IMF warns on rising debt risks in virus hit Middle East, Central Asia

The International Monetary Fund (IMF) on Sunday maintained that the Middle East and Central Asian countries need to curb their financing requirements. This comes as a surge in financing is leading to a humongous government debt, a crucial matter that has been exacerbated by the pandemic.

According to reports, the region, which includes around 30 countries from Mauritania to Kazakhstan, saw an economic rebound in the third quarter as countries considerably relaxed measures to contain the novel coronavirus.

But as it is widely known, the disparity in growth and recovery will depend on the degree of robustness of vaccination drive in various countries, reliance on heavily impacted sectors, such as tourism, and countries’ fiscal policy.

Jihad Azour, director of the Middle East and Central Asia Department at the IMF, stated that “Recovery has started, but recovery has started in an uneven, uncertain way,”. He further added that “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 rating firm maintained that the “early inoculators”, which include the oil-rich Gulf countries like Morocco and Kazakhstan will reach 2019 gross domestic product (GDP) level probably by next year. But it is to be noted that the same cannot be said for other countries.

The Washington-based global lender said in its Regional and Economic Outlook Update that “High financing needs could constrain the policy space required to support the recovery,”.

It is to be noted that lower demand and a slump in commodity prices had eroded state finances last year. It was reported that in the Middle East and North Africa, fiscal deficits were widened to 10.1% of GDP in 2020 from 3.8% of GDP in 2019.

The crisis had drastically 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.

According to the IMF, the financing needs are projected to increase over the coming two years. It is to be noted that emerging markets in the region will likely need around $1.1 trillion during 2021-2022 from $784 billion in 2018-2019.

This emphatically presents financial stability risks and has a potential to slow economic recovery. Complementary to it, countries with high external debt have also become more vulnerable to a tightening of global financial conditions. This will directly lead to an increase in their borrowing costs and curb access to markets.

The fund additionally stated that “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,”.

It maintained that “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,”.

Thus, a coordination among monetary and fiscal authorities is needed complementary to a deepening of domestic debt markets and an expansion of the investor base.