MENA Countries Must Diversify Income to Address Deficit

Region is Facing a Rapid Accumulation of Public Debt Due to Covid-19
A picture taken on December 16, 2020 shows newly constructed towers in Riyadh, the Saudi Arabian capital and main financial hub. (Getty)

The World Bank has recently warned that economies of the Middle East and North Africa (MENA) region are suffering a sudden accumulation of public debt owing to challenges caused by the coronavirus (Covid-19) that pushed the region’s countries to spend much money on healthcare in order to stop the spread of this pandemic.

In its recent report, the World Bank revealed the estimated accumulated cost of the pandemic in terms of gross domestic product (GDP) losses by the end of 2021 will amount to USD 227 billion in the region.

Great Impact

The report showed that the value of the region’s economies has shrunk by 3.8 percent in 2020, 1.3 percentage points higher than World Bank forecasts last October. However, the regional growth estimate is 6.4 percentage points lower than the pre-pandemic growth forecast published in October 2019.

"When MENA governments increased borrowing to address Covid-19, they saved lives and livelihoods, all investments in human capital," said Ferid Belhaj, World Bank Vice President for the Middle East and North Africa.

An Assistant Professor of Economics at Kuwait University elaborated the reasons and timing of the debt--

“There are two groups of MENA; the first group includes oil-producing countries and the second is non-oil countries. The non-oil countries like Jordan, Lebanon and Egypt have borrowed for some time, and have depended on some Arab development funds, Gulf investments and remittances of their workers in the Gulf area,” Dr. Reyadh Faras, an Assistant Professor of Economics at Kuwait University, told Majalla. 

Things Got Worse

“Things got worse after the eruption of Covid-19 pandemic. The Gulf States themselves have been suffering debt due to the pandemic, therefore their financial flow to the non-oil countries in the MENA region have been severely reduced. This will have a great impact on the non-oil countries for several years,” Faras confirmed to Majalla.

Meanwhile Belhaj said, "We can see hopeful signs of light through the tunnel, especially with the deployment of vaccines, but the region remains in crisis. Strong institutions are crucial to absorbing this crisis, re-launching economies, and building them back stronger and more resilient in the years ahead.”

"Transparency will play an important role in helping MENA countries address the tradeoffs between the short-term needs and the long-term risks of public debt," Roberta Gatti, World Bank Chief Economist for the Middle East and North Africa Region, said in press release published earlier this month.

"Transparency in the use of public information on the spread of Covid-19 as well as the vaccination programs can help accelerate the recovery. In turn, reforms that improve debt transparency and the quality of public investment can be implemented immediately, reducing borrowing costs and raising long-term growth. Simply put, transparency can help chart a path to lasting recovery for the MENA region,” Gatti noted.

Challenges Aggravate

Challenges in the region have been exacerbated due to the Covid-19 pandemic that contributed to an increase in poverty, a decline of public finances, a rise in debt vulnerabilities, and a further erosion of trust in government, the report made clear.

Faras called on MENA’s non-oil countries to take steps to reform their economies so as to address their debts and overcome their financial problems, noting that they should search for more varied investments.

The essential borrowing done by MENA governments in order to sustain the funding of necessary health and social protection measures increased government debt dramatically, according to the report.

Growing Debt

The average public debt in MENA countries is expected to rise 8 percent, from about 46 percent of GDP in 2019 to 54 percent in 2021, while debt among MENA oil importers is expected to average about 93 percent of GDP in 2021, warned the report.

“Concerning the oil countries, they had to borrow for the first time in 2014 when oil prices dropped dramatically. They had to compensate for the depressed oil prices by two methods: first to liquidate some sovereign assets to address the budget deficit - like Kuwait and Saudi Arabia; and to borrow funds which was done on local and international levels,” Faras showed.

“Such strategies increased debts in a number of countries like Bahrain whose public debt exceeded 128 percent of GDP in 2020, and Saudi Arabia whose debt was 34 percent of GDP due to the pandemic,” he revealed. Kuwait’s debt hit 19.3 percent of GDP in 2020.

Faras referred to a bill submitted by the Kuwaiti government to the National Assembly on regulated borrowing from Kuwait’s sovereign fund, noting that there is a consensus on all sides about this measure.

Finding a Solution

Faras called for finding a solution to this deficit, elaborating that price of an oil barrel should be 90 USD in the 2021-2020 Kuwaiti budget to address this issue. He demanded diversifying the countries’ economies, saying that “Saudi Arabia is the strongest economy in the Arab countries, followed by Egypt and the UAE, but Djibouti, Comoros and Yemen have lower positions in the list.”

Faras noted that Saudi Arabia made many financial and economic reforms, expecting that the deficit will drop to 5 percent of GDP in 2021 compared with 12 percent in 2020.

The report affirmed that MENA countries must continue spending on healthcare and social protection as long as the pandemic exists. Consequently, in a post-pandemic world, most MENA countries may find themselves stuck with a debt service requiring resources that otherwise could be used for economic development.

Kuwaiti clerks sort banknotes at a currency exchange shop in Kuwait City on September 7, 2020, a sector heavily affected by the COVID-19 pandemic which caused a sharp drop in travel and tourism. (Getty)

Diversifying Income

Faras called for varying public incomes in the oil-states, while the non-oil countries need more foreign investment and an active role of the private sector as they do not have sources of income as do the oil countries. Accordingly, the non-oil countries need to pay much attention to tourism and industry.

“Saudi Arabia has made a varied economy in tourism, industry and others. UAE’s economy has been diversified into the sectors of property, business and tourism. Egypt has several free zones that boost its economic status,” he told Majalla.

Furthermore, Kuwaiti economic researcher and consultant Amer Al-Tamimi warned against continued budget deficits in the Gulf states.

“The Gulf Cooperation Council (GCC) member states will continue facing budget deficits owing to the drop in oil prices below the balance between revenues and expenditures,” Al-Tamimi told Majalla.

“So, these countries will have to borrow from the local and international financial markets or issue treasury bills and bonds,” he said, signaling that the accumulation of public debt may rise to more than the 54 percent as mentioned in the report.

“However, the solution lies in rationalizing spending and generating sustainable non-oil revenues. Some Gulf countries have managed to diversify their economies in creative and better ways than others in the GCC bloc. These countries will be able to set appropriate foundations for sustainable development,” Al-Tamimi recommended.

On addressing the tensions between the short-term objectives and the long-term risks of rising public debt in MENA countries, the report proposed some options during three distinct phases of economic recovery: spending priorities during the pandemic; fiscal stimulus as the pandemic subsides; and, alleviating the potential costs of a debt overhang in the medium term.