Dubai, UAE – The Middle East and North Africa region faces a growing challenge: a significant rise in government debt relative to their economies.
According to a recent World Bank report titled “Economic Update in the Middle East and North Africa,” the debt-to-GDP ratio in the region has increased by over 23 percent in the past six years, translating to an average annual increase of roughly 4 percent. This trend is concerning not just for the MENA region but for the global economic landscape.
The COVID-19 pandemic acted as a catalyst for this debt surge. Lockdowns and economic disruptions caused government revenues to plummet while social safety net programs and healthcare expenditures skyrocketed. This perfect storm forced many MENA countries to borrow heavily to meet their financial obligations.
The report highlights a staggering increase of over 11 percentage points in the debt-to-GDP ratio in 2020 alone, a direct consequence of the pandemic’s economic fallout.
However, there are signs of recovery. As the pandemic waned between 2020 and 2023, the debt-to-GDP ratio in 13 MENA countries started to decline. This indicates a positive effort by governments to reign in borrowing and stabilize their finances.
However, the road to pre-pandemic levels remains long for most. Only eight out of 19 MENA countries managed to return to their pre-pandemic debt-to-GDP ratios by 2023.
The situation in individual MENA countries varies. Egypt, Lebanon, and Yemen stand out for experiencing ongoing increases in their debt-to-GDP ratios in 2023. These countries likely faced unique economic challenges that prevented them from joining the region’s broader debt stabilization trend.
A Global Debt Problem with Regional Implications
The debt crisis in the MENA region is not an isolated phenomenon. In a broader context, the World Bank report sheds light on a global issue: the ballooning debt of emerging economies.
The Institute of International Finance estimates that emerging market debt has reached a staggering US$100 trillion—a significant leap from the US$75 trillion recorded in 2019. This alarming trend is further compounded by the worsening debt situation of low-income countries.
This global debt burden has far-reaching consequences. Kristalina Georgieva, Director-General of the International Monetary Fund, emphasizes the issue’s gravity. She points out that the era of ultra-low interest rates that fueled much of the global debt accumulation is over. As interest rates rise, the cost of servicing this debt becomes increasingly burdensome.
The report echoes this concern, highlighting that high debt levels can lead to a vicious cycle: rising interest payments eat away at government budgets, hindering investments in vital areas like infrastructure, education, and healthcare – all crucial ingredients for long-term economic growth.
Oil and the Divergent Paths of MENA Economies
The report also highlights a significant disparity within the MENA region. Oil-importing countries have been disproportionately affected by the debt crisis.
The debt-to-GDP ratio in these nations jumped by a concerning 10 percent between 2019 and 2020, reflecting their vulnerability to external factors like oil price fluctuations.
In contrast, most oil-exporting countries in the region witnessed a net decline in their debt-to-GDP ratios over the same period. The 2022 oil price surge brought a much-needed financial boost to these economies, significantly improving their fiscal balances.
Looking Forward: Navigating the Debt Challenge
The MENA region faces a crucial challenge in managing its growing debt burden. While the post-pandemic decline in debt-to-GDP ratios offers a glimmer of hope, many countries remain above their pre-pandemic levels. Moving forward, governments will need to implement sound fiscal policies that prioritize economic growth while ensuring debt sustainability. Diversifying their economies away from a reliance on oil will be crucial for oil-importing nations.
Additionally, exploring innovative financing mechanisms and international cooperation can help MENA countries address their debt challenges and build a more resilient future.
The situation in the MENA region underscores the global interconnectedness of the debt issue. As the International Monetary Fund has highlighted, rising interest rates pose a significant risk for highly indebted economies worldwide.
Addressing this challenge requires a coordinated effort at both national and international levels. By implementing sustainable borrowing practices, fostering economic growth, and fostering international cooperation, countries can navigate these turbulent economic waters and secure a more stable financial future.
The rising government debt in the MENA region presents a complex challenge that demands immediate attention. While the recent decline in debt-to-GDP ratios offers a reason for cautious optimism, the long-term path to fiscal sustainability requires a multi-pronged approach.
Governments must prioritize responsible spending, explore avenues for economic diversification, and implement innovative financing solutions. International cooperation, focusing on knowledge sharing and debt relief initiatives, can also play a vital role in supporting the MENA region’s efforts to achieve sustainable debt levels. By acknowledging the global nature of the debt crisis and taking proactive measures, MENA countries can pave the way for a more prosperous and resilient future for their citizens.