Public Debt and Economic Growth in Egypt: A Vector Autoregression Approach

Mounting public debt has been a chronic problem in many countries, particularly in developing countries in the 21^st century. Although the debt-growth nexus has been extensively studied, this relationship is still controversial among academics. In this paper, the impact of public debt (domestic and external debt) on Egypt's economic growth is empirically examined using quarterly data from 2002 to 2020. To achieve this purpose, a structural vector autoregression model is employed including the real gross domestic product (GDP) and domestic and external debt. In addition, the model includes variables that measure the key channels to transmit the effect of public debt to economic growth, which are public and private investments and domestic savings. The results confirm that domestic debt negatively affects real output, whereas an increase in external debt initially reduces the growth rate, then this effect is reversed in the first quarter. Regarding the GDP cumulative responses to public debt, the negative impact of domestic and external debt on economic growth is revealed. However, the external debt's negative effect on growth lasts in the long run. Moreover, a crowding-out effect caused by domestic debt is evident in the negative response of private investment to domestic debt, whereas external debt increases private investment. Furthermore, the findings support public investment's significant role in stimulating private investment. Also, there is a high interrelation between domestic and external debt, because the increase in one drives up the other. The paper's results are relevant to policymakers because they have critical implications for debt management strategy.