Egypt’s Debt: The Cost of Paying and the Cost of Not Paying

Debt is an obligation of the state, but servicing it is not an end in itself. A debt strategy cannot be considered successful simply because payments reach creditors on time if doing so leaves the economy less able to generate the resources needed to meet its future obligations.

The real measure is what remains after debt service: How much capacity does the economy retain to invest and grow? What does debt service mean for household incomes and purchasing power? What assets and policy options remain available to the state? And a year later, has the debt burden become lighter—or heavier?

The problem with debt does not necessarily begin when a government is unable to make a payment when it falls due. It can begin much earlier, when the cost of keeping payments current itself becomes a burden on the economy—crowding out investment and public services, eroding citizens’ incomes, and forcing an increasing share of fiscal policy to revolve around a single question: how to meet the next payment.

At that point, the more important question is no longer whether Egypt can pay, but at what cost it can pay—and what remains for the economy and its citizens after it does.

A government may remain, in accounting terms, capable of meeting its obligations by generating large fiscal surpluses, squeezing spending, raising revenues, selling assets, or borrowing anew to repay old debts. It may still, by the standards of credit markets, be a country that pays on time. But that alone is not enough to establish that its debt is sustainable if the cost of maintaining that record weakens the economy’s productive capacity or erodes the incomes and savings on which future growth and repayments depend.

This raises a question often posed by observers: if debt service has become such a heavy burden, why not seek a restructuring that extends maturities, reduces financing costs, or otherwise eases the burden before payments are missed?

In principle, sovereign debt can be restructured, and many countries have done so. But there is a fundamental difference between negotiating a new arrangement for debt while remaining current on payments and first stopping payment on an obligation that has fallen due.

A default can provide an immediate cash-flow benefit that should not be overlooked: payments that would otherwise have gone to creditors are temporarily retained by the state. If subsequent negotiations produce longer maturities, lower interest costs, or a reduction in the present value of the debt, the resulting reduction in debt service could create room for investment, public services, and social protection.

But that is only one side of the calculation. Markets do not look only at the money a government has not paid today; they also look at the likelihood that creditors will receive their money tomorrow. If a country is deemed to be in default, its credit ratings may be sharply downgraded, risk premiums may rise, and access to some financing markets may be lost for a period—or become more expensive when the government, companies, and banks seek to return.

The dollar effect: when the cost of a decision reaches the citizen

For Egypt, there is an especially important channel: foreign currency. The economy needs foreign currency not only to service its debt, but also to import food, energy, medicine, machinery, and production inputs. If a default were to lead to weaker dollar inflows, capital outflows, or a precautionary increase in demand for foreign currency, the pound would come under pressure. As the currency weakens, the cost of imports and production rises, and that increase eventually finds its way into prices.

This is where the paradox can emerge. The state may save billions in debt service, only for part of those apparent savings to return to citizens through higher inflation and weaker purchasing power. The decision, therefore, has to be judged by its ultimate effects, rather than by the immediate savings reflected in the government’s accounts on the first day.

Nor is all Egyptian debt owed to foreigners. A large share of government debt is domestic, held by banks, financial institutions, and investors inside Egypt. If a restructuring were to include these instruments on a compulsory basis, a reduction in the government’s debt-service burden could instead translate into losses on the balance sheets of the banks and institutions holding those instruments.

Any discussion of restructuring must therefore specify which debt is being targeted, who the creditors are, and how much of a loss the financial system could absorb without turning a solution to a debt crisis into a banking crisis.

The cost of repayment: citizens, assets, and sovereignty

But acknowledging those risks does not mean that continuing to repay at any cost is necessarily the right alternative.

Repayment has a cost of its own— less visible than default, perhaps, but potentially more persistent. When interest payments consume a large share of revenue, less room remains for investment, education, healthcare, and social protection. When the state must refinance large sums every year, the budget becomes highly sensitive to interest rates. And when exceptional resources are repeatedly used to meet short-term obligations, liquidity may improve today while the economy’s capacity weakens tomorrow.

This is where the citizen moves to the centre of the debt-sustainability calculation, rather than appearing as a social addendum to financial analysis.

Citizens are, after all, among those who ultimately bear the cost of adjustment: through taxes, prices, interest rates, public services, the purchasing power of their incomes and savings, and employment opportunities.

The same logic applies to state assets. Selling a state-owned asset is not inherently a mistake, just as state ownership is not, in itself, an economic virtue independent of the asset’s efficiency. Divestment can be an excellent decision if the state receives a fair price, a new investor improves the efficiency of the activity, and the proceeds are used to retire more expensive debt or finance a higher-return investment.

The calculation changes, however, when a sale becomes compulsory because of an urgent obligation. A seller who needs cash immediately does not have the same bargaining power, and some assets may carry strategic or future value that exceeds their price at the moment they are sold.

The question, therefore, should not be: how many dollars can the state obtain from an asset? It should be: what value is being surrendered in exchange for those dollars, and what might the asset have delivered over the years ahead?

The alternatives: repayment, liability management, and deeper restructuring

This brings us to the most important criterion. Debt sustainability should not mean merely the Treasury’s ability to pay. It should mean the state’s ability to service its obligations while preserving an economy capable of growing, citizens able to maintain their livelihoods, a stable financial system, and sufficient policy space for the state to make its own decisions.

By that measure, Egypt has three possible paths.

The first is to continue servicing its debt while gradually reducing it. The advantage is that this avoids the shock of default and preserves access to financial markets. But it remains costly if interest rates and financing needs stay high for years.

The second is to actively manage the debt before default: extend maturities, reduce reliance on short-term financing, increase concessional funding, conduct liability-management operations, and use exceptional resources to reduce the most expensive parts of the debt. This path would not deliver the large reduction that a coercive restructuring might achieve, but it could ease the burden while preserving a greater degree of stability and confidence.

The third is a deeper restructuring if the analysis shows that debt service can no longer be maintained without imposing an economically and socially intolerable cost. This could involve a substantial extension of maturities, lower interest rates or, in the hardest cases, a reduction in the present value of what creditors receive. Such measures could free up more resources, but they would also carry the greatest risks for the currency, banks, investment, and access to financing.

The choice, therefore, cannot be made on instinct or simply out of fear of the word “default.”

What is needed is a calculation of the full cost of each scenario. How much would Egypt pay in interest and principal over the next five or ten years? How much would it need to refinance each year? What would be the effect on education, healthcare, and investment? Which assets might the state have to use or sell? How large a fiscal surplus would be required, and could society bear it?

Against that must be set the cost of restructuring. What might happen to the pound? How much could financing costs rise? How exposed would the banking system be? How much investment and growth could be lost? And how much of the apparent saving would remain after these effects were taken into account?

Only then does the question of debt repayment become an economic one in the fullest sense.

Egypt may still have room to act before reaching a point at which restructuring becomes unavoidable. Rather than waiting until restructuring becomes unavoidable, it can negotiate and redesign its debt portfolio while remaining current on payments. Reducing the interest bill and refinancing risks can become a goal no less important than reducing the debt-to-GDP ratio.

Egypt can also point to its exposure to regional shocks in seeking better financing terms. Losses to revenue streams such as the Suez Canal caused by conflicts beyond its control, together with higher regional risk costs, could strengthen the case for concessional financing, international guarantees, longer maturities, and instruments designed to absorb shocks. But these circumstances strengthen the argument for better financing terms more than they provide, by themselves, a justification for unilaterally stopping payments.

This is why timing matters. A state that restructures its debt terms while it is still able to pay retains room to choose.

The question with which we began therefore needs to be reformulated. It is not: can Egypt pay its debts? Nor is it: why does Egypt not stop paying? The more important question is this: Is the way Egypt is paying today the least costly option for Egypt and Egyptians?

If managing the debt while continuing to pay can reduce costs and risks to a level the economy can bear, it is the more rational choice. If the calculations eventually show that this is not enough—and that maintaining the current course requires a persistent drain on household incomes, growth, public assets, and the state’s policy space—then an orderly restructuring becomes a legitimate economic option that should be taken seriously.

Ultimately, making the next payment cannot be the only measure of a successful debt strategy. What matters is whether servicing the debt leaves the economy with enough capacity to invest, grow, and generate the resources needed to meet future obligations.

That means looking beyond the immediate payment to its longer-term consequences: the burden borne by citizens, the productive capacity that remains, and the assets and policy choices still available to the state. The real test is whether each year of debt service leaves Egypt better positioned to meet the next one—or increasingly constrained by it.