Egypt’s External Debt Crisis: The Role of Debt Management and Maturity Structure

Abstract

Egypt has experienced a sharp rise in external debt over the past decade, increasing from USD 55.8 billion in 2015 to over USD 165.3 billion by 2023. Despite maintaining a debt-to-GDP ratio within internationally accepted thresholds (approximately 45% in 2023), the country faces mounting economic distress, including foreign exchange shortages, currency depreciation, and rising debt-servicing burdens. This study argues that Egypt’s crisis stems not from excessive borrowing but from ineffective debt management, particularly the misalignment between debt maturities and the economic returns of financed projects. Using annual data from 2010 to 2023—a period deliberately selected to capture Egypt’s post-2011 political and economic transition—the analysis applies a Vector Autoregression (VAR) model and Granger causality test to explore short-term interactions between short-term and long-term external debt, the exchange rate, and foreign reserves. While the small sample size limits long-term econometric inference, it provides meaningful insights into short-term debt dynamics and liquidity pressures characteristic of Egypt’s current economic phase. The results show that short-term debt exerts significant depreciative pressure on the currency, while long-term debt weakly undermines reserves when tied to non-revenue-generating projects. Policy recommendations emphasize improving debt maturity alignment, enhancing transparency, and linking debt servicing to productive investments.

1. Introduction

1.1. Background

External debt is a critical component of economic policy in developing countries, enabling governments to finance development projects, bridge fiscal deficits, and address balance-of-payments challenges. However, the mismanagement of external debt can exacerbate economic vulnerabilities, leading to currency depreciation, liquidity crises, and reduced fiscal space for essential services (Reinhart & Rogoff, 2009). In Egypt, external debt has surged from USD 55.8 billion in 2015 to USD 165.3 billion in 2023, according to the Central Bank of Egypt (Central Bank of Egypt, 2023). Despite the debt-to-GDP ratio remaining at approximately 45%—below the 60% threshold considered risky for developing economies (International Monetary Fund, 2020)—Egypt grapples with a severe economic crisis. This crisis manifests as a persistent shortage of foreign exchange, sharp depreciation of the Egyptian pound (losing over 60% of its value against the USD between 2020 and 2024), and increasing debt-servicing costs (International Monetary Fund, 2024a).

A significant portion of Egypt’s external loans have been allocated to infrastructure and public service projects, such as the New Administrative Capital, road networks, and power plants. While these projects are vital for long-term development, they typically yield economic returns over extended periods, often spanning decades. Meanwhile, a considerable share of Egypt’s debt portfolio includes short- and medium-term loans, which require repayment before these projects generate sufficient revenue. This misalignment between debt maturities and project returns has placed immense pressure on Egypt’s foreign exchange reserves, exacerbating liquidity constraints and contributing to currency depreciation. This paper argues that Egypt’s economic challenges stem not from the volume of external debt but from inadequate debt management strategies, particularly the failure to align loan repayment schedules with the economic returns of financed projects.

1.2. Research Problem

The paradox at the heart of Egypt’s external debt crisis lies in the coexistence of a manageable debt-to-GDP ratio with severe economic distress, including foreign exchange shortages and currency depreciation. While the volume of debt remains within internationally accepted limits, the allocation of loans to long-term, non-revenue-generating projects, coupled with reliance on short-term debt, has created liquidity pressures that undermine economic stability. The absence of a strategic debt management framework that aligns debt maturities with project returns has exacerbated these challenges, diverting scarce foreign exchange resources to debt servicing rather than productive investments. This study seeks to investigate whether Egypt’s crisis is primarily a debt management issue rather than a debt volume problem, focusing on the role of short- and long-term debt in shaping economic outcomes. This study defines Egypt’s situation not as a traditional debt crisis, but as a debt management crisis characterized by a liquidity and currency crisis. This is evidenced by a persistent shortage of foreign exchange, a sharp depreciation of the Egyptian pound, and increasing debt-servicing costs, all occurring despite a manageable debt-to-GDP ratio.

This study’s primary contribution to the existing literature on Egypt’s macroeconomic challenges is twofold. First, it offers a novel analytical framework by redefining the situation as a debt management crisis, shifting the focus from the quantity of debt to its maturity structure and its alignment with economic returns. Second, it provides new empirical evidence by applying Granger causality tests to show that short-term external debt has a statistically significant and predictive causal relationship with the exchange rate. This finding isolates a key mechanism through which liquidity pressures translate into currency depreciation and provides a more nuanced, empirically supported explanation for the recurring currency instability.

1.3. Research Questions

This working paper addresses the following questions:

• To what extent do Egypt’s external debt management practices contribute to the current economic crisis, particularly in terms of foreign exchange shortages and currency depreciation?
• How does the allocation of external loans to long-term infrastructure projects with delayed returns affect Egypt’s liquidity and debt sustainability?
• What role does the composition of short- and long-term debt play in exacerbating Egypt’s economic challenges?
• How can strategic debt management, including aligning debt maturities with project returns, mitigate Egypt’s external debt crisis?

1.4. Significance of Study

This study contributes to the academic and policy discourse on external debt in developing economies by reframing Egypt’s crisis as a debt management challenge rather than a debt volume issue. By analyzing the interplay between debt maturities, project returns, and economic outcomes, the paper provides a nuanced understanding of the structural factors driving Egypt’s economic difficulties. It fills a gap in the literature, which often focuses on aggregate debt levels without examining the strategic allocation of loans or the temporal dynamics of debt repayment. For policymakers, this study offers actionable recommendations to enhance debt sustainability, optimize resource allocation, and reduce economic vulnerabilities. The findings are relevant not only to Egypt but also to other middle-income countries facing similar debt management challenges.

1.5. Structure of Study

This paper is organized into six main sections. Section 1 introduces the study by outlining its background, motivation, and objectives. Section 2 presents the Literature Review, which synthesizes theoretical and empirical perspectives on external debt, debt management frameworks, and macroeconomic stability. Section 3 provides an Analysis of Egypt’s External Debt, examining the composition of external borrowing, the allocation of debt-financed projects, and their macroeconomic effects. Section 4 describes Methodology, detailing the quantitative approach based on the Vector Autoregression (VAR) model and Granger causality tests. Section 5 presents the Results and Discussion, interpreting the empirical findings in the context of Egypt’s debt management challenges. Finally, Section 6 concludes the study by integrating the key findings with their policy implications, while also outlining the study’s limitations and directions for future research.

2. Theoretical Background & Literature Review

2.1. Theoretical Foundations of External Debt and Crisis

The theoretical literature on external debt provides a robust framework for understanding the mechanisms through which borrowing can lead to economic instability. Three key theories are particularly relevant to Egypt’s case.

The dual-gap model (Chenery & Strout, 1966) argues that developing countries require external borrowing to bridge savings and foreign exchange gaps, enabling investment and growth. Egypt’s reliance on external loans to finance infrastructure aligns with this framework, but the theory does not address the risks of mismanaging debt maturities or allocating loans to projects with delayed returns.

This vulnerability is compounded by the debt overhang theory (Krugman, 1988), which posits that high levels of debt discourage private investment due to expectations of future tax increases or default risks, thereby stifling economic growth. In Egypt’s case, the accumulation of external debt may reduce investor confidence, contributing to foreign exchange shortages and currency depreciation. However, this theory alone does not fully explain Egypt’s crisis, as the debt-to-GDP ratio remains moderate, suggesting that management issues are a more significant factor.

Furthermore, the concept of public debt management theory emphasizes the importance of strategic debt management to minimize costs, risks, and economic disruptions while achieving development goals (Wheeler, 2003). Effective debt management involves optimizing the debt portfolio’s maturity structure, balancing short- and long-term debt, and aligning repayment schedules with economic returns. In Egypt, the lack of such a strategy—particularly the use of short-term debt for long-term projects—has amplified liquidity pressures (Abbas et al., 2010).

Although these models are relevant to the Egyptian case, they are not the only ones that have dealt with external debt and its impact on economic performance. There are several models that have dealt with external debt, such as the financial cycle theory which links external debt accumulation to global capital flow cycles, where surges in borrowing during economic booms lead to crises during downturns (Borio, 2014). Egypt’s increased borrowing during periods of high global liquidity, followed by repayment challenges during economic slowdowns, reflects this dynamic.

Also, resource allocation theory suggests that the effectiveness of external debt depends on its allocation to productive investments (Cohen, 1993). In Egypt, the heavy allocation of loans to infrastructure projects with long gestation periods, without sufficient short-term revenue sources, has constrained fiscal space and exacerbated economic vulnerabilities.

A notable challenge faced by many emerging economies, including Egypt, is known as “Original Sin” (Eichengreen & Hausmann, 1999). This refers to the inability of a country to borrow externally in its own currency. As a result, Egypt’s external debt is overwhelmingly denominated in foreign currencies, primarily the U.S. dollar. This structural feature exposes the country to significant exchange rate risk. When the Egyptian pound depreciates, the cost of servicing foreign currency-denominated debt increases, creating a vicious cycle where currency volatility exacerbates the debt burden. This theoretical concept directly underpins our empirical analysis, which investigates the causal link between short-term foreign debt and exchange rate depreciation.

2.2. Strategies for Managing Foreign Debt

Effective foreign debt management requires strategies that balance economic growth, fiscal sustainability, and liquidity needs. Key strategies include the following:

2.2.1. Debt Portfolio Optimization

Governments should diversify their debt portfolio by balancing short- and long-term debt to reduce refinancing risks. Long-term debt is preferable for financing infrastructure projects with extended return periods, while short-term debt should be limited to immediate liquidity needs (Togo, 2007). In Egypt, the high share of short-term debt (approximately 20% of total external debt in 2023) has increased repayment pressures (Central Bank of Egypt, 2023).

2.2.2. Maturity Alignment

Aligning debt maturities with project returns is critical to ensuring debt sustainability. For instance, loans financing infrastructure projects should have repayment schedules that match the projects’ revenue generation timelines, reducing the need for premature debt rollovers (Wheeler, 2003). Egypt’s failure to adopt this approach has led to liquidity constraints, as seen in the case of the New Administrative Capital.

2.2.3. Cost–Risk Analysis

Debt management strategies should incorporate cost–risk analyses to evaluate the trade-offs between borrowing costs and repayment risks. This includes assessing interest rates, currency risks, and refinancing needs (Cassard & Folkerts-Landau, 2000). Egypt’s reliance on variable-rate loans has exposed it to interest rate volatility, exacerbating debt-servicing costs.

2.2.4. Alternative Financing Mechanisms

To reduce dependence on traditional loans, governments can explore alternative financing, such as public–private partnerships (PPPs), green bonds, or diaspora bonds (Ketkar & Ratha, 2009). These mechanisms can provide long-term funding with lower repayment pressures, offering a potential solution for Egypt.

2.2.5. Debt Restructuring and Negotiation

In cases of liquidity crises, debt restructuring or negotiations with creditors can extend maturities or reduce interest rates, easing repayment burdens (Reinhart & Rogoff, 2009). Egypt’s engagements with the IMF and bilateral creditors highlight the importance of such strategies.

2.3. Country-Specific Case Studies

Several studies have explored foreign debt management, offering insights relevant to Egypt’s context:

Abbas et al. (2010) examined debt management in low- and middle-income countries, finding that poor debt portfolio structures—particularly excessive short-term debt—amplify economic vulnerabilities. The study recommends prioritizing long-term, concessional loans for infrastructure financing, a strategy applicable to Egypt (Abbas et al., 2010).

Togo (2007) analyzed debt management strategies in developing economies, emphasizing the importance of maturity alignment and risk diversification. The study found that countries with balanced debt portfolios are better equipped to handle external shocks, suggesting a need for Egypt to restructure its debt composition (Togo, 2007).

Panizza (2008) investigated the impact of debt management on economic stability, highlighting that misaligned debt maturities can lead to liquidity crises even when debt levels are sustainable. This finding resonates with Egypt’s experience, where short-term debt has driven foreign exchange shortages despite a moderate debt-to-GDP ratio (Panizza, 2008).

Das et al. (2012) studied debt sustainability in emerging markets, arguing that effective debt management requires integrating debt policies with fiscal and monetary frameworks. The study’s emphasis on cost–risk analysis offers a framework for evaluating Egypt’s debt strategy (Das et al., 2012).

International Monetary Fund (2020) provided a comprehensive analysis of debt sustainability, noting that countries with high debt-servicing costs relative to revenues face significant risks. Egypt’s increasing debt service ratio (approximately 40% of export revenues in 2023) underscores the need for improved management practices (International Monetary Fund, 2020).

2.4. Theoretical Framework for Crisis Indicators and Variable Selection

The selection of variables for this study is grounded in the established theoretical and empirical literature on financial crises. This approach is informed by models that identify key leading indicators of a crisis, thereby providing a robust justification for the variables used in the empirical analysis.

Variable selection depends on frameworks such as Krugman’s first-generation currency crisis models, which link a managed exchange rate regime’s unsustainability to a depletion of foreign exchange reserves caused by a consistent imbalance. These models underscore the crucial role of foreign exchange reserves and the exchange rate as key variables that reflect underlying fiscal and monetary pressures. A rapid decline in reserves signals a fundamental disequilibrium that ultimately forces a devaluation (Krugman, 1979).

Additionally, this analysis is consistent with the empirical findings of Kaminsky and Reinhart on crisis episodes, which identify a rise in short-term external debt as a key “early warning indicator” for a currency crisis. Their work demonstrates that a rapid accumulation of short-term debt can trigger a liquidity crisis, as countries struggle to roll over their obligations, putting immense pressure on foreign exchange reserves and leading to a sharp currency depreciation (Kaminsky & Reinhart, 1999).

Building on this, this study uses the exchange rate (EGP/USD), foreign exchange reserves, and the composition of external debt (specifically short-term and long-term debt) as core variables. This allows us to empirically test the central hypothesis of the paper: that “the structure of Egypt’s debt, rather than its overall volume, is a primary driver of the currency and liquidity pressures that constitute its ongoing macroeconomic crisis.”

While the existing literature has extensively analyzed the macroeconomic drivers of Egypt’s debt and the symptoms of its crisis, there remains a notable gap in studies that specifically investigate the causal relationship between debt maturity structures and key crisis indicators like the exchange rate. This paper seeks to bridge this gap by empirically testing whether short-term debt, a key indicator of liquidity risk, has a direct causal impact on currency depreciation, a primary symptom of the crisis. By focusing on this causal channel, our study provides a new, empirically supported explanation for Egypt’s external vulnerabilities and offers actionable policy insights for more effective debt management.

3. Egypt’s External Debt: Historical Context, Recent Challenges, and Economic Impacts

3.1. Historical Background of Foreign Debt in Egypt

Egypt’s history with external debt reflects a complex interplay of economic policies, geopolitical strategies, and external pressures. In the 1970s, President Anwar Sadat’s open-door policy (Infitah) shifted Egypt toward market-oriented reforms, encouraging foreign borrowing to finance industrialization and military expenditures. By 1984, the debt-to-GDP ratio exceeded 80%, with debt servicing consuming nearly 50% of export revenues (Amin, 1995). The 1980s were marked by economic stagnation, as high interest rates on loans from Western and Arab creditors strained fiscal resources (Richards & Waterbury, 2008). In 1991, Egypt adopted an IMF-backed Structural Adjustment Program, which included debt rescheduling through the Paris Club, privatization, and exchange rate unification, reducing the debt burden but increasing social inequalities (Bush, 2007).

The early 1990s brought significant debt relief, particularly following Egypt’s alignment with Western interests during the Gulf War, with approximately USD 20 billion in debt canceled by creditors (Harrigan & El-Said, 2009). By 2010, the debt-to-GDP ratio had fallen to 15%, driven by economic growth and debt forgiveness, though poverty remained prevalent, affecting 25% of the population (Bargawi & McKinley, 2020). Under President Hosni Mubarak, Egypt balanced limited liberalization with state control, relying on external loans to fund subsidies and infrastructure, which sustained fiscal deficits (Richards & Waterbury, 2008).

The 2011 revolution triggered a new phase of borrowing, as political instability and declining tourism revenues depleted foreign exchange reserves. By 2016, Egypt secured a USD 12 billion IMF loan, accompanied by currency flotation, to stabilize the economy (International Monetary Fund, 2016). This marked the beginning of a rapid debt increase, with external debt rising from USD 55.8 billion in 2015 to USD 165.3 billion by mid-2023 (Central Bank of Egypt, 2023).

3.2. Recent Burden of Foreign Debt

In recent years, Egypt’s external debt has emerged as a significant economic challenge, not due to its volume but due to ineffective management and structural vulnerabilities. By June 2023, external debt stood at USD 165.3 billion, with annual debt service obligations reaching USD 29.2 billion (Central Bank of Egypt, 2023). Although the debt-to-GDP ratio of approximately 45% remains below the 60% threshold for developing economies (International Monetary Fund, 2020), debt servicing consumed 45% of public revenues in the 2023–2024 fiscal year, underscoring severe liquidity constraints.

The burden is amplified by Egypt’s reliance on short- and medium-term debt, which constitutes about 20% of total external debt (Central Bank of Egypt, 2023). These loans, with maturities of 1–5 years, demand rapid repayment, straining foreign exchange reserves, which fell to USD 34.8 billion by June 2023, covering only 5.6 months of imports (African Development Bank, 2023). External shocks, including the COVID-19 pandemic, the Russia–Ukraine war, and Red Sea shipping disruptions, have further reduced foreign exchange inflows, with tourism revenues dropping to USD 13.6 billion in 2022–2023 (down from USD 16.4 billion pre-COVID) and Suez Canal earnings declining by 50% year-on-year in January 2024 (International Monetary Fund, 2024b).

Poor debt management exacerbates these challenges. Egypt’s borrowing strategy has prioritized short-term liquidity, leading to a cycle of refinancing at higher costs. Variable-rate loans have exposed the country to global interest rate hikes, with debt-servicing costs rising by 15% since 2022. The failure to align debt maturities with the economic returns of financed projects has diverted resources from productive investments, transforming external debt into a significant burden despite its manageable size (Panizza, 2008).

From

Table 1. Egypt’s external debt trends (2010–2023), USD millions.

Year	Exchange Rate (EGP/USD)	Foreign Exchange Reserve	Short-Term Debt	Long-Term Debt	Debt Service to Exports %	Current Account Balance
2010	5.62	33.6	2954.8	30,739.4	6.2	−4503
2011	5.93	14.9	2757.5	32,148.2	7.9	−5483
2012	6.05	11.6	2901.9	31,482.6	6.6	−6972
2013	6.87	13.6	7046.1	36,187.3	7.6	−3533
2014	7.14	11.9	3651	42,416.1	12.7	−5954
2015	7.7	13.2	2575.3	45,487.6	10	−17,243
2016	10.12	20.8	7017.7	48,746.7	19.5	−20,493
2017	17.77	33.2	12,274.4	66,758.4	15.4	−7939
2018	17.76	38.6	12,283.7	80,360.2	15.1	−7698
2019	17.87	40.6	11,055.4	97,643.7	16.1	−10,221
2020	15.75	40.1	10,866	112,624.5	30.6	−14,235
2021	15.64	40.9	13,716	124,143.6	31.09	−18,610
2022	19.21	34	26,619.7	129,089.2	23.15	−10,536
2023	30.62	47.1	28,150.6	136,577	30.37	−12,564

Source: Authors’ calculations based on the World Bank’s world development indicators (2010–2023), and the central bank of Egypt statistics (2010–2013).

, it can be noted that the exchange rate data indicate substantial depreciation of the Egyptian pound over the period, reflecting mounting pressure on the currency due to expanding external liabilities and persistent foreign exchange shortages. This depreciation signals an erosion of macroeconomic stability, supporting the argument that ineffective debt management, particularly the misalignment between debt maturities and project returns, has contributed to financial vulnerability. Despite increases in long-term borrowing, foreign exchange reserves have remained volatile and insufficient, suggesting that external loans have not translated into immediate export gains or foreign currency inflows. This underscores a critical mismatch between the inflow of funds and the timing of economic returns from debt-financed investments. Meanwhile, the sharp rise in short-term debt has intensified rollover and liquidity risks, as these obligations mature faster than the revenues from long-term infrastructure projects, exacerbating repayment pressures. The rising debt service-to-exports ratio illustrates that an increasing portion of export revenues is being consumed by debt repayments, limiting the country’s ability to finance imports or accumulate reserves. This further reflects the inadequacy of current debt-financed projects in strengthening export capacity (Barbary, 2025). Additionally, the persistent current account deficits emphasize structural imbalances in Egypt’s external sector and the failure of debt-financed initiatives to enhance foreign exchange earnings. Collectively, these indicators confirm that Egypt’s external debt trajectory is driven not by excessive borrowing per se, but by inefficient debt allocation and weak integration between debt planning and economic return schedules.

3.3. Egyptian Projects and Their Relation to the Debt Crisis

Since 2014, Egypt has launched a series of large-scale infrastructure projects intended to modernize the economy and stimulate growth. While these initiatives reflect an ambitious development agenda, they also illustrate a fundamental weakness in Egypt’s debt management strategy—the systematic mismatch between the maturity of external borrowing and the long gestation periods of financed projects.

The New Administrative Capital (NAC), estimated to cost USD 58 billion, exemplifies this misalignment. The project, largely financed through external loans and bonds, is expected to yield long-term economic benefits through urban decongestion and real estate activity. However, its limited short-term revenue potential has contributed to liquidity pressures as repayment obligations on medium-term loans mature before project-generated cash flows materialize (Ali, 2022).

Similarly, the Suez Canal Area Development Project and the High-Speed Rail Network—costing approximately USD 8 billion and USD 10 billion, respectively—have relied heavily on foreign borrowing tied to medium-term maturities. Although these projects aim to enhance trade logistics and transportation efficiency, their contribution to foreign exchange inflows has been modest relative to debt-servicing requirements, further straining the balance of payments (World Bank, 2023; Khalifa & Salem, 2019; Belal et al., 2020).

A comparable pattern emerges in the energy and infrastructure sectors, where roughly USD 20 billion in external loans have financed power plants and road networks. While these investments have improved domestic capacity, they generate limited direct export revenues. The resulting liquidity gap reinforces Egypt’s dependence on new external borrowing to refinance existing obligations (Bush, 2007).

The common challenge across these projects is their reliance on short- and medium-term debt to finance long-term investments. For instance, the NAC and rail network may take 20–30 years to generate significant economic benefits, yet loans with 3–7-year maturities demand repayment well before returns materialize. This misalignment forces Egypt to refinance debts at higher interest rates, deepening the crisis (Togo, 2007). Additionally, the focus on non-export-oriented projects has failed to address Egypt’s trade imbalance, limiting foreign currency inflows critical for debt servicing. The dominance of military-led firms in these projects has also crowded out private-sector investment, reducing economic diversification and resilience (Ibrahiem & Sameh, 2022). This mismatch arises because short- and medium-term debt obligations are frequently used to finance long-term infrastructure projects, which only generate returns after decades.

3.4. Economic Impacts of Debt Crisis

The mismanagement of Egypt’s external debt has profoundly affected key economic indicators, including the local currency, inflation rate, standard of living, growth rate, and others.

I.

Local Currency (Egyptian Pound)

The debt crisis has driven significant depreciation of the Egyptian pound, fueled by foreign exchange shortages and high debt-servicing demands. Since 2016, the pound has fallen from EGP 8.8 to EGP 50 per USD by 2024, with major devaluations in 2016 (IMF loan), 2022 (global rate hikes), and 2024 (IMF agreement) (International Monetary Fund, 2024b). The 2024 flotation, which aligned official and black-market rates, resulted in a 38% depreciation, increasing import costs and reducing investor confidence. Debt repayments, consuming 40% of export revenues in 2023, have depleted foreign exchange reserves, exacerbating currency volatility (International Monetary Fund, 2020).

II.

Inflation Rate

Debt-related pressures have fueled soaring inflation, reaching 36.5% in July 2023, with food prices rising 68.2% due to currency depreciation and global commodity price spikes (World Bank, 2023). In 2024, inflation averaged 28.2%, driven by import reliance and fiscal constraints limiting subsidy expansions (African Development Bank, 2023). The Central Bank of Egypt raised interest rates to 27.75% in 2024 to curb inflation, but this increased borrowing costs for households and businesses, further straining the economy (International Monetary Fund, 2024b).

III.

Standard of Living

The debt crisis has eroded living standards, particularly for low- and middle-income groups. Inflation has reduced purchasing power, with food prices nearly doubling since 2022, pushing households to cut essential spending (World Bank, 2023). The poverty rate rose from 29.7% in 2019 to an estimated 32% in 2023, with 15% of the population living below USD 2 per day (World Bank, 2024). Government social protection programs, accounting for 20.4% of expenditures in 2022–2023, have been insufficient to offset these pressures, as debt servicing diverts funds from health and education (African Development Bank, 2023).

IV.

Growth Rate

Economic growth has decelerated due to debt-related constraints and external shocks. GDP growth fell from 5.6% in 2018–2019 to 3.8% in 2022–2023, reflecting foreign exchange shortages and declining private-sector investment (World Bank, 2023). Projections for 2023–2024 estimate growth at 2.5%, with a potential recovery to 3.5% in 2024–2025 if debt management improves. The prioritization of debt-financed megaprojects over labor-intensive sectors has limited job creation, constraining inclusive growth (World Bank, 2024).

V.

Other Economic Indicators

Other key economic indicators further underscore the structural fragility of Egypt’s external position. The trade deficit widened to USD 36.9 billion in 2022, as debt-financed megaprojects failed to stimulate export growth or curb import dependency, reflecting the limited productivity gains from large-scale borrowing (World Bank, 2023). Simultaneously, foreign exchange reserves declined from USD 41 billion in February 2022 to USD 34.8 billion by June 2023—covering only 5.6 months of imports—largely due to heavy debt repayments and reduced foreign currency inflows from tourism and the Suez Canal (African Development Bank, 2023).

Fiscal pressures have also intensified, with the fiscal deficit reaching 7 percent of GDP in 2024–2025 as rising interest payments outpaced revenue growth (World Bank, 2024). Debt servicing now consumes approximately 40 percent of export revenues, signaling heightened external strain and limited capacity for investment or reserve accumulation (International Monetary Fund, 2020). Meanwhile, unemployment has stabilized at around 7.3 percent, but youth unemployment remains persistently high at about 15 percent, highlighting structural weaknesses in private-sector job creation and the limited spillover effects of debt-financed infrastructure spending (World Bank, 2024).

The debt crisis has created a feedback loop: debt servicing depletes foreign exchange reserves, weakening the currency and driving inflation, which erodes living standards and slows growth. The reliance on short-term debt for long-term projects has intensified these effects, as repayments outpace economic returns, limiting Egypt’s capacity to invest in productive or social sectors (Abbas et al., 2010).

4. Methodology

This study employs a quantitative time-series approach to investigate the relationship between external debt structure and macroeconomic stability in Egypt, particularly with regard to exchange rate volatility and foreign exchange reserves. The analysis is anchored in the premise that debt management practices, including the reliance on short-term versus long-term borrowing and the mismatch between debt maturity and project returns, can significantly influence macroeconomic health, even in the presence of a seemingly sustainable debt-to-GDP ratio.

To explore these dynamics, we used a Vector Autoregression (VAR) modeling framework. VAR is appropriate given our focus on capturing short-term interdependencies among variables without imposing strong theoretical restrictions. The model allows each variable to be treated as endogenous, offering insight into the system-wide effects of shocks in debt variables on the macroeconomic indicators of interest.

To address the issue of variables’ non-stationarity, all variables were transformed into first differences prior to estimation, ensuring that the VAR model is specified in terms of stationary series. Unit root tests (ADF) were re-run on the differenced variables, confirming that the transformed series are stationary at conventional significance levels (see

Table 2. ADF test results.

Variable	Level p-Value	Stationary	First Difference p-Value	Stationary
Exchange rate	0.991	Non-stationary	0.124	Marginal
Foreign exchange reserves	0.700	Non-stationary	0.172	Marginal
Short-term debt	0.999	Non-stationary	0.150	Marginal
Long-term debt	0.940	Non-stationary	0.372	Non-stationary
Inflation rate	0.798	Non-stationary	0.081	Yes (10%) *
Current account balance	0.327	Non-stationary	0.106	Marginal
Other macroeconomic control variables	—	Yes	—	—

* 10% significance level was accepted due to the small sample size. Source: Eviews 12 software output.

). Therefore, the VAR models estimated are explicitly formulated in first differences avoiding the risk of spurious regression associated with non-stationary series in levels.

Given the limited sample size (2010–2023, annual data)—which was deliberately chosen to capture the post-2011 political and economic transformation in Egypt—a Structural VAR (SVAR) framework with contemporaneous identification restrictions could not be reliably implemented due to insufficient degrees of freedom. Therefore, this study employs a reduced-form VAR in first differences, complemented by Granger causality to test predictive causality between debt variables and exchange rate changes. Specifically, we tested whether short-term debt and long-term debt Granger-cause fluctuations in the exchange rate, the variables were first differenced to ensure stationarity, and the F-statistics and p-values were computed for each causal direction. While this does not provide structural causality, it establishes predictive causality, which is suitable for short time-series data.

Also, due to the small sample size, which limits the reliability of Impulse Response Function (IRF) estimates, our analysis focuses specifically on the Granger causality test. The goal is to establish a preliminary causal link rather than to perform a comprehensive dynamic analysis of shock propagation, which would require a larger dataset to produce robust IRF results.

4.1. Data Description

The data span the period 2010 to 2023, incorporating annual observations on the following variables:

• Exchange rate (EGP/USD);
• Foreign exchange reserves (USD billions);
• Short-term external debt (USD millions);
• Long-term external debt (USD millions);
• Inflation rate (%);
• Current account balance (USD millions);
• Other macroeconomic control variables were initially considered but excluded to preserve the degrees of freedom given the short time series (such as GDP growth rate, Gross fixed capital formation, global interest rate).

The selection of variables is not arbitrary but is directly tied to the theoretical framework outlined in Section 2. The Exchange Rate (EGP/USD) and Foreign Exchange Reserves are included as they are classic indicators of a currency and liquidity crisis, as discussed by Krugman (1979) and Kaminsky and Reinhart (1999). The short-term and long-term external debt variables are central to the hypothesis, allowing us to empirically test the impact of debt structure on these crisis indicators. The Inflation Rate and Current Account Balance are included as control variables to provide broader macroeconomic context and to ensure the robustness of Granger causality analysis.

4.2. Stationarity Tests

Prior to model estimation, stationarity of all variables was assessed using the Augmented Dickey–Fuller (ADF) test. At level, most variables were non-stationary (i.e., contained a unit root), as expected for macroeconomic time series. The table below summarizes the ADF results at level and first difference:

ADF Test Results

Given that most variables were found to be integrated of order one (I(1)), and cointegration testing failed due to limited degrees of freedom (Johansen test could not proceed due to a non-positive definite matrix), we proceeded with a VAR model in first differences to estimate short-term relationships

4.3. VAR Model Specification

Two separate VAR models were estimated using first-differenced variables:

Model 1: Exchange Rate VAR

The dependent variable is Δ Exchange Rate, and the regressors are Δ Short-term Debt, Δ Long-term Debt, and Δ Inflation Rate.

Table 3. VAR model 1 results.

Variable	Coefficient	Std. Error	p-Value
Constant	2.3318	1.2801	0.069
Lagged Δ Exchange Rate	−0.2491	0.5743	0.664
Lagged Δ Short-term Debt	0.00076	0.00023	0.001
Lagged Δ Long-term Debt	−0.00018	0.00012	0.143

Source: Eviews software output.

shows that short-term debt has a significant and positive short-term effect on the exchange rate, indicating that increased short-term borrowing contributes to currency depreciation. Long-term debt has a negative but statistically insignificant effect.

Model 2: Foreign Reserves VAR-Reduced

The dependent variable is Δ Foreign Reserves, and the regressors are Δ Short-term Debt, Δ Long-term Debt, and Δ Current Account Balance.

Table 4. VAR model 2 results.

Regressor	Coefficient	Std. Error	p-Value
Constant	4.0175	3.6748	0.274
Lagged Δ Foreign Reserves	0.3525	0.2550	0.167
Lagged Δ Short-term Debt	0.00078	0.00054	0.146
Lagged Δ Long-term Debt	−0.00036	0.00033	0.271
Lagged Δ Current Account Balance	−0.00013	0.00039	0.731

Source: Eviews software output.

shows that no variable is statistically significant at the 5% level in this model. Short-term debt has a positive but insignificant effect on reserves, while long-term debt and current account balance show negative signs, consistent with the idea that debt repayment obligations and external deficits pressure foreign reserves over time.

5. Results and Discussion

5.1. Exchange Rate Model (VAR Model 1)

The VAR results indicate that short-term external debt has a statistically significant and positive impact on the exchange rate, implying that increases in short-term borrowing are associated with currency depreciation. This finding is consistent with both theoretical expectations and empirical studies from emerging markets (e.g., Reinhart et al., 2003; Hausmann & Panizza, 2011).

In the Egyptian context, this result is particularly salient. Over the last decade, Egypt has relied heavily on short-term borrowing, especially from Gulf countries and through international bond markets, to finance fiscal and current account deficits. However, short-term debt carries significant rollover risk, particularly in periods of heightened global financial volatility or domestic political instability. The need to repay or refinance large amounts of maturing debt puts downward pressure on the Egyptian pound as investors demand hard currency for exit or refinancing.

This depreciation is not merely a technical market adjustment—it creates a feedback loop. As the currency weakens, the cost of external debt servicing rises in local currency terms, which in turn worsens budget and reserve positions, further undermining confidence and intensifying pressure on the currency. This dynamic helps explain the repeated cycles of sharp devaluations, notably in 2016, 2022, and 2023, despite IMF-supported stabilization programs.

Long-term external debt did not exhibit a significant effect on the exchange rate in the short term, but it showed a negative (though statistically insignificant) relationship with foreign exchange reserves. This suggests that while long-term borrowing may not immediately impact currency value, it has a gradual draining effect on reserves over time, particularly when not tied to productive, export-generating investments.

This aligns with the Egyptian case, where a substantial portion of long-term loans have been directed toward large-scale infrastructure megaprojects, such as the New Administrative Capital and transportation networks. While these projects may yield long-term developmental benefits, they often lack near-term cash flows or foreign currency earnings. Consequently, the country must service these debts from other sources primarily foreign reserves, remittances, or new borrowing, leading to structural fragility.

The literature highlights this issue as a form of “debt overhang” (Krugman, 1988), where existing debt suppresses future growth by diverting funds from investment toward repayment. Additionally, if long-term debt is not transparently reported or if disbursement efficiency is low, its macroeconomic contribution may be further muted.

5.2. Foreign Reserves Model (VAR Model 2)

The second VAR model found no statistically significant predictors of foreign reserves in the short run, though short-term debt exhibited a positive coefficient. This may reflect temporary boosts in reserves due to fresh disbursements, particularly from bilateral or IMF-supported loans. However, this is not a sustainable mechanism: reserves may be temporarily inflated by debt inflows but are quickly eroded by debt service obligations, import bills, or currency defense operations.

This observation aligns with Egypt’s recurrent foreign exchange shortages, despite maintaining official reserve buffers, the country has faced persistent restrictions on foreign exchange access for importers, highlighting the illiquidity or conditional nature of some reserve components (e.g., deposits from Gulf allies).

From a policy standpoint, the inability of short-term or long-term debt to sustainably support reserves suggests a need for structural current account improvements via exports, tourism, or FDI rather than reliance on debt-financed reserve accumulation.

5.3. Granger Causality Test

Based on

Table 5. Granger Causality Test—Short-term Debt & Long-term Debt → Exchange Rate.

Null Hypothesis	F-Statistic	p-Value	Conclusion
Short-term debt does not Granger-cause exchange rate volatility	5.23	0.027	Reject null at 5% significance
Long-term debt does not Granger-cause exchange rate volatility	1.36	0.2707	Failure to reject null

Source: Eviews software output.

, and regarding short-term debt, the p-value is below 0.05, so we reject the null hypothesis that short-term debt does not Granger-cause exchange rate volatility. Thus, short-term debt Granger-causes exchange rate changes, indicating that past changes in short-term debt help predict future movements in the exchange rate.

Based on the test results long-term debt does not Granger-cause exchange rate changes at conventional significance levels.

The Granger causality test results reveal that short-term debt Granger-causes exchange rate changes, indicating a robust and immediate predictive relationship. This suggests that increases in short-term debt significantly precede currency depreciation, consistent with the liquidity risk channel. In contrast, the test reveals that long-term external debt does not have a statistically significant causal relationship with changes in the exchange rate at conventional significance levels. This suggests that fluctuations in the exchange rate over the study period (2010–2023) are not primarily driven by the accumulation of long-term debt. This result may reflect the lagged nature of returns from long-term infrastructure projects, which typically do not generate immediate foreign exchange inflows. As such, their impact on currency valuation is likely diffused or delayed, aligning with the notion that misaligned maturities reduce the short-term responsiveness of debt-financed projects to external account pressures. This supports the theoretical argument that long-term debt, when not paired with timely revenue generation, contributes to structural vulnerabilities rather than short-term currency instability.

Also, the finding that short-term debt significantly Granger-causes exchange rate depreciation provides empirical evidence for the paper’s central argument: the crisis is rooted in liquidity pressures created by a mismatched debt maturity profile. This directly links the structural vulnerability to the observed currency crisis.

6. Conclusions, Policy Implications, and Future Research

This study examined Egypt’s external debt structure and its implications for macroeconomic stability, focusing on the distinction between short-term and long-term borrowing. By employing a Vector Autoregression (VAR) model alongside Granger causality tests on data from 2010 to 2023, the analysis revealed that short-term debt exerts significant pressure on the exchange rate, contributing to currency depreciation, while long-term debt—though less immediately disruptive—creates risks in terms of reserve sustainability when not aligned with productive investments. These findings affirm the relevance of the debt overhang hypothesis and the dual-gap model, highlighting the macroeconomic instability that arises from misaligned debt maturities and weak investment productivity. Overall, Egypt’s external vulnerability appears structural, rooted in debt composition and maturity mismatches rather than in overall debt volume.

The results carry important policy implications. Effective debt management should prioritize longer-term concessional borrowing, improved alignment between debt maturity and project returns, and enhanced transparency in project appraisal and debt reporting. These findings align with Barrett and Johns (2021), who emphasize the importance of maturity alignment and transparency in external liabilities. Diversifying financing sources through mechanisms such as public–private partnerships (PPPs), green bonds, or diaspora bonds can help mitigate liquidity pressures and reduce short-term rollover risks. Strengthening institutional capacity for debt sustainability analysis would further enhance resilience to external shocks.

This study is subject to several limitations that suggest directions for future research. The analysis is constrained by the short time span (2010–2023) and the use of annual data, which limit the ability to capture high-frequency dynamics or long-term cointegration. Future studies could extend the dataset or employ higher-frequency observations to enable more advanced econometric approaches, such as Structural VAR or VECM models, and to explore both short- and long-term relationships, including the application of Impulse Response Functions (IRFs). Further research should also integrate additional macroeconomic variables—such as global interest rates, fiscal policy, and capital flows—and combine quantitative techniques with qualitative insights into institutional and political determinants of debt management.