IMF Warns On Rising Debt Risks in Middle East, Central Asia

The International Monetary Fund said on Sunday countries in the Middle East and Central Asia need to curb their financing requirements, as a surge in government debt, exacerbated by the pandemic, threatens recovery prospects.
The
region, which includes around 30 countries from Mauritania in the west to
Kazakhstan in the east, saw an economic rebound in the third quarter as
countries relaxed measures to contain the novel coronavirus.
But
the outlook remains highly uncertain and recovery paths will diverge depending
on the speed of vaccinations, reliance on heavily impacted sectors, such as
tourism, and countries’ fiscal policy.
“Recovery has started, but recovery
has started in an uneven, uncertain way,” said Jihad Azour, director of the
Middle East and Central Asia Department at the IMF.
“The outlook is uncertain because the
legacies of the pre-COVID-19 are still there, especially for countries who have
high levels of debt.”
The
Fund said “early inoculators,” which include the oil-rich Gulf countries,
Kazakhstan and Morocco, will reach 2019 gross domestic product (GDP) levels
next year, while recovery to those levels is expected to take one year more for
other countries, Reuters reported.
“High financing needs could constrain
the policy space required to support the recovery,” the Washington-based global
lender said in its Regional and Economic Outlook Update.
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 percent of GDP in
2020 from 3.8 percent 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
IMF warned that financing needs are projected to increase over the coming two
years, with emerging markets in the region likely to need around $1.1 trillion
during 2021-2022 from $784 billion in 2018-2019.
This
presents financial 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.
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
explained.
It further recommended coordination among monetary and fiscal authorities, as well as a deepening of domestic debt markets and an expansion of the investor base.