Debt Service as an Intertemporal Constraint: ARDL Evidence on Debt Overhang in Egypt

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3-25-2026

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Debt Service as an Intertemporal Constraint: ARDL Evidence on Debt Overhang in Egypt

by Sarah El-Khishin * and Arwa Mohamed     Economics Department, The British University in Egypt, P.O. Box 43, El Sherouk City 11837, Cairo, Egypt * Author to whom correspondence should be addressed. Economies 2026, 14(4), 105; https://doi.org/10.3390/economies14040105 Submission received: 19 February 2026 / Revised: 19 March 2026 / Accepted: 20 March 2026 / Published: 24 March 2026 Downloadkeyboard_arrow_down Versions Notes  

Abstract

This paper examines the impact of public debt servicing on private investment in Egypt within the debt overhang hypothesis. While existing research largely focuses on the debt–growth relationship, limited attention has been given to how debt servicing burdens affect private capital formation. Using annual data from 1990 to 2023, the study employs an Autoregressive Distributed Lag (ARDL) model to estimate short-run and long-run dynamics between private sector gross fixed capital formation and key mac-roeconomic variables. Results provide statistically significant evidence of a long-run debt overhang effect, whereby debt servicing exerts a persistent negative impact on private investment. Short-run effects appear temporarily expansionary but dissipate as servicing pressures accumulate. The analysis focuses on Egypt-where debt servicing pressures have repeatedly intensified in response to external shocks and exchange rate adjustments-but offers broader implications for emerging market and developing economies. The paper contributes to the literature by identifying repayment capacity as the key transmission channel through which public debt affects private investment. In contexts characterized by liquidity constraints, external vulnerabilities, and refinancing risks, debt servicing burdens-rather than debt levels alone-constitute the binding con-straint on private capital formation. Accordingly, the findings emphasize the im-portance of assessing debt sustainability through servicing obligations and repayment pressures.

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