Several oil-importing Arab states face debt crises in 2023

By Gregg Carlstrom: Middle East correspondent, The Economist, Dubai

BLESSED ARE the young, said Herbert Hoover, an American president, for they shall inherit the national debt. Those in the Middle East must be particularly sanctified. Oil-importing states will end 2022 with hair-raising amounts of debt. Egypt, Jordan and Tunisia all owe around 90% of GDP. Lebanon, which defaulted in 2020, has yet to restructure a debt pile that dwarfs its economy.

Debt will be a dominant issue in 2023, as several states either seek or start IMF programmes (two are repeat customers). Even with external support, though, the region will struggle to extract itself from a debt trap. The coming year will bring tight budgets, more shortages, and hardship for tens of millions of Arabs.

Egypt announced a $3bn deal with the IMF in October, a much-needed infusion for a country where debt service alone will swallow almost half of revenue in 2023. But it will need more. The government will sell some state-owned firms to raise capital and will seek to cut electricity consumption to boost natural-gas exports. It will also continue throttling imports, although not as aggressively as in 2022. There will be little to spend on education or health care.

To fulfill the terms of the IMF agreement Egypt devalued its currency, which lost 35% of its value in 2022. That should help cut the import bill as foreign goods become ever more unaffordable. Some investors think the pound may have a bit further to fall. Inflation peaked in September at 15%, and 22% for food. Prices will climb much higher in 2023.

Lebanon reached a staff-level agreement with the IMF in April. To unlock the $3bn loan, though, it must pass a budget, impose capital controls, overhaul its bank-secrecy law and clean up its financial sector. It has done almost none of those—the 2022 budget was passed only in late September—and it will probably make little progress in 2023. Neither its corrupt politicians nor its insolvent banks want to face reality.

Gone are the days of oil-rich states providing lavish handouts to allies

The country will subsist on handouts. Remittances from the sprawling diaspora will inject a modicum of hard currency; Iran will send fuel shipments to provide a couple of hours of electricity each day. Poverty and crime will continue to rise. More citizens will emigrate: the middle class on planes, the poor risking their lives on boats.

Tunisia will fall somewhere in between. An IMF deal will face continued opposition from the UGTT, the powerful public trade union, which fears it will impose wage and subsidy cuts that will worsen poverty. Kais Saied, the authoritarian-minded president, will try to cow and co-opt the union into compliance. He will not have much choice. The country is struggling to import staples; unrest is a real possibility.

Everyone will hope for help from the Gulf states. If oil prices stay high, they will have billions of dollars to spend around the region. Gone are the days, though, of lavish handouts to allies. Instead they see countries like Egypt as distressed assets. Sovereign-wealth funds will snap up stakes in strategic sectors, but monarchs will be far less eager to cut cheques.

Egypt buried itself in debt to build questionable megaprojects; Tunisia, to pay one of the world’s largest public wage bills. Lebanon turned its economy into a giant Ponzi scheme. None of them has a plan for serious reform. The best that any of them can hope for in 2023 will be to muddle through.■

Gregg Carlstrom: Middle East correspondent, The Economist, Dubai

This article appeared in the Middle East section of the print edition of The World Ahead 2023 under the headline “Drowning in debt”