Response of fiscal policies to the cyclical fluctuation of output and expenditure for sustainable debt in Egypt : an empirical study

Abstract EN

Governments strive to achieve the country's development by setting up big projects that may need massive financing, thus resorting to debt; a weak response to cyclical output and expenditure gaps may cause a breakdown in the financial balance, insolvency, and debt explosion.

The rising public debt in Egypt has caused a big concern about solvency and debt sustainability.

This paper examines whether Egypt's debt is sustainable and assesses its solvency.

Moreover, estimating the reaction function of fiscal policies.

The study uses an empirical approach.

That utilizes annual series data for the period 1990 to 2020.

and applies the ARDL bounds testing method to capture the effect of long-run linkage between variables and employs it in two forms.

The first estimate sustainable debt by estimating the regression of public revenues on public expenditures.

In the second, the study employs three separate models to examine the effect of public debt as a total, external, and domestic besides output gap, expenditure gap, oil price, and exchange rate as regressor variables on primary budget balance regressed variables.

This study found debt is sustainable, and the fiscal policy is countercyclical in public debt and external but weak.

And it is procyclical in the domestic model.

Furthermore, the oil prices negatively affect the primary budget balance, while the devaluation of the local currency positively affects it.

The study recommended that there is a need to achieve a primary surplus in the coming years and to take robust countercyclical policies to maintain the sustainability of the debt.