Chronicle of the Middle East and North Africa

Financial Crisis likely to Worsen in many Arab Nations

There is a general concern that the Lebanese scenario may unfold in many Arab countries as a result of the financial crisis compounding other crises.

Financial Crisis
A money changer counts notes at his shop in the Lebanese capital Beirut . ANWAR AMRO / AFP

Ali Noureddine

This article was translated from Arabic.

The foreign debt crisis in the Arab region

The World Bank has been warning of the rising foreign debt in oil-importing nations in the Arab region since 2021, when it amounted to about 93 per cent of their GDP.

All economic indicators suggest that 2023 will see several of these debts turn into crises that some of these countries may not be capable of handling. A number of occurrences in 2022 increased the negative impact of these debts on these countries and their peoples.

Due to the debt crisis compounding other crises, including a fall in foreign reserves and a shrinking inflow of remittances, there is a general concern that the Lebanese scenario may unfold in many Arab countries.

Mounting debt and decline in economic activity

As a consequence of the Coronavirus pandemic, the combined GDP of the Middle East and North Africa region fell from $3.47 trillion in 2019 to $3.12 trillion in 2020, signaling the start of the region’s foreign debt crisis. In other words, the waves of thorough lockdowns imposed throughout the pandemic reduced the size of their combined economies by approximately $350 billion.

The volume of remittances received by the countries in the region decreased from $59.63 billion in 2019 to $53.42 billion in 2020 during the same year. This fall in remittances to home countries was caused by decreased economic activity brought on by the pandemic in the nations where expatriates worked.

This state of affairs has left the governments of oil-importing countries that do not enjoy revenues from the export of natural resources facing two simultaneous crises: a decline in tax revenues due to a slowdown in economic activity, and a decrease in their foreign currency reserves as a result of the decline in remittances from abroad.

The scarcity of foreign currency reserves often leads to a decline in the exchange rates of local currencies due to the unavailability of the hard currency required to finance imports. Meanwhile, the decline in tax revenues led to an increase in the budget deficit of the countries of the Middle East and North Africa from 3.8 per cent of GDP in 2019, to 10.1 per cent in 2020.

Countries of the Arab region were thus forced to resort to foreign loans in 2020 and 2021 in order to float their budgets and cover the cost of social protection networks that were immensely needed during the pandemic, as well as to obtain hard currency to cover the deficit in the balance of payments.

Due to all these trends, the cumulative total debt of Arab nations by 2022 exceeded $1.5 trillion.

Egypt has the highest government debt of any of these nations, exceeding $409.5 billion and surpassing 94% of its GDP. Sudan’s debt-to-GDP ratio, which was higher than 284%, ranked first globally.

2022: the year of a worsening foreign debt crisis

In 2022, as events in the world economy intensified the consequences of the growing foreign debt, the countries of the Arab region, especially those that import oil, began to realize the risks of this phenomenon.

Since March of 2022, the U.S. Federal Reserve has been raising target interest rates, which has peaked at around 4.5 per cent compared to just 0.25 per cent at the start of 2020. It was only inevitable that the rising interest rates on the U.S. currency would cause increasing interest rates on the inflated debts owed by governments in the Arab region.

The war in Ukraine exacerbated matters by unleashing a wave of inflation worldwide that saw increases in the prices of all raw materials and basic commodities, including oil and foodstuffs. This, in turn, led to a further increase in the deficit in the balance of payments of Arab countries importing food and oil, and contributed to further scarcity of foreign currency reserves.

Countries were thus forced to borrow to cover their deficits, which in turn contributed to further increases in foreign debt. Furthermore, due to the scarcity of hard currency that accompanied these developments, they had to borrow even more to service their massive debts.

As a result, Egypt was compelled to turn to the IMF in 2022 as a last resort to secure an additional $3 billion loan under the condition that the Egyptian government receives these funds in installments across a 46-month period.

Meanwhile, Tunisia, in a bid to address its financial crises, reached an agreement at the staff level with the Fund in mid-October to obtain $1.9 billion in new financing, which will be paid over a period of 48 months.

Authorities in Sudan also resorted to the IMF to secure a $2.5 billion loan, while the U.S. administration agreed to grant the country an interim loan of $1.15 billion to pay off arrears owed to the World Bank. Despite the suspension of all these agreements in the wake of the military coup in the country, these loans are expected to be completed once Sudan begins implementing the political agreement to transfer power to civilians.

Lebanon, which has defaulted on paying its debts since 2020, signed an agreement with the IMF at the staff level in April 2022 to obtain $3 billion in financing. The country’s presidential vacuum, however, has so far impeded the implementation of the terms of this agreement, which has delayed Lebanon’s entry into the promised loan program.

On the other hand, some countries such as Morocco have opted to resort to World Bank programs to secure loans to deal with the repercussions of the war in Ukraine, climate change and the effects of the Coronavirus pandemic.

All these examples illustrate how the accumulation of massive foreign debt forced countries of the Arab region to resort to loans from the IMF and the World Bank. They also reveal the financial difficulties precipitated by developments in the global economy in 2022, which pushed them toward such programs that impose such harsh conditions.

Negative developments are expected in 2023

Not much good news is expected in 2023 in terms of the foreign debt crises, especially in the aforementioned countries of the Arab region. The U.S. Federal Reserve is expected the continue its policy of increases in the targeted interest rate that may exceed 5.1 per cent by the end of 2023. This will inevitably lead to further increases in foreign debt interests, and greater deficits in the budgets of borrowing countries.

The IMF also expects that 2023 will record high inflation rates of around 6.5 per cent in global markets which will increase importing countries’ need for hard currency to finance imports of food and oil as well as the deficit in their balance of payments.

All of these developments will directly impact the standard of living of people in the borrowing countries, whose budgets will be exhausted by paying off their debt, impairing their capacity to spend on social safety nets and public services.

Because of their financial struggles, these nations will be unable to invest in the infrastructure that will help their economies develop and draw in international capital.

Furthermore, if their debts continue to increase in size as a result of these countries’ efforts to pay off interest and deficits in their public budgets, a snowball effect of tremendous proportions is expected to follow.

The Arab world’s nations, particularly those that rely on oil imports, must be conscious of the dangers posed by these shifts and work to develop comprehensive economic plans. They must address the imbalances in their public spending plans and budgets as well as the structural imbalances in their local economies. These changes call for more effective debt management to reduce interest rates, improve the efficiency of public spending, and see the creation of support systems for the most vulnerable groups.

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