Exploring the Impact of Twin Deficit on External Debt in Egypt During the period (2006-2022)

Document Type : Original Article

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Economics department, Faculty of Commerce, Damanhour University

Abstract

The purpose of this research is to analyzes the effects of both external and internal imbalances on external debt in Egypt during the period (2006-2022). The empirical analysis includes three stages, starting with conducting the Toda-Yamamoto causality test to ascertain the direction of causality between fiscal deficit, current account deficit and external debt. Then, the autoregressive distributed lag (ARDL) approach is utilized to determine the short and the long run effects of fiscal deficit and current account deficit on external debt. Furthermore, the Break Least Squares (BLS) estimation is employed to explore whether the structural breaks that resulted from the political and economic events experienced during the study period have resulted in various effects on the relationship between the utilized variables.
The results of the Toda and Yamamoto causality test established the existence of causality running from current account balance to external debt as a percentage of GDP. The ARDL model revealed that the current account surplus reduces external debt in the long run while fiscal deficit increases external debt. The BLS detects multiple structural breaks and emphasizes the different effects during each time period. This research has important implications regarding the importance of generating current account surplus in mitigating the problem of external debt, also reducing the budget deficit is important as persistent deficit aggravates the external debt problem.

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