How Egypt tackles its debt could be an example to other debt laden economies

Global sovereign debt has reached critical levels. As of 2024, total global public debt amounted to $102 trillion, with developing countries accountable for about $31 trillion of that burden.

Since 2010, public debt – debt owned by governments, also known as sovereign debt – in developing economies has been growing since at about twice the rate of advanced economies.

According to the most recent IMF statistics, total global debt (public + private) remains greater than 235% of global GDP, highlighting the broader picture of global debt pressure. Public debt alone is equal to nearly 93% of global GDP.

This dramatic debt burden has serious social implications, particularly for developing countries. According to the United Nations, 3.3 billion people still live in countries where interest payments exceed national spending on health and education, directly crowding out critical social investments and hurting long-term growth, welfare, and human development. Vulnerabilities are extremely common among low-income countries. Meanwhile, the G20's Common Framework, announced in 2020 to help low-income countries restructure their debts, has received criticism for its ineffectiveness, restrictive impact and limited success. As a result, low-income countries face very few choices for restoring fiscal stability.

Although Egypt’s general budget debt, which includes both domestic and external debt, declined from nearly 96% of GDP in June 2023 to about 85.6% by June 2025, reflecting the country’s recently adopted approach to debt management. Despite these gains, public debt continues to exert significant pressure on the state budget.

External debt alone reached around $156 billion in 2024, equivalent to 42% of GDP, while debt service accounted for nearly 49% of total exports — absorbing almost half of export revenues and creating liquidity constraints.

Although recent reforms have increased Egypt’s revenue while creating primary surpluses, the country’s debt continues to tighten the fiscal space, highlighting the importance of further debt management.

Egypt’s success and challenges present a practical case study and a potential driver of regional development.

The following framework is not Egypt's official debt plan, but rather a recommended set of innovative financing instruments to help governments whose debt is broadly sustainable but faces increasing funding constraints.

Divided into four pillars, this framework could be applicable in Egypt, and further afield.

Debt conversion to reshape Egyptian public debt could play a major role in helping to reduce the country's debt burden.

Debt conversion means restructuring the current stock of debt by changing its core features to reduce risks. This can be done by transferring foreign-currency debt into local currency or lower-risk FX, switching between fixed and floating interest rates, and adjusting maturities to ease repayment pressures.

A practical example is the IBRD Flexible Loan, which allows governments to proactively manage currency, interest and maturity risks while preserving creditor value. It has been used in the Philippines, Indonesia and Colombia. Debt conversion can also be supported by proactive risk management tools, where third-party institutions such as Multilateral Development Banks (MDBs) or Development Finance Institutions (DFIs) provide hedging instruments and guarantees to help governments manage currency, interest, and maturity risks more effectively.

Unlike debt conversions, a debt swap is an arrangement in which a country replaces part of its existing debt with a new obligation on different terms. New terms could include longer maturities, lower interest rates or a commitment to fund specific projects, reducing repayment pressure while preserving creditor value.

Debt swaps are a key component of successful debt management. Debt-for-Climate and Debt-for-Development programmes, focusing on health, education and food security, have proven promising results and could eventually be scaled up with international financial support. These swaps strongly connect repayment of debt to credible social and environmental outcomes, ensuring that fiscal sustainability results in tangible benefits to citizens.

Egypt's blueprint builds on its previous experiences while adapting them to regional peculiarities. Importantly, Egypt itself has already engaged in debt swap arrangements — including agreements with the UAE linked to the Ras El-Hekma deal, debt swaps with Germany and Italy, and a memorandum of understanding with China on future debt swap cooperation. These experiences provide Egypt with a practical foundation to expand and innovate debt swap mechanisms at scale.

Blended hedging platforms provide low-cost FX protection by combining concessional and private capital.

The Philippines and Indonesia, in collaboration with the Asian Development Bank, have built blended finance hedging platforms to protect themselves against currency and interest rate risks, enabling more investment in infrastructure and climate programmes.

Brazil has advanced blended finance through risk-sharing mechanisms and the launch of Eco Invest Brasil, a dedicated hedging platform developed with the Inter-American Development Bank to provide affordable foreign exchange protection for renewable and infrastructure projects.

Building on these global experiences, Egypt can adapt similar blended finance and hedging platforms to stabilize its debt profile, reduce borrowing costs, and attract private capital into strategic sectors.

Providing first-loss guarantees would reassure investors and attract private financing.

Synthetic local currency loans/bonds are foreign-currency securities constructed through swaps or guarantees. They may allow Egypt to repay in local currency while investors earn hard-currency returns, reducing FX risk. Institutions such as the International Finance Corporation (IFC), the EBRD, and the World Bank frequently provide or support these products.

FX linked bonds stabilize debt repayment costs by protecting against currency fluctuations.

Thematic bonds are debt instruments dedicated to financing projects with specific social or environmental objectives. They include green bonds, sustainability-linked bonds (SLBs), blue bonds and social bonds, each designed to align debt with measurable development outcomes. Egypt has already launched its Sustainable Finance Framework and issued its first green bond, positioning itself as a regional leader in climate finance.

SLBs are debt products that align borrowing costs with measurable objectives for sustainability, such as reducing emissions or increasing renewable energy projects. When targets are accomplished, coupon rates fall, lowering debt payment costs and rewarding governments for their efforts; if targets are missed, rates may rise, providing substantial pressure for reform.

Drawing on these global experiences, Egypt could apply these concepts to its own regional setting, providing currency protection and boosted trust in sovereign and economic initiatives.

Credit enhancements are the cornerstone of innovative debt management. In simple terms, credit enhancements are mechanisms that reduce risk for investors and lenders. MDBs, DFIs and donor governments can provide things like guarantees, insurance or first-loss coverage to make innovative financing more attractive.

Partial guarantees reduce default risk. First Loss Funds leverage private capital through swaps, diaspora platforms and hedging strategies. Policy-based enhancements combine concessional financing to reforms, enhancing accountability and measurable results.

Egypt already has some practical experience with credit enhancements. One clear example is the Samurai bond issuance in Japan, where the African Development Bank provided a partial guarantee when Egypt sold its bonds in the Japanese market. This guarantee reduced the risk for investors, lowered the cost of borrowing and made it possible for Egypt to access the Japanese market with better terms.

Building on these experiences, Egypt can expand the systematic use of credit enhancements — like first loss funds, FX hedging platforms and sustainability linked guarantees — to stabilise its debt profile, reduce borrowing costs and crowd in private capital at scale.

Egypt, along with the Seychelles, Belize, and Barbados, has pioneered debt swaps. Now, it offers a broader framework that explicitly links sovereign debt to sustainable development objectives.

The country has the potential to transform its national debt into a powerful instrument for economic growth and long-term development. Doing so could provide a case study for other economies to release themselves from the burden of debt.

The author of this article is conducting doctoral research on the impact of innovative sovereign financing instruments on attracting domestic and foreign investment.

The views expressed are the author’s own and do not represent official policy.