INFOGRAPHIC: Egypt’s Bond Addiction

This is PART 2 of an excellent two-part series by Isabel Esterman on government securities: treasury bonds and bills, and other debt instruments sold by a government (including Egypt) to finance its borrowings. Here is Part 1

This time we’re looking at the impact of relying on these financial instruments to cover borrowing needs.

We all know that Egypt is in really bad shape, but if you start paying attention to bond issuances and yields, you can watch (in horror) as this vicious circle of debt continues. As long as Egypt’s debt grows much faster than its economy, things are going to be rough.

As to how to solve this, one possible route is for Egypt to get its accounts in order, by cutting spending (restructuring energy and food subsidies is the obvious place to start) and raising revenues (increasing taxes, and possibly bringing military and ministerial funds into the treasury). Unless this is done very well, though, it’s hard to avoid hurting the vulnerable or angering the powerful, and it’s difficult to see how the current administration has the political capital to do either.

In theory, Egypt could also come up with a comprehensive stimulus plan, and convince lenders (domestic and foreign), that a big enough infusion of cash will get Egypt’s economy back in gear without the need to resort to austerity measures. For this to work, it would have to be a whole lot more detailed and credible than what we’re seeing come out of either the ruling party or the opposition.

Disclaimer: In the course of the research for this graphic, it was discovered that the proportion of government spending on debt servicing (to cover the repayment of interest and principal on a debt) was actually much larger than the figure  extensively used in the media. It stood at 35.7% rather than the “25%” often quoted in mainstream media.

We have consulted bankers and financial analysts to confirm this, but there is still controversy over  how it the figure should be calculated. It is a matter of terminology, so for number geeks out there, we have chosen to look at entries (sources below) for “interest” and “loan repayment” as a percentage of total budget outlay, rather than “interest” as a percentage of “expenditures”, which yields the more widely-cited figure of 25%.

infographicPart2Figures come from the following sources:

Public Debt/GDP

Budget allocation

Debt service payments

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