C., K. Rogoff and M. Savastano, 2003, “Debt Intolerance,Brookings Papers in Economic Activity, No. 1: 174.

23

Prepared by Maria Teresa Guin–Siu.

24

Egypt’s general government comprises the budget sector (central and local government agencies as well as decentralized entities at central and local levels), the General Authority for the Supply of Commodities (GAS C), the National Investment Bank (NIB), and the Social Insurance Funds (SIFs).

25

Comparable data on domestic public debt exists only since 1994.

26

Data limitations and differences in coverage create difficulties for in-depth comparisons of public debt ratios across EMCs. All comparisons should therefore be regarded as illustrative. For example, Egypt compares more favorably with the rest of the EMCs in terms of net public indebtedness. However, the majority of EMCs calculate and report public debt in gross terms, hence cross-country comparisons should be made on that basis.

Arab Republic of Egypt: Selected Issues
Author: International Monetary Fund