MENA Economies Face Rapid Accumulation of Public Debt; Strong Institutions Will Be Key to Recovery

Washington: The COVID-19 pandemic exacerbated long-standing development challenges in the Middle East and North Africa (MENA) region, contributing to a rise in poverty, a deterioration of public finances, an increase in debt vulnerabilities, and a further erosion of trust in government.

The substantial borrowing that MENA governments incurred to finance health and social protection measures increased government debt. Countries must continue spending on health and income transfers, which will add to already high debt burdens and lead to complicated policy decisions after the pandemic recedes.

The World Bank’s latest regional economic update report, entitled Living with Debt: How Institutions Can Chart a Path to Recovery in the Middle East and North Africa, details the economic devastation of the COVID-19 pandemic to date, the long-term ramifications of the resulting explosion in public debt, and the difficult choices governments will face, even as the public health crisis abates.

As an example, the report shows that the region’s economies are estimated to have contracted by 3.8% in 2020, which is 1.3 percentage points above the World Bank forecasts in October 2020; however, the regional growth estimate is 6.4 percentage points lower than the pre-pandemic growth forecast published in October 2019. The estimated accumulated cost of the pandemic, in terms of gross domestic product (GDP) losses by the end of 2021, will amount to $227 billion. The region is expected to recover only partially in 2021, but that recovery is, in part, dependent on an equitable rollout of vaccines.

“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. “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.”

According to the report, the substantial borrowing that MENA governments had to incur to finance essential health and social protection measures increased government debt dramatically: the average public debt in MENA countries is expected to rise 8 percentage points, from about 46% of GDP in 2019 to 54% in 2021. Notably, debt among MENA oil importers is expected to average about 93% of GDP in 2021.

The need to keep spending — and keep borrowing — will remain strong for the immediate future. MENA countries will have no choice but to continue spending on healthcare and social protection as long as the pandemic continues. Consequently, in a post-pandemic world, most MENA countries may find themselves stuck with debt service bills requiring resources that otherwise could be used for economic development.

Addressing what MENA countries can do to resolve the tensions between short-term objectives and the long-term risks of rising public debt, the report discusses policy options during three distinct phases of economic recovery:

Expenditure priorities during the pandemic;
Fiscal stimulus as the pandemic subsides;
Mitigating the potential costs of debt overhang in the medium term.
Governance and transparency issues emerge as central protagonists across all three phases.

“Transparency will play an important role in helping MENA countries address the tradeoffs between short-term needs and the long-term risks of public debt,” said Roberta Gatti, World Bank Chief Economist for the Middle East and North Africa Region. “Transparency in the use of public information on the spread of Covid-19 and 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.”

COVID-19 Response

The World Bank Group, one of the largest sources of funding and knowledge for developing countries, is taking broad, fast action to help developing countries strengthen their pandemic response. It is supporting public health interventions, working to ensure the flow of critical supplies and equipment, and helping the private sector continue to operate and sustain jobs. The WBG is making available up to $160 billion over a 15-month period ending June 2021 to help more than 100 countries protect the poor and vulnerable, support businesses, and bolster economic recovery. This includes $50 billion of new IDA resources through grants and highly concessional loans and $12 billion for developing countries to finance the purchase and distribution of COVID-19 vaccines.