Improving Public Debt Management
In the OIC Member Countries
104
C) Policy RecommendationsThe institutional framework of public debt management in Egypt generally follows guidelines
proposed by the World Bank and the IMF. There is a debt management agency responsible for
debt management located at the MoF. The mediumterm debt management strategy considers
several risk indicators and has identified challenges for market development and sources of
financing. The debt management strategy is transparent as the document is published online.
The MoF also monthly publishes information on the public debt profile. Some data in the
monthly report is, however, not uptodate.
Despite the formally sound debt management framework, Egypt’s high level of domestic public
debt is worrying. The large amount of outstanding debt and high interest rates give rise to high
interest expense and impede budget consolidation efforts. Without the high debt service costs,
more money could be spent on education, health and social welfare programs, as well as
infrastructure projects, where current investments are considered to be insufficient (see also
Alexbank 2015).
Two main challenges regarding the risk profile of the public debt portfolio can be identified:
First, the refinancing risk of Egypt’s debt portfolio is high. The average time to maturity is low
amounting to 2.2 years and the share of debt maturing in one year is high at 55.2%. The debt
management strategy has already identified lengthening the average time to maturity and
lowering the share of shortterm debt as a key priority and improvements have been achieved
in the last years. However, without more ambitious targets regarding the maturity structure,
refinancing risk is likely to remain high.
Second, the government strongly depends on the domestic banking sector. The high borrowing
need by the government gives rise to a crowding out of the private sector in the domestic debt
market. When corporations and small and medium enterprises have difficulties getting credit,
this may negatively affect the economy and weaken economic growth. The high share of
domestic debt held by commercial bank indicates relatively low efficiency of the financial
system (Abbas and Christensen 2007). As the government has already recognized in the debt
management strategy, it is important to further diversify the creditor base of domestic public
debt. The government currently carries out several reforms to improve the domestic debt
market.
External debt is low and manageable (see also Sakr 2016). Because external debt mainly
exhibits mediumto longterm maturities, it is unlikely that the government will face
difficulties in refinancing external debt. Interest rates on external debt are lower than interest
rates on domestic debt. Generally, Egypt is advised to seek for more external funding to reduce
the dependency on the domestic banking sector. To attract foreign investors, confidence in the
economic stability and fiscal policy reforms are important. The IMF has urged the government,
for example, to reform subsidies, to introduce exchange rate flexibility and to improve the
business environment (Jarvis 2015).
The government may increase the use of Eurobonds to attract external investors. Additionally,
issuing sukuk may help diversifying the government’s debt portfolio. Such Islamic finance
instruments are also likely to attract investors from other (Islamic) countries, thereby
diversifying the investor base and increasing the share of external financing. Hence, it is
recommended to accelerate the amendment of the new sukuk law, which would provide
additional foreign investment opportunities and thereby relieve the government from its
domestic financing dependency.