External Debt Sustainability in Egypt’s economy: A probabilistic Approach

Abstract

The concept of external debt sustainability gains importance because it relates to responsible policies that ensure macroeconomic stability. One stability rule of external debt is that the ratio of net debt to GDP be equal to or less than the present value of the ratio of net exports to GDP plus the interest differential times the ratio of total assets to GDP. This paper used a probabilistic approach to examine the sustainability of Egypt’s external debt, considering that sustainability requires the net debt to be less than or equal to the present value of net exports. We have applied VAR methodology using a quarterly panel dataset comprising 2010 – 2023. The estimated parameters were then used in a Monte Carlo simulation to calculate the distribution of the repayment capacity. Our empirical analysis led us to conclude that there is evidence of the unsustainability of Egypt’s external debt. Accordingly, Egypt must balance domestic adjustment and foreign borrowing adequately.