Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue

Mohamed Fathy Abdelgany; Taghreed Badr Al-deen

doi:doi:10.11648/j.ijefm.20231102.12

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Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue

Mohamed Fathy Abdelgany, Taghreed Badr Al-deen

Published in International Journal of Economics, Finance and Management Sciences (Volume 11, Issue 2)

Received: 5 March 2023 Accepted: 21 March 2023 Published: 31 March 2023

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Abstract

Public debt sustainability is a multidimensional process. Egypt maintains a sustainable general path in conducting its fiscal policy. However, the rising path of accumulated debt to GDP ratio implies critical restrictions on fiscal stance and fiscal space. The research tests the structural endogenous long-term response of the Egyptian government towards the accumulated stock of public debt. in addition to examining the fiscal fatigue hypothesis when debt jumps to high extreme levels. The research adopts the widely accepted approach proposed by Bohn to estimates a fiscal reaction function. the Autoregressive Distributed Lag ARDL technique is applied for the time period from 1981 to 2021. Empirical wise, two critical specified regressions are estimated. The first measures the response of the structural long-term primary balance as a percentage of GDP to the stock of public debt to GDP ratio. This provides a general judgement whether the fiscal policy is expansionary, neutral or restrictive. Second, a non-linear estimation is implemented to test for the possibility of fiscal fatigue. the existence of an inverse U-shaped response can be used to endogenously determine a debt threshold above which the government is unable to keep its fiscal position within the sustainability condition. Findings of the first regression indicate that the government is unable to adjust its structural primary balance positively with the increase in the stock of previous debt to GDP ratio during the examined time period. Thus, fiscal policy of the Egyptian government tends to be restrictive during the examined time period. Furthermore, the fiscal fatigue hypothesis applies as the magnitude of government fiscal response is conditioned by the level of accumulated public debt. At low levels of debt to GDP ratio the government adjustment of its primary balance is not structurally planned. Government show weak response. When the level of accumulated debt to GDP ratio goes high, government undertakes serious measures and effectively adjust the primary balance to GDP with the increased public debt. however, when the level of the previous debt to GDP ratio jump to extreme high levels, government is unable to maintain the positive response indicating the possibility of fiscal fatigue and fiscal default. The research emphasizes the necessity of a planned serious fiscal actions to correct the long-term response. Cyclical automatic response of the government should be revised. Moreover, Non-interest expenditures should be structurally adjusted to maintain the required level of government reasonable primary balance.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 11, Issue 2)
DOI	10.11648/j.ijefm.20231102.12
Page(s)	44-61
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Debt Sustainability, Fiscal Reaction Function, Bohn’s Approach, Structural Primary Balance, Output Gap, Expenditure Gap, Fiscal Fatigue, Debt Threshold

References

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APA Style

Mohamed Fathy Abdelgany, Taghreed Badr Al-deen. (2023). Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue. International Journal of Economics, Finance and Management Sciences, 11(2), 44-61. https://doi.org/10.11648/j.ijefm.20231102.12

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ACS Style

Mohamed Fathy Abdelgany; Taghreed Badr Al-deen. Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue. Int. J. Econ. Finance Manag. Sci. 2023, 11(2), 44-61. doi: 10.11648/j.ijefm.20231102.12

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AMA Style

Mohamed Fathy Abdelgany, Taghreed Badr Al-deen. Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue. Int J Econ Finance Manag Sci. 2023;11(2):44-61. doi: 10.11648/j.ijefm.20231102.12

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@article{10.11648/j.ijefm.20231102.12,
  author = {Mohamed Fathy Abdelgany and Taghreed Badr Al-deen},
  title = {Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {11},
  number = {2},
  pages = {44-61},
  doi = {10.11648/j.ijefm.20231102.12},
  url = {https://doi.org/10.11648/j.ijefm.20231102.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20231102.12},
  abstract = {Public debt sustainability is a multidimensional process. Egypt maintains a sustainable general path in conducting its fiscal policy. However, the rising path of accumulated debt to GDP ratio implies critical restrictions on fiscal stance and fiscal space. The research tests the structural endogenous long-term response of the Egyptian government towards the accumulated stock of public debt. in addition to examining the fiscal fatigue hypothesis when debt jumps to high extreme levels. The research adopts the widely accepted approach proposed by Bohn to estimates a fiscal reaction function. the Autoregressive Distributed Lag ARDL technique is applied for the time period from 1981 to 2021. Empirical wise, two critical specified regressions are estimated. The first measures the response of the structural long-term primary balance as a percentage of GDP to the stock of public debt to GDP ratio. This provides a general judgement whether the fiscal policy is expansionary, neutral or restrictive. Second, a non-linear estimation is implemented to test for the possibility of fiscal fatigue. the existence of an inverse U-shaped response can be used to endogenously determine a debt threshold above which the government is unable to keep its fiscal position within the sustainability condition. Findings of the first regression indicate that the government is unable to adjust its structural primary balance positively with the increase in the stock of previous debt to GDP ratio during the examined time period. Thus, fiscal policy of the Egyptian government tends to be restrictive during the examined time period. Furthermore, the fiscal fatigue hypothesis applies as the magnitude of government fiscal response is conditioned by the level of accumulated public debt. At low levels of debt to GDP ratio the government adjustment of its primary balance is not structurally planned. Government show weak response. When the level of accumulated debt to GDP ratio goes high, government undertakes serious measures and effectively adjust the primary balance to GDP with the increased public debt. however, when the level of the previous debt to GDP ratio jump to extreme high levels, government is unable to maintain the positive response indicating the possibility of fiscal fatigue and fiscal default. The research emphasizes the necessity of a planned serious fiscal actions to correct the long-term response. Cyclical automatic response of the government should be revised. Moreover, Non-interest expenditures should be structurally adjusted to maintain the required level of government reasonable primary balance.},
 year = {2023}
}

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TY  - JOUR
T1  - Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue
AU  - Mohamed Fathy Abdelgany
AU  - Taghreed Badr Al-deen
Y1  - 2023/03/31
PY  - 2023
N1  - https://doi.org/10.11648/j.ijefm.20231102.12
DO  - 10.11648/j.ijefm.20231102.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 44
EP  - 61
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20231102.12
AB  - Public debt sustainability is a multidimensional process. Egypt maintains a sustainable general path in conducting its fiscal policy. However, the rising path of accumulated debt to GDP ratio implies critical restrictions on fiscal stance and fiscal space. The research tests the structural endogenous long-term response of the Egyptian government towards the accumulated stock of public debt. in addition to examining the fiscal fatigue hypothesis when debt jumps to high extreme levels. The research adopts the widely accepted approach proposed by Bohn to estimates a fiscal reaction function. the Autoregressive Distributed Lag ARDL technique is applied for the time period from 1981 to 2021. Empirical wise, two critical specified regressions are estimated. The first measures the response of the structural long-term primary balance as a percentage of GDP to the stock of public debt to GDP ratio. This provides a general judgement whether the fiscal policy is expansionary, neutral or restrictive. Second, a non-linear estimation is implemented to test for the possibility of fiscal fatigue. the existence of an inverse U-shaped response can be used to endogenously determine a debt threshold above which the government is unable to keep its fiscal position within the sustainability condition. Findings of the first regression indicate that the government is unable to adjust its structural primary balance positively with the increase in the stock of previous debt to GDP ratio during the examined time period. Thus, fiscal policy of the Egyptian government tends to be restrictive during the examined time period. Furthermore, the fiscal fatigue hypothesis applies as the magnitude of government fiscal response is conditioned by the level of accumulated public debt. At low levels of debt to GDP ratio the government adjustment of its primary balance is not structurally planned. Government show weak response. When the level of accumulated debt to GDP ratio goes high, government undertakes serious measures and effectively adjust the primary balance to GDP with the increased public debt. however, when the level of the previous debt to GDP ratio jump to extreme high levels, government is unable to maintain the positive response indicating the possibility of fiscal fatigue and fiscal default. The research emphasizes the necessity of a planned serious fiscal actions to correct the long-term response. Cyclical automatic response of the government should be revised. Moreover, Non-interest expenditures should be structurally adjusted to maintain the required level of government reasonable primary balance.
VL  - 11
IS  - 2
ER  -

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Author Information

Mohamed Fathy Abdelgany

Faculty of Politics & Economics, Beni-Suef University, Beni-Suef, Egypt
Taghreed Badr Al-deen

Faculty of Politics & Economics, Beni-Suef University, Beni-Suef, Egypt

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Plain Text BibTeX RIS

APA Style

Mohamed Fathy Abdelgany, Taghreed Badr Al-deen. (2023). Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue. International Journal of Economics, Finance and Management Sciences, 11(2), 44-61. https://doi.org/10.11648/j.ijefm.20231102.12

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ACS Style

Mohamed Fathy Abdelgany; Taghreed Badr Al-deen. Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue. Int. J. Econ. Finance Manag. Sci. 2023, 11(2), 44-61. doi: 10.11648/j.ijefm.20231102.12

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AMA Style

Mohamed Fathy Abdelgany, Taghreed Badr Al-deen. Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue. Int J Econ Finance Manag Sci. 2023;11(2):44-61. doi: 10.11648/j.ijefm.20231102.12

Copy | Download

@article{10.11648/j.ijefm.20231102.12,
  author = {Mohamed Fathy Abdelgany and Taghreed Badr Al-deen},
  title = {Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {11},
  number = {2},
  pages = {44-61},
  doi = {10.11648/j.ijefm.20231102.12},
  url = {https://doi.org/10.11648/j.ijefm.20231102.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20231102.12},
  abstract = {Public debt sustainability is a multidimensional process. Egypt maintains a sustainable general path in conducting its fiscal policy. However, the rising path of accumulated debt to GDP ratio implies critical restrictions on fiscal stance and fiscal space. The research tests the structural endogenous long-term response of the Egyptian government towards the accumulated stock of public debt. in addition to examining the fiscal fatigue hypothesis when debt jumps to high extreme levels. The research adopts the widely accepted approach proposed by Bohn to estimates a fiscal reaction function. the Autoregressive Distributed Lag ARDL technique is applied for the time period from 1981 to 2021. Empirical wise, two critical specified regressions are estimated. The first measures the response of the structural long-term primary balance as a percentage of GDP to the stock of public debt to GDP ratio. This provides a general judgement whether the fiscal policy is expansionary, neutral or restrictive. Second, a non-linear estimation is implemented to test for the possibility of fiscal fatigue. the existence of an inverse U-shaped response can be used to endogenously determine a debt threshold above which the government is unable to keep its fiscal position within the sustainability condition. Findings of the first regression indicate that the government is unable to adjust its structural primary balance positively with the increase in the stock of previous debt to GDP ratio during the examined time period. Thus, fiscal policy of the Egyptian government tends to be restrictive during the examined time period. Furthermore, the fiscal fatigue hypothesis applies as the magnitude of government fiscal response is conditioned by the level of accumulated public debt. At low levels of debt to GDP ratio the government adjustment of its primary balance is not structurally planned. Government show weak response. When the level of accumulated debt to GDP ratio goes high, government undertakes serious measures and effectively adjust the primary balance to GDP with the increased public debt. however, when the level of the previous debt to GDP ratio jump to extreme high levels, government is unable to maintain the positive response indicating the possibility of fiscal fatigue and fiscal default. The research emphasizes the necessity of a planned serious fiscal actions to correct the long-term response. Cyclical automatic response of the government should be revised. Moreover, Non-interest expenditures should be structurally adjusted to maintain the required level of government reasonable primary balance.},
 year = {2023}
}

Copy | Download

TY  - JOUR
T1  - Constraints to Debt Sustainability in Egypt: Structural Response and Fiscal Fatigue
AU  - Mohamed Fathy Abdelgany
AU  - Taghreed Badr Al-deen
Y1  - 2023/03/31
PY  - 2023
N1  - https://doi.org/10.11648/j.ijefm.20231102.12
DO  - 10.11648/j.ijefm.20231102.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 44
EP  - 61
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20231102.12
AB  - Public debt sustainability is a multidimensional process. Egypt maintains a sustainable general path in conducting its fiscal policy. However, the rising path of accumulated debt to GDP ratio implies critical restrictions on fiscal stance and fiscal space. The research tests the structural endogenous long-term response of the Egyptian government towards the accumulated stock of public debt. in addition to examining the fiscal fatigue hypothesis when debt jumps to high extreme levels. The research adopts the widely accepted approach proposed by Bohn to estimates a fiscal reaction function. the Autoregressive Distributed Lag ARDL technique is applied for the time period from 1981 to 2021. Empirical wise, two critical specified regressions are estimated. The first measures the response of the structural long-term primary balance as a percentage of GDP to the stock of public debt to GDP ratio. This provides a general judgement whether the fiscal policy is expansionary, neutral or restrictive. Second, a non-linear estimation is implemented to test for the possibility of fiscal fatigue. the existence of an inverse U-shaped response can be used to endogenously determine a debt threshold above which the government is unable to keep its fiscal position within the sustainability condition. Findings of the first regression indicate that the government is unable to adjust its structural primary balance positively with the increase in the stock of previous debt to GDP ratio during the examined time period. Thus, fiscal policy of the Egyptian government tends to be restrictive during the examined time period. Furthermore, the fiscal fatigue hypothesis applies as the magnitude of government fiscal response is conditioned by the level of accumulated public debt. At low levels of debt to GDP ratio the government adjustment of its primary balance is not structurally planned. Government show weak response. When the level of accumulated debt to GDP ratio goes high, government undertakes serious measures and effectively adjust the primary balance to GDP with the increased public debt. however, when the level of the previous debt to GDP ratio jump to extreme high levels, government is unable to maintain the positive response indicating the possibility of fiscal fatigue and fiscal default. The research emphasizes the necessity of a planned serious fiscal actions to correct the long-term response. Cyclical automatic response of the government should be revised. Moreover, Non-interest expenditures should be structurally adjusted to maintain the required level of government reasonable primary balance.
VL  - 11
IS  - 2
ER  -

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