Investigating the Impact of Real Exchange Rate and Current Account Deficit on External Debt in Egypt During the Period (1980-2022)

Document Type : Original Article

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Economics Department, Faculty of Economic Studies and Political sciences, Alexandria university, Egypt

Abstract

This study examines the impact of the real exchange rate, the current account deficit, and their combined effect on external debt in Egypt. This study employed the ARDL bounds testing procedure for annual time-series data spanning 1980–2022. This study finds a long-run cointegration relationship between variables in the empirical model. The results reveal that real exchange rate depreciation and current account deficits stimulate external debt. However, their combined effect is that real exchange rate depreciation negatively moderates the impact of the current account deficit on external debt in Egypt. This finding suggests that real exchange rate depreciation can act as a buffer, thus reducing the impact of the current account deficit on external debt. Accordingly, this study recommends that government policies should reduce foreign currency-denominated debt to reduce exposure to exchange rate risks, develop domestic capital markets to provide alternative sources of financing, reduce reliance on external debt, utilize hedging instruments such as currency swaps to mitigate the impact of exchange rate fluctuations on external debt, address the causes of the current account deficit by improving export competitiveness, and adopt import substitution strategies to enhance the effectiveness of real exchange rate adjustments.

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