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Egypt’s debt-for-climate swap proposal unlikely to help

Climate-linked debt instruments are a promising way to finance climate action, but they are still too expensive for many developing countries.

Egypt’s debt-for-climate swap proposal unlikely to help
[Source photo: Anvita Gupta/Fast Company Middle East]

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Egypt is a highly indebted country, with a public debt-to-GDP ratio of over 100%. Since 2015, the Egyptian government has heavily relied on borrowing from global markets and multilateral partners.

This makes it difficult for the country to attract new debt financing, even for climate-friendly projects. 

Recently, at the Africa Climate Summit in Nairobi, Egypt’s Prime Minister Mostafa Madbouly reiterated his country’s call for a “single and effective” mechanism to swap the debt of low and middle-income countries for climate financing.

However, the proposal has been met with skepticism from experts, who point to Egypt’s large debt burden and the challenges of mobilizing sufficient climate financing.

A debt swap is a debt conversion process whereby the debtor and the creditor agree to waive the debt, in part or total, in return for certain obligations the debtor must meet.

In climate financing, a debt swap could involve a country exchanging its debt for climate-friendly investments, such as renewable energy projects or disaster risk reduction measures.

According to the Central Bank of Egypt, Egypt’s external debt jumped to nearly $163 billion by December 2022 from under $40 billion in 2015. 

Since sustainability-linked financial instruments designed to reward borrowers for meeting environmental or social goals are untested, it is unclear whether they could provide enough funding to meet Egypt’s climate financing needs.

While bilateral debt swaps have benefited Egypt’s development, they have not significantly impacted the country’s overall debt burden. At only 10%, Egypt’s bilateral debt is a small fraction of its external public debt, totaling just over $11 billion. 

In June, Egypt was forgiven $54 million in debt by Germany to be used for green energy. However, this only constitutes 2.3% of Egypt’s total debt to Germany.

In a 22-year-old debt swap program with the Italian government, the debt forgiven and redirected to food security, poverty reduction, education, and health projects has amounted to only $349 million. 

Egypt’s short-term external debt is high, amounting to $30.2 billion and representing 89% of its foreign reserves. This means the country could face difficulty repaying its debts if there is a sudden capital outflow.

The total foreign debt service as a percentage of exports of goods and services and primary income has also increased. This means the country spends more of its export earnings on debt repayment, leaving less money available for other priorities.

This has led to growing concerns about Egypt’s ability to meet its repayment obligations. In May, Moody’s put Egypt’s B3 ratings on review for downgrade, citing a foreign liquidity shortage. Fitch has also downgraded Egypt’s outlook from B+ to B for similar reasons.

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