MENA economies face rapid build-up of public debt
The accumulated cost of the pandemic is expected to reach $ 227 billion by the end of 2021
WASHINGTON, April 2, 2021 – The COVID-19 pandemic has exacerbated long-standing development challenges in the Middle East and North Africa (MENA) region, contributing to increasing poverty, deteriorating public finances, increased vulnerability to debt and further erosion of trust in government.
The large loans that MENA governments have taken out to finance health and social protection measures have increased public debt. Countries must continue spending on health and income transfers, which will add to the already high debt burden and lead to complex policy decisions after the pandemic has ended.
The World Bank’s latest regional economy update report, titled Living with Debt: How Institutions Can Pave the Way for 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 public debt explosion, and the difficult choices governments will face, even as the public health crisis s ‘attenuates.
For example, the report shows that the region’s economies have contracted by 3.8% in 2020, which is 1.3 percentage point above World Bank forecasts in October 2020; however, the estimate of regional growth is 6.4 percentage points lower than the pre-pandemic growth forecast published in October 2019. The estimated cumulative 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 only expected to partially recover in 2021, but this recovery depends in part on a fair deployment of vaccines.
“When MENA governments increased borrowing to fight COVID-19, they saved lives and livelihoods, all investments in human capital,” mentionned Ferid Belhaj, World Bank Vice President for the Middle East and North Africa. “We can see encouraging signs of light through the tunnel, especially with the rollout of vaccines, but the region remains in crisis. Strong institutions are essential to absorb this crisis, revive economies and rebuild them stronger and more resilient in the years to come. “
According to the report, the large loans that MENA governments have had to contract to finance essential health and social protection measures have significantly increased public debt: the average public debt of MENA countries is expected to increase. 8 percentage points, from around 46% of GDP in 2019 to 54% in 2021. Notably, the debt of MENA oil importers is expected to average around 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 health care and social protection as long as the pandemic continues. Therefore, in a post-pandemic world, most countries in the MENA region may find themselves with debt service bills requiring resources that could otherwise be used for economic development.
Addressing what MENA countries can do to resolve the tensions between short-term goals and the long-term risks of rising public debt, the report examines policy options during three distinct phases of the recovery. economic:
- Spending priorities during the pandemic;
- Fiscal stimulus as the pandemic abates;
- Mitigate the potential costs of over-indebtedness in the medium term.
Governance and transparency issues appear as central protagonists in all three phases.
“Transparency will play an important role in helping MENA countries cope with the trade-offs between short-term needs and long-term public debt risks.,” mentionned Roberta Gatti, World Bank Chief Economist for the Middle East and North Africa Region. “Transparency in the use of public information about the spread of Covid-19 and vaccination programs can help speed recovery. In turn, reforms that improve debt transparency and the quality of public investments can be implemented immediately, lowering borrowing costs and increasing long-term growth. Simply put, transparency can help pave the way for a sustainable recovery for the MENA region.“
The World Bank Group, one of the most important sources of finance and knowledge for developing countries, is taking broad and swift action to help developing countries strengthen their response to the pandemic. It supports public health interventions, works to ensure the flow of essential supplies and equipment, and helps the private sector continue to function and maintain jobs. The WBG is making up to $ 160 billion available over a 15-month period ending in June 2021 to help more than 100 countries protect the poor and vulnerable, support businesses and support economic recovery. This includes $ 50 billion in new resources from IDA in the form of highly concessional grants and loans and $ 12 billion for developing countries to finance the purchase and distribution of COVID-19 vaccines.