Why did Arab countries sink into debt?

Public debt of half of the Arab countries exceeds 90 per cent of GDP, with the expectation that there will be a rapid increase in both the absolute figure and the ratio of the public debt to GDP due to the continuous increases in the budget deficit since the global financial crisis in 2008.

The continuing budget deficit is the most important reason for the rise in the public debt of the Arab countries. Public debt in Arab oil-importing countries rose from 64 per cent of GDP in 2008 to 85 per cent in 2018. In contrast, public debt in oil-exporting countries, including the six member states of the Gulf Cooperation Council, rose from only 13 per cent of GDP in 2008 to 33 per cent in 2018, driven by the collapse of oil prices since 2015. This is a clear indication that the Arab region has not yet recovered from the global financial crisis and economic, political and social turmoil during the last decade.

Over the last few years, radical changes have taken place in terms of indebtedness in the Arab countries. Until a few years ago, the Arab countries, with the exception of a few of them (Jordan and Lebanon), were not highly indebted countries. Oil-producing countries, such as Libya, Saudi Arabia, Kuwait, the UAE and Qatar were among the capable donors in providing financial aid, loans and guarantees to other countries.

It is clear that the Arab world, with the exception of Kuwait and the UAE, is moving strongly to rely on foreign and local debt to fulfil the growing deficit exacerbated in its budgets. The reliance on borrowing and the sale of bonds and grants is no longer confined to poor and middle-income countries, such as Jordan, Tunisia and Morocco, but rather to oil-producing countries.

The main problem of the Arab debt is that the new loans are used to meet previous commitments or to meet the current expenditures of their budgets. Consequently, the increase in indebtedness does not reflect deep economic reforms, viable investments or expansion of capital expenditure. Recent borrowings is for current unproductive purposes and not for worthwhile investment purposes. This is why debt accumulates.

In the search for the causes of rising indebtedness in Arab countries, one finds that the reasons at oil-exporting countries are due to the following factors: The drop of oil prices to less than half since 2014, spending on armaments in some Arab countries continues to increase, rising costs of war, tensions and divisions among some countries in the region and the siege imposed on others the ambitious projects in the field of infrastructure and tourism in some other countries.

The reasons for the increase in indebtedness in oil-importing countries include: First, the surrounding political tensions and the movements of asylum-seekers, such as in Jordan and Lebanon. Second, foreign aid and grants have fallen in comparison to previous periods. Third, the relative size of the public sector and its high costs on the treasury. Fourth, economic reform and reform programmes with international institutions that opened up their appetite for borrowing. Fifth, the high burden of public debt service, which has become a high proportion of the budget current expenditure items in many Arab countries. Sixth, resorting to a new loan to service an old loan.

To ensure the sustainability of public debt in Arab countries, and in order to maintain long-term Arab states' ability to meet their outstanding obligations, they have to be able to repay their debts on time. This requires setting public debt ceilings similar to that of the eurozone debt limits, 60 per cent of GDP, prevent public debt service from becoming a burden on the treasuries of those states and that indebtedness would grow at lower rates than GDP growth rates.

To alleviate the problem of indebtedness, the following should be done: First, address the annual budget deficit of Arab countries through rationalisation of public expenditure. Second, search for long-term, low-cost external sources of debt and practice less dependence on conditional borrowing that causes negative effects on the economies of Arab countries. Third, find clear and long-term public debt strategies aimed at addressing all issues of public debt, including establishing clear scientific and practical bases for domestic and foreign borrowing in terms of size and countries which can be borrowed from, thus setting specific criteria for borrowing. It also includes a clear road map for reducing public debt within a specified period of time. Fourth, stimulate economic growth in Arab countries and increase domestic and foreign direct investments, so that debt-to-GDP ratio can be reduced in the near future.

The writer is director general of the Association of Banks in Jordan. He contributed this article to The Jordan Times