Four questions about the debt and financing risks of COVID-19 in the Middle East and North Africa


A man walking through the Pakistan Stock Exchange building. The pandemic has increased funding needs in Pakistan and other countries in the region. (photo: IMF)

By Jeta Menkulasi, Cesar Serra and Suchanan Tambunlertchai
IMF Middle East and Central Asia Department

In the Middle East, North Africa, Afghanistan and Pakistan (MENAP), countries have responded to the COVID-19 pandemic with unprecedented scale and urgency. While this vigorous response saved lives and cushioned the economic shock, it also exacerbated existing debt vulnerabilities and led to increased financing needs.

  • How significant were debt vulnerabilities in the MENAP region before the pandemic and what were the main concerns? Many countries were already facing high debt. At the end of 2019, half of MENAP countries had public debt ratios above 70% of GDP and one in four countries faced gross public financing needs above 15% of GDP per year.
  • With limited access to external finance, governments and large state-owned enterprises have turned to domestic banks. This has widened the exposure of banks to the public sector in several of MENAP’s emerging markets, ranging from over 20% of total bank assets in Iraq, Jordan and Qatar, to over 45% in Algeria, Egypt and Pakistan, and up to 60 percent in Lebanon. In contrast, banks in other emerging markets had public sector exposure of 12%.

    The excess liquidity of banks in some countries and an underdeveloped institutional investor base in others, as well as the absence of a more dynamic private sector, have prompted banks to hold government bonds until ‘at maturity, hampering liquidity and the development of the domestic debt market.

  • How has the pandemic affected the region’s deficits, debt and financing strategies? The collapse in economic activity has resulted in tax revenue losses as countries increase public spending to mitigate the impact of the pandemic. As a result, fiscal balances deteriorated in almost all countries. Compared to pre-pandemic expectations, primary deficits in the MENAP region increased on average 7.5% of GDP in 2020. These higher deficits, combined with the economic slowdown, resulted in an average increase of 7 percentage points. percentage of debt-to-GDP ratios.

    Although a third of MENAP countries tapped into international financial markets, accounting for 25.5% of global emerging market emissions, domestic financing played a critical role, particularly during the first phase of the crisis, when international markets have been disrupted. For example, the governments of Egypt, Jordan, Pakistan and Tunisia have covered more than 50% of their gross public financing needs with domestic bank financing in 2020.

  • What challenges will emerging markets in the MENAP region face as a result of increased financing needs ahead? Gross public financing needs are expected to reach a total of $ 1,044 billion in 2021-2022, compared to $ 780 billion in 2018-2019. Financing needs over the 2021-2022 period are expected to remain above 15% of GDP, on average, in most emerging markets in the MENAP region, albeit with limited external debt amortization needs ( around 4% of GDP).

    As the prospects for intensive exploitation of international markets are limited, banks’ exposure to the state is expected to accelerate in the coming years. This could crowd out credit to the private sector at a time when private financing is essential to spur recovery. In addition, the Regional economic outlook estimates that fiscal needs could be further exacerbated by 3% of GDP in a potential shock scenario involving a rapid tightening of global financial conditions as well as delayed fiscal adjustment due to a protracted recovery. If national banks were to finance these unforeseen needs, in addition to the expected financing needed in 2021-2022, Egypt, Oman, Pakistan and Tunisia would absorb an additional 10-23% of bank assets in the form of public debt by the end. 2022. As a result, Egyptian and Pakistani banks could achieve levels of public sector exposure similar to those currently seen in Lebanon.

  • What policies can help countries reduce debt vulnerabilities? Countries will need credible and clearly communicated medium-term fiscal and debt management strategies. These will require careful coordination between regulators in the monetary, fiscal and financial sectors in order to forge a common vision of the overall absorptive capacity of national financial markets.

    Countries with limited or no fiscal space will need to initiate growth-friendly consolidation plans as the crisis subsides. In countries with market access, policymakers should seek to proactively mitigate refinancing and refinancing risks. Engaging in liability management operations (such as lengthening maturities) can improve existing debt conditions and the medium-term debt profile. In countries where market access is more limited, governments might consider reshaping their commercial and bilateral debt.

    The development of domestic capital markets, the gradual broadening of the investor base and the widening of opportunities for banks to diversify their assets, including through further progress in financial inclusion, would help reduce risks. linked to the banks’ overexposure to the State. In the medium term, policymakers could introduce changes in banking regulations to reduce the existing bias of banks’ asset portfolios towards government bonds.

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