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Arab Debt Distress
Between IMF Conditionality and Sovereign Autonomy
30 July 2025
Dr. Medhat Nafei
Chairman of Arab Alloys Company and Egyptian Economist
Global public debt reached an unprecedented $102 trillion in 2024. While developing nations held under a third of this total ($31 trillion), their debt has increased at double the rate of advanced economies since 2010.[1]
The Arab region finds itself entangled in an accelerating debt crisis, exacerbated by both domestic weaknesses and global economic turbulence. In the wake of COVID-19, numerous Arab governments turned to borrowing as a short-term buffer. As global interest rates surged due to monetary tightening, aid flows shrank significantly, and commodity markets destabilized, these debts evolved into long-term liabilities that currently challenge national policy sovereignty.
According to the IMF Fiscal Monitor (2025), average gross public debt in middle-income Arab countries now exceeds 85% of GDP. In Egypt and Tunisia, more than 20% of public revenues are allocated to debt service—squeezing fiscal space for vital social services. Lower-income countries like Sudan and Yemen face full-blown balance-of-payments crises triggered by arrears, diminished domestic revenues, and limited access to concessional finance. [2]
The intensifying debt distress extends beyond Arab nations. As the CSIS report aptly notes, global debt levels reached an all-time high, fueled by prolonged low interest rates in the previous decade followed by abrupt tightening in 2022–2023. Emerging and developing economies have been disproportionately affected, with over 60% of low-income countries already in—or at high risk of—debt distress (CSIS, 2023). For Arab countries, these global dynamics intersect with longstanding vulnerabilities: energy subsidies, weak tax systems, bloated public sectors, and exposure to geopolitical volatility.
Global Context: A Shared but Unequal Burden
The Arab region grapples with rising debt distress that mirrors, yet intensifies, broader global trends. While public debt accumulation is not inherently problematic, its current trajectory across many Arab economies raises questions about long-term fiscal sovereignty, macroeconomic stability, and policy autonomy. The following analysis contextualizes the debt challenges facing Arab countries within both the global debt landscape and the unique structural vulnerabilities of the region.
By 2022, approximately 60% of the world’s poorest countries—roughly 75 states—were in or near debt distress, while developing-country external debt climbed to $9.3 trillion. Meanwhile, total global debt swelled by $15 trillion in 2023, peaking at $315 trillion[3]—a surge that exacerbates fiscal disparities. For Arab economies, these trends intensify structural vulnerabilities, including inefficient subsidies, narrow tax bases, and geopolitical risks, further eroding fiscal resilience.
Debt dynamics vary significantly across Arab nations, reflecting divergent economic structures. The Gulf Cooperation Council (GCC) states possess stronger fiscal resilience due to hydrocarbon revenues and sovereign wealth fund assets, which provide substantial financial cushions. However, following oil price declines in 2014 and 2020, even these wealthier nations have increasingly turned to international capital markets—issuing Eurobonds and sukuk—to fund economic diversification efforts.
IMF data (2023) highlights stark contrasts within the region: Saudi Arabia maintained a conservative debt profile, with government debt at less than 25% of GDP, while Oman and Bahrain faced substantially higher ratios of 40% and 100%, respectively.[4]
Conversely, middle-income and low-income Arab countries face far more acute debt risks. Egypt's public debt stood at around 95% of GDP by the end of FY2022/23, and its external debt reached $165 billion, according to central bank data[5]. Tunisia, Lebanon, Jordan, and Sudan all suffer from high debt-service ratios, limited access to concessional financing, and growing social pressures. Lebanon's sovereign default in 2020 continues to serve as a cautionary tale, especially given the country's dollarized economy and prolonged political paralysis.[6]
A deteriorating maturity profile further complicates the Arab world’s debt crisis. While GCC nations have traditionally relied on long-term sovereign instruments (10-30 year bonds), recent years have seen a worrying rise in short-term liabilities—particularly among non-oil economies. Egypt's Treasury bill issuances now comprise 42% of domestic debt, with average maturities shrinking from 5.7 to 3.2 years since 2018 (Central Bank of Egypt, 2023). Similarly, Tunisia's short-term external debt obligations surged to 39% of FX reserves in 2023, up from just 17% pre-pandemic (IMF Country Report, 2023).
The resulting maturity mismatch creates acute rollover risks, as governments must constantly refinance while facing:
- Higher global rates increasing borrowing costs.
- Currency depreciation pressures (for dollar-pegged economies).
- Crowding out of private sector credit.
Creditor shift compounds these risks—Chinese loans (averaging 15-20 year terms) provide temporary relief but often include hidden shorter-term repayment cliffs, while Gulf SWF investments increasingly favor 5-7 year bridge financing rather than long-term development capital.[7]
Conditionality vs. Sovereignty: A Fragile Balancing Act
Arab governments today are caught between the demands of international financial institutions and domestic political realities. IMF lending offers liquidity and credibility but often comes at the cost of fiscal sovereignty. Egypt’s 2023 Extended Fund Facility (EFF), for instance, mandated fiscal tightening, privatization, and exchange rate flexibility—all of which sparked some sort of public resistance amid rising inflation and real wage declines.
The tension between policy stabilization and political legitimacy grows increasingly unwarranted. With unemployment and inequality rising, externally imposed reforms risk inflaming public unrest. As the CSIS report warns, international financial assistance should align with societal preferences and institutional realities—not override them (CSIS, 2023).
Gulf Models and Diverging Pathways
Some Arab states, notably in the Gulf, have leveraged oil revenues to chart an alternative course. Saudi Arabia and the UAE are channeling windfalls into long-term transformation strategies like Vision 2030, emphasizing economic diversification, digital innovation, and private sector dynamism. In 2023, Saudi Arabia recorded 5.3% non-oil GDP growth—illustrating the potential of pre-emptive diversification (World Bank, 2024).
Oil-importing states, by contrast, face narrower options. Jordan, despite successive IMF engagements, continues to struggle with persistent unemployment and low growth. Lebanon’s financial collapse—marked by public debt over 180% of GDP and currency depreciation exceeding 98%—stands as a stark warning about the risks of unchecked debt accumulation and institutional decay.
Reclaiming Fiscal Space: A Reform Agenda
To navigate the escalating debt crisis, Arab states must pursue sovereign-led and transformative strategies that address both structural vulnerabilities and systemic gaps in their financial architecture. A foundational step involves enhancing debt transparency across the region. Current debt sustainability assessments often rely on incomplete or outdated data, particularly regarding contingent liabilities and bilateral loan agreements. To rectify this, Arab countries should adopt rigorous transparency standards similar to those promoted by the IMF and World Bank, ensuring a comprehensive view of public debt obligations and risks (IMF & World Bank, 2023).
Equally important stands the urgent need to overhaul domestic revenue systems. Tax structures in many Arab economies remain skewed toward regressive consumption taxes, placing a disproportionate burden on low- and middle-income households. A shift toward more equitable and efficient taxation mechanisms—such as property taxes and capital gains taxes—can help redress this imbalance. Notably, countries like Egypt and Morocco collect less than 0.5% of their GDP from property taxes, a figure that pales in comparison to the OECD average of 2.2% (OECD, 2023). Reforming these systems not only improves revenue generation but also enhances social justice and fiscal resilience.[8]
In parallel, the external financing landscape must undergo re-imagination. The traditional creditor-driven model of conditional lending has proven inadequate for the development needs of Arab economies. Instead, a pressing need exists for co-designed financing programs that incorporate flexibility for countercyclical spending, especially during economic downturns. Innovative financial instruments such as blended finance and debt-for-climate swaps can also create more sustainable and development-oriented borrowing options, aligning financial flows with long-term strategic goals.
Finally, strengthening the regional financial architecture becomes essential to promote greater economic sovereignty and risk mitigation. Institutions like the Arab Monetary Fund and the Islamic Development Bank should be empowered to take on more proactive roles in supporting regional financial stability. This includes fostering the development of local currency bond markets and establishing robust regional risk-sharing mechanisms. A revitalized and coordinated regional approach can offer Arab countries the tools needed to better withstand external shocks and collectively pursue inclusive, sustainable development.
Debt, Development, and the Moral Imperative
The debate over debt must transcend fiscal arithmetic. As emphasized in the Jubilee Committee report spearheaded by Pope Francis and Joseph Stiglitz, over 3.3 billion people live in countries that spend more on debt than healthcare. Another 2.1 billion reside in states prioritizing debt interest over education. Their June 2025 report, A Plan for Addressing the Twin Crises of Debt and Development, proposes a global overhaul—calling for debt moratoriums, inclusive burden-sharing, and alignment of finance with social and environmental justice.[9]
At the 2025 BRICS Summit held in Rio de Janeiro, member states openly questioned the influence of traditional credit rating agencies and called for the establishment of a more multipolar and equitable global financial system. Among the key proposals were the introduction of local currency-denominated bonds and the creation of a multilateral debt guarantee mechanism, drawing inspiration from the 1989 Brady Bonds framework.
Toward a Sovereign-Led Resilience Paradigm
Although the original Brady Bonds[10] were not without shortcomings—such as asymmetric terms, vulnerability to interest rate fluctuations, and limited transparency—they played a pivotal role in helping heavily indebted countries regain access to international capital markets. Historical experience offers a valuable reference point for designing a new generation of market-based instruments that prioritize financial flexibility, equity among stakeholders, and alignment with long-term development objectives
Current efforts—such as the Jubilee Committee and BRICS initiatives—stand apart through their commitment to justice and sustainability. They reframe debt not merely as a financial concern, but as a civilizational dilemma requiring new definitions of value, governance, and intergenerational responsibility.
The Arab region must seize this moment to reclaim its financial sovereignty—not through rejection of global finance, but through principled engagement rooted in inclusive development. The choice exists not between austerity and default, but between externally driven stabilization and sovereign-led resilience.
References
[1] United Nations Conference on Trade and Development. (2025). A world of debt report 2025. UNCTAD. https://unctad.org/publication/world-of-debt
[2] International Monetary Fund. (2025). Fiscal Monitor: Balancing Act—Managing Public Finance in a Fragmented World. IMF.
[3] Center for Strategic and International Studies. (2024). The emerging global debt crisis and the role of international aid. https://www.csis.org
[4] International Monetary Fund. (2023). Middle East and Central Asia regional economic outlook. https://www.imf.org
[5] Central Bank of Egypt. (2023). Annual report on external debt and economic indicators. https://www.cbe.org.eg
[6] International Monetary Fund. (2022). Lebanon: Article IV consultation report. https://www.imf.org
[7] World Bank. (2023). Debt sustainability in MENA economies. https://www.worldbank.org
[8] Organisation for Economic Co-operation and Development. (2023). Revenue Statistics 2023. OECD Publishing. https://doi.org/10.1787/6e5eb45d-en
[9] Stiglitz, J. E., & Jubilee Committee. (2025). A Plan for Addressing the Twin Crises of Debt and Development. Vatican City: Pontifical Academy of Social Sciences.
[10] Brady Bonds were debt instruments issued in the late 1980s to help restructure the sovereign debt of developing countries, allowing them to convert defaulted loans into tradable securities backed by U.S. Treasury bonds
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