Surge in public debt imperils Mena recovery: IMF

Dubai - In the Middle East and North Africa, fiscal deficits widened to 10.1 per cent of GDP in 2020 from 3.8 per cent of GDP in 2019

The financing needs of the Middle East and North African countries are projected to increase over the coming two years, the International Monetary Fund warned on Sunday, as it raised the requirement of emerging markets in the region to around $1.1 trillion during 2021-2022 from $784 billion in 2018-2019.

The IMF warned that the regional economies needed to curb their financing requirements, as a surge in government debt, exacerbated by the pandemic, threatens recovery prospects.

“High financing needs could constrain the policy space required to support the recovery,” the global lender said, in its latest Regional Economic Outlook Update report released Sunday.

Lower demand and a slump in commodity prices eroded state finances last year. In the Middle East and North Africa, fiscal deficits widened to 10.1 per cent of GDP in 2020 from 3.8 per cent of GDP in 2019.

The crisis led many countries to raise debt, partly taking advantage of abundant liquidity in the global markets, to afford extra spending needed to mitigate the impact of the pandemic.

The Washington-based find said the rising financial needs presents stability risks and could slow economic recovery. Many countries rely on domestic banks to fund sovereign needs, which could make credit less easily available for corporates and small enterprises.

It said countries with high external debt have also become more vulnerable to a tightening of global financial conditions, which would increase their borrowing costs and curb access to markets.

“Although comfortable reserve levels provide support for the region’s emerging markets, vulnerabilities for countries with elevated external debt and limited fiscal space are higher,” the Fund said.

“Countries need to implement policies and reforms to help reduce elevated public gross financing needs and, over time, mitigate the concentration of bank exposure to the sovereign,” it said.

The IMF noted that Middle East and North African countries that have made progress in vaccination would bounce back to pre-pandemic levels next year. By contrast, slow and late innoculators will happen recover sometime between 2022-23.

Jihad Azour, director of the Middle East and Central Asia Department at the IMF, said the current recovery is moving on a diverging path with the vaccine rollout and the policy response playing an important role in the quality and the depth of the recovery.

“This multi-speed recovery is on different levels, one between those who are fast in inoculating the vaccine and who will rapidly reach a level of full coverage of their population or 75 per cent or so, and those who will be slow in vaccinating, and those who will be late,” he added.

Many countries in the region, especially in the GCC, have launched vast vaccination campaigns and are administrating some of the fastest per capita deliveries in the world. On the other hand, access to adequate vaccine supplies remains a challenge for many others due to worldwide shortages, internal conflicts or political troubles, and weak finances.

After a 4.8 per cent contraction in 2020, Gulf states are now expected to grow by 2.7 per cent this year, an upgrade of 0.2 per cent from October.

Across the Middle East and North Africa region, the real GDP growth is expected to pick up to 4.0 per cent in 2021 underpinned by strong policy responses and a better-than-expected external backdrop, the IMF said.

The IMF said while the vaccine offers hope that the end of the crisis could be in sight, the wide variance in the vaccine rollout is leading to a prolonged and uneven economic recovery.

issacjohn@khaleejtimes.com