Some regions of the Middle East and North Africa (MENA) are experiencing a debt storm. The amount of debt in the area has been rising, with certain nations having reached very high levels (Chart 1). Egypt, Jordan, and Tunisia are facing uncertain times ahead of them, with their economic stability on the verge of collapse as they struggle with the possibility of a debt crisis. A sobering example is Lebanon, which is now experiencing one of the world’s worst economic crises. Its abrupt default has brought these nations’ serious debt-related problems and their wider implications into stark relief.
The increasing amount of debt combined with the unfavorable outlook for the world economy is creating a perfect storm (Chart 2). Less availability of low-interest loans and the wealthy MENA oil producers’ unwillingness to provide the unrestricted financial assistance of the past have contributed to this dilemma. The challenging socioeconomic circumstances these nations confront compound this complicated equation by limiting the potential for major budgetary restructuring. Consequently, these nations face an enormous and more challenging problem in ensuring debt sustainability.
Not only are these nations’ chances for economic expansion in jeopardy, but their social stability is as well. Stakes are really high. There is a small window of opportunity for survival among these dire circumstances, but it is one that demands audacious action to confront the debt problem head-on.
Origins of the crisis
The MENA region’s spiraling debt issues are mostly the result of a confluence of unfortunate events and bad policy choices. Every country—Egypt, Jordan, Lebanon, and Tunisia—has a distinct set of issues, distinguished by varying political and economic environments and differences in the makeup of their outstanding debt. However, there is a theme running across their situations.
These countries have been hampered by long-standing structural problems with governance and regulatory frameworks, state-run economies, bloated public sectors that impede the expansion of the private sector, limited mobilization of domestic income, and poorly targeted subsidies. These issues have persisted for a while, mostly as a result of insufficient improvements. Another factor fueling the brewing crisis is their dependence on debt finance and fixed exchange rates. Increased food costs have contributed to spiraling debt levels, and recent shocks like the epidemic and the fallout from Russia’s invasion of Ukraine have made the situation worse. The issue has been made worse by societal issues and mistrust of the government, which prevent the fair allocation of the costs associated with economic change. Therefore, public debt has been used as a short-term, stopgap measure to avoid dealing with economic issues, but without long-term fixes.
Let’s talk about the details:
Egypt’s economy has stagnated for years, mostly due to the military’s extensive economic control. The impact of the epidemic on tourism, along with the soaring price of food imports after Russia’s conflict in Ukraine, have exacerbated Egypt’s problems. Long-term budget deficits and maintaining a constant exchange rate have led to significant financial demands, which are partially satisfied by influxes of short-term capital. Egypt’s gross financing requirements in 2023 represent an astounding 35 percent of its GDP, as reported in the IMF’s April 2023 Fiscal Monitor. As a result, the country is very vulnerable to interest rate increases and rollover risks.
Jordan has also been struggling with slow development, which is partly due to geopolitical and economic upheavals as well as an overpriced fixed exchange rate. Its economy has been further burdened by the massive inflow of Syrian refugees and commercial disruptions that followed the civil conflict in Syria. Jordan has been grappling with managing its public finances in the meanwhile, severely reliant on official assistance and burdened by massive subsidies, public business transfers, and security expenses (mostly due to geopolitical considerations). Thankfully, Jordan is doing well under its current IMF program and has a more effective framework for governing than the other three nations. However, because of its large debt load, it is very susceptible to unfavorable events.
