The external debt‐inflation nexus in Egypt

Abstract

Egypt has a long history with external financing dating back to the 19th century. Nevertheless, Egypt's external debt has been mounting remarkably in the past few years. This paper examines the impact of Egypt's external debt on its price level, a topic ignored by researchers. Nonetheless, as inflation is a hydra‐headed problem, this paper develops several models which incorporate fiscal and monetary policies besides other inflation‐inducing internal and external factors using monthly data extending from 2000M1 to 2020 M1. By employing ARDL cointegration analyses on monthly time series variables and using Egypt's wholesale price index to account for inflation, the paper concludes that external debt raises prices both in the short and long runs. Moreover, money supply and interest rate were also found to increase prices in the long run long despite decreasing them in the short run. Finally, upsurges in the international prices of primary products stimulate domestic prices both in the short and long terms, while depreciation in the local currency aggravates inflation in the short and long terms as well. As external debt raises inflation and affects many other inflation‐inducing factors indirectly, the paper concludes that reducing Egypt's external debt may help in curbing Egypt's inflation.

Does external debt drive inflation in Sudan: evidence from symmetric and asymmetric ARDL approaches

“…This result is in line with the findings of Abate (2020) of a long-run positive relationship between money supply and inflation in Ethiopia from 1985 to 2018. It also aligns with the findings of Kumar and Dash (2020) in India and Helmy (2022), who found money supply to have a statistically significant positive impact on inflation in Egypt in the long run, using quarterly data from 2000 to 2020. Also, this monetary theory of inflation is supported by the findings of Benati (2021), who used data on 27 countries and found a one-for-one relationship between broad money growth and long-term inflation.…”

“…For instance, Benati (2021) used data from 27 countries and found a one-for-one relationship between broad money growth and long-term inflation. For additional evidence on the role of money supply in inflation, see the findings of Abate (2020) for Ethiopia, Kumar and Dash (2020) for India, and Helmy (2022) for evidence in Egypt.…”

Does External Debt Stocks Have an Asymmetric Effect on Inflation Dynamics in Cameroon? An Application of Nonlinear ARDLL

“…The study found public debt to have a positive and significant effect on inflation for GMM estimates while PMG estimation indicated that public debt is deflationary in the short run but inflationary in the long run. Equally, Heba (2021) found that external debt elevates prices both in the short and long runs in Egypt. His findings are consistent with that of Aisen, & Veiga (2006) who conclude that external finance deficit increases both inflation and interest rates.…”

“…2(2) 17-23, 2023 external debt decrease when the inflation rate increase. Helmy (2021) using Egypt as a case study concludes that in the short run and long run, external debt deteriorates inflation. Similarly, Boshra (2023) indicates that in both the short and long run, inflation has a decreasing impact on external debt.…”

Inflation targeting: A time-frequency causal investigation

“…Moreover, developing economies often grapple with substantial external debt, exposing them to fluctuations in global financial markets. This susceptibility can create difficulties for central banks as they endeavor to oversee and stabilize domestic inflation rates [ 6 , 7 ]. Furthermore, in developing economies, reduced central bank credibility leads expectations to be anchored in historical data, thereby increasing their reliance on past information.…”