The untold story of public debt

Ahram Online, by Hatem Y Ezz Eldin

Do increases in public debt necessarily hinder growth? Not according to economists

The increasing public debt in Egypt has been a serious issue that is usually misrepresented and poorly explained in the Egyptian media. No one likes to bear the burden of being indebted.

It is annoying and can constrain capabilities and aspirations. It gives you fewer options to manoeuvre. But that is only one side of the story. There are other hidden sides.

The ability to repay interest on loans is one. Overall financial strength is another. The percentage of the debt to gross domestic product (GDP) is a third.

When the Central Bank of Egypt (CBE) publishes the latest figures for the country’s public debt, or when the government inks a loan agreement or receives a tranche of a previously agreed loan, the Egyptian media starts to list the disadvantages of these loans and exaggerates the real “damage” they could eventually cause to an already troubled economy.

However, this is not the full picture. We should try to find out what other elements in the picture are missing.

The public debt is the total amount of money owed by the government to its creditors. Governments spend money on infrastructure projects, healthcare, education, defence, and a wide range of other goods and services. Borrowing money is often not particularly expensive.

When interest rates are low and the economy is going through an economic slowdown, it can be more desirable for governments to borrow than, for example, raise taxes.

Egypt’s external debt stood at $93.13 billion at the end of the third quarter of 2018, up by 15.2 per cent. Domestic debt also increased by 5.2 per cent year-on-year to LE3.887 trillion in the same period.

But the percentage of public debt to GDP in Egypt was cut to 97 per cent, down from 108 per cent a year earlier. The government aims to cut the percentage to 80 per cent over the next four years.

Globally, the world’s debt is approaching a historic level of U$250 trillion. In the US, the percentage of public debt to GDP was 106 per cent in 2018. In Italy and Belgium, the percentage stood at 130 per cent and 102 per cent, respectively. In Japan, the percentage is as high as 236 per cent.

The percentage of global debt to GDP is around 328 per cent. So, why are the heavily-indebted advanced economies performing better than the emerging ones? The answer is mainly due to better debt management. If public debt is properly utilised, it can spur economic growth and strengthen the capacity to repay domestic and foreign arrears.

Is it true that the rise of public debt always damps economic growth by depressing capital formation, crowding out investment, and encouraging capital flight?

Not necessarily, argues economist Shaimaa Emara, who writes that “nowadays, loans have become the main player in achieving development across the world.

Developed countries are the heaviest borrowing countries. Developing countries could reach economic growth if they depend on managing loans according to rational planning by using such loans in establishing development projects.” Therefore, debt can generate future growth, but fiscal discipline is also crucial.

The volume of debt has not been a serious challenge to the Egyptian economy in recent history, and the real challenge has been the inefficient management and utilisation of such debt.

Corruption also obviously limited the use of borrowed money in the past. For example, during the time of Said Pasha in 1854, the total loan incurred by Egypt was some LE18 million or five times the annual revenue of the government at the time.

The loans were not efficiently utilised and were not directed to industrialisation or development projects.

The amount of public debt increased as society’s needs grew due to poor economic management, regional instability, and corruption.

The inefficient implementation of economic reforms and structural adjustment policies during the 1990s in particular led to the accumulation of Egypt’s current public debt.

Higher spending on inefficient sectors and the rise of the costs of imported materials, high subsidies, and public-sector wages all added further burdens.