Egypt Battles High Debt Burden Amidst Fiscal Consolidation
Egypt is struggling with exceptionally weak debt affordability, with significant public debt as a proportion of economic size threatening the country’s outlook.
However, the country is getting multilateral lender support, including a huge investment drive from Qatar to enhance economic conditions. key macroeconomic indicators have been weakened, with a double-digit headline inflation rate in the country.
The country’s consumer price index has, however, improved significantly, supported by effective monetary authority policy and some fiscal consideration. Egyptians’ debt remains a threat to economic growth.
In a non-rating commentary note, Moody’s said exceptionally weak debt affordability remained Egypt’s overarching credit constraint, reflecting the government’s elevated debt burden and very high inflation-adjusted domestic borrowing costs.
“If accrued interest expense on government T-bills is included, effective interest payments likely exceeded 90% of revenue, severely constraining fiscal flexibility and Egypt’s broader credit profile.
According to the ratings agency, Egypt’s ratings, including its Caa1 long-term issuer ratings, reflect the government’s high debt burden, very weak debt affordability and high gross financing needs, which are mitigated by sizeable official and bilateral support.
The policy pivot toward currency flexibility and inflation targeting will, if maintained, reduce the risk of a renewed build-up of external imbalances and strengthen the economy’s shock absorption capacity.
Moody’s noted that the country’s ongoing fiscal adjustment, moderating inflation, and structural reforms raise the prospect of a medium-term improvement in the economy’s potential growth and the government’s fiscal metrics.
Geopolitical disruptions and social pressures could challenge the effectiveness of policy adjustment, according to details from the review note, saying that recent developments in Egypt point to an improving credit profile, in line with the positive outlook.
Egypt’s economic growth rebounded to 4.4% in the fiscal year ending June 2025 (FY2025) and further to 5.3% year over year in the first quarter of FY2026 from 2.4% in FY2024, driven by non-oil manufacturing and tourism.
The country’s inflation slowed sharply to 12.5% year over year in October 2025 from a recent peak of 36% in early 2024, allowing the central bank to start cutting interest rates.
On the external front, the current account deficit narrowed to 4.2% of GDP in FY2025 from 5.4% of GDP in FY2024 due to rising remittances and tourism receipts, which more than offset a widening trade deficit and still-depressed Suez Canal receipts.
Moody’s highlighted that a new major investment agreement with Qatar is set to bolster central bank foreign-currency reserves before the end of 2025, while strengthening the medium-term outlook for foreign direct investment inflows.
The review report stated that the government was also able to successfully tap the international capital markets several times this year, in both conventional and Sukuk format at progressively narrowing spreads.
On the consolidated general government basis, Moody’s analysts estimate that improved tax collection and prudent non-interest spending led to a record-high primary surplus of 3.3% of GDP in FY2025, up from around 2% of GDP in FY2024 – when one-off proceeds from the 2024 sale of development rights in the Ras El Hekma project are excluded.
However, exceptionally weak debt affordability remained Egypt’s overarching credit constraint, reflecting the government’s elevated debt burden and very high inflation-adjusted domestic borrowing costs.
“We estimate that interest payments were more than 60% of consolidated general government revenue in FY2025, one of the highest among the sovereigns we rate.”.
If accrued interest expense on government T-bills is included, effective interest payments likely exceeded 90% of revenue, severely constraining fiscal flexibility and Egypt’s broader credit profile.
Moody’s analysts expect domestic borrowing costs and interest payments to start moderating in the coming quarters on the back of ongoing fiscal consolidation, declining inflation, improving central bank credibility which should help anchor medium-term inflation expectations and reduce the medium-term inflation risk premium, as well as government efforts to diversify its domestic funding base.
Nevertheless, a material decline in inflation-adjusted borrowing costs is yet to begin to materialize. Egypt with “a3” economic strength reflects a large and diversified economy with a robust trend growth rate, although its potential is constrained by structural rigidities and business environment challenges due to the large footprint of the public sector.
Egypt’s “b2” institutions and governance strength balances a growing track record of completing economic and fiscal reforms against a history of ineffective macroeconomic policies, especially related to exchange rate management, that have increased exposure to shocks and led to the emergence of periodic acute foreign currency shortages over the past decade.
Its “ca” fiscal strength reflects a high interest bill that weighs on debt affordability, and elevated debt burden at more than 80% of GDP in June 2025.
The “caa” susceptibility to event risk score is driven by government liquidity risk, capturing the very high gross government financing needs at over 30% of GDP , including a large external borrowing requirement relative to the government’s foreign currency resources.
The positive outlook reflects the prospect for a moderation in Egypt’s debt service burden.
Increasing monetary policy credibility and effectiveness, following the exchange rate flotation and the adoption of the inflation targeting framework in 2024, opens the path for the policy rates and domestic borrowing costs to decline.
It also maintains a favorable environment for longer-term foreign-currency inflows to help meet the country’s large external financing needs.
In addition, ongoing fiscal consolidation and government asset monetization program has the potential to set the debt burden on a sustained downward trajectory that would, over time, contribute to lowering debt service payments.
Greater confidence that the government’s debt affordability is sustainably improving, driven by a combination of durable reduction in real borrowing costs, lower debt burden and structurally higher revenue generation, would support a higher rating level.
Upward credit pressure would also be supported by a lengthening track record of preserving the official foreign currency liquidity buffers in the context of the flexible exchange rate regime, notwithstanding large external financing needs over the coming few years.
Moody’s said significant capital outflows or a structural decline in inflows that threatened to erode Egypt’s foreign currency buffers and overall macroeconomic stability would be credit negative.
It added that a renewed build-up in foreign currency shortages, possibly as a result of a sustained departure from the flexible exchange rate framework, would also weigh on the rating.
An indications that government debt affordability—measured by the interest-to-revenue or interest-to-GDP ratios—is unlikely to improve materially over the medium term would also exert negative pressure on the rating, Moody’s said in the review update.MTN Nigeria Hits 52-Week High as Investors Double Down Bets
