Sensitivity of public debt to macroeconomic shocks: An application to the Egyptian economy
Sensitivity of public debt to macroeconomic shocks: An application to the Egyptian economy

Summary/Abstract: This paper aims at assessing the vulnerability of public debt to various shocks in macroeconomic variables in Egypt. This is particularly relevant for the Egyptian economy since it has currently witnessed high levels of public debt and has adopted a structural reform program that encompasses fiscal and monetary reforms to ensure macroeconomic stability. Hence, it is crucial to provide insights to policy makers on the most influential variables that affect the public debt to boost the reform efforts and guarantee fiscal sustainability. Accordingly, this work utilizes a structural vector auto regressive model (SVAR) for the Egyptian economy during the period (2005-2015) to investigate the relationship between gross public debt and a set of macroeconomic, monetary and fiscal variables. The results indicate a positive relationship between government debt and major economic variables – except inflation and government revenues. A positive shock in economic growth, government expenditures, real effective exchange rates or interest rates are all expected to cause a higher level of public debt. This result is consistent with the upward trend of rising public debt through the time interval of the study. Meanwhile, an increase in the inflation rate erodes the real value of public debt, and hence has a negative impact on the debt-to-GDP ratio. Finally, an increase in government revenues leads to a reduction in the debt-to-GDP ratio but after a transitory period of 3 quarters. This negative relationship does not occur instantly, as it takes time to reverse the upward trend in public debt and overcome the inclination to borrow more even if revenues are increasing. Consequently, sufficient measures need to be taken to ensure a sustainable increase in government revenues, while cutting and prioritizing government expenditures to decrease the overall level of public debt.

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