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Domestic Vs Foreign debt

What if the Egyptian government decided to contain domestic debt and increase foreign debt?
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Scenario 1:

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.



Scenario 2:

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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