In this scenario, GoE continues to rely on domestic debt, which already reached 88 Percent of GDP in Q4 2014/2015.
- The government crowds out the private sector in the credit market, affecting private investment.
- Increasing the percentage of domestic debt puts pressure on the level of prices and lowers investor’s confidence and hence growth rates.
- The cost of debt servicing is highly affected with monetary policy decisions; i.e., higher interest rate means higher debt servicing putting pressure on state budget.
In this scenario, the GoE decides to allow for more foreign debt, which reached 15 percent of GDP in Q4 2014/2015 while keeping the highest portion as domestic debt.
- Public debt portfolio becomes more balanced, and dollar availability lowers short run pressures on the Egyptian Pound.
- Dollar availability could help in industry recovery through facilitating the import of intermediate inputs.
- The cost of debt servicing in this case is more sensitive to exchange rate, i.e., lower Egyptian pound means higher debt servicing cost.
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