The impact of public external debt on economic growth: An empirical study on the Egyptian economy

The study aims to determine the effects of public external debt on the economic growth of Egypt both in the short run and the long run. We specify a growth equation based on the standard neoclassical growth model that we extend by adding public external debt and some control variables based on the time series data covering the period 1990 – 2013.The Engel and Granger (1987) econometric techniques are employed in the empirical analysis in order to regress an error correction model (ECM) which allows estimating the short and longrun consequences of debt on the Egyptian economic growth. Studyresults show that the levels of public external debt in this country are growth damaging. a one percentage point increase in the ratio of public external debt reduced the annual growth rate by 0.26 in the long run, and by 0.12 – 0.20 in the short run.On the other hand, the study was aimed to examine the “crowding out effect” hypothesis associated with debt. The results confirmed that increasing in the burdens of external debt can has adverse effects on the composition of public spending by crowding out the amount of resources available for infrastructure and human capital, with negative effects on growth. In addition, by raising the budget deficit, these payments reduce public savings, which in turn, may either raise interest rates or crowd out credit available for private investment. In order to avoid the negative effects of external debt, Egypt will need a range of measures and policies that reduce the fiscal deficit. Far from distortionary measures, we must improve the business climate and achieve a favorable environment to attract foreign direct investment and encourage domestic savings as well as institutional reforms to ensure transparency and working to  reduce corruption.