Gaza war, Red Sea disruption fuel high debt levels in MENA: IMF

Doaa A.Moneim , Thursday 18 Apr 2024

The war in Gaza, Red Sea shipping disruptions, and oil production cuts have exacerbated the high debt and the elevating borrowing cost issues in the Middle East and North Africa (MENA) region, including Egypt, the International Monetary Fund said on Thursday.

Si ge du Fonds mon taire international Washington D.C. AFP The International Monetary Fund headquarters in Washington D.C. AFP


In its Regional Economic Outlook report, the IMF expected MENA’s real GDP growth to remain subdued, improving moderately to 2.7 percent in 2024 from 1.9 percent in 2023, before recovering to 4.2 percent if the ongoing developments in the region start to fade gradually.

MENA’s emerging market and middle-income countries, including Egypt, are projected to see a slower pace of real GDP growth of 2.8 percent in 2024 (compared to 3.1 percent seen in 2023), a downward revision of 0.7 percent from October’s report edition.

The report predicted, however, that real GDP growth in MENA’s emerging markets and middle-income economies and Pakistan would accelerate to nearly four percent in 2025 as constraints to growth in 2024, including the tight policies and country-specific events (such as the spillovers from conflicts) begin to wane.

The report also highlighted the impact of the conflict in Gaza on the region’s economy, stressing that the conflict “not only causes lasting human and social costs but can also lead to large and persistent output losses with potential spillovers to other countries.”


Speaking of Egypt, the report explained that foreign exchange shortages held back economic activity until recent necessary corrective steps were taken in terms of the country’s macroeconomic policy.

Egypt is currently engaging in an Extended Fund Facility loan programme of $8 billion. The programme is designed to secure macroeconomic stability and protect incomes amid the severe spillovers of the war on Gaza on Egypt’s economy.

The report also highlighted that the situation in the Red Sea is expected to weigh on activity in the remainder of the current FY2023/2024, which concludes by the end of June.

Consequently, the report reaffirmed its projection of Egypt’s real GDP growth at three percent, the same projection the IMF announced in January.

Furthermore, the report optimistically projected inflationary pressure in most of MENA’s emerging and middle-income markets to continue to ease.

The report said that, in the case of Egypt, the inflation rate is projected to decline gradually as foreign exchange shortages ease and monetary policy tightening takes hold.

The IMF’s Mission Chief to Egypt told Ahram Online this month that inflation in Egypt will peak in 2024, exceeding 32 percent, before shrinking to over 25 percent in 2025 as the FX shortage in the market starts to wane.

On the other hand, the report expected deterioration of current account balances in most emerging markets and middle-income economies in 2024, mainly driven by increasing domestic demand and imports.

The current account balance deficit in this country group is projected to widen from three percent of GDP in 2023 to 6.3 percent in 2024, or by about $20 billion, according to the report.

For Egypt, the report said that sluggish export receipts are further weighing on external balances in some economies, including Egypt.

Debt levels

Concerning debt levels in MENA’s middle-income countries and emerging markets, the report expected public sector debt ratios to remain elevated in 2024, amid rising interest expenses, despite actions taken to boost fiscal buffers.

 “However, the overall fiscal deficit for EM&MIs (Emerging Markets and Middle-Income countries) is set to rise to 8.2 percent of GDP in 2024 (from 5.4 percent in 2023), reflecting a sizable increase in interest expenses,” according to the report.

Consequently, so goes the report, “public sector debt-to-GDP ratios are projected to remain above 90 percent in 2024 before gradually declining over the medium term, helped by divestment (Egypt), continued fiscal consolidation (Egypt, Jordan, Morocco), and favourable interest-growth differentials.”

Public sector gross financing needs are expected to remain a significant challenge for most emerging markets and middle-income countries in the MENA region, the report stressed.

Therefore, the report projected public gross financing needs over 2024 to jump by 5.6 percent to nearly 115 percent of fiscal revenues ($261.3 billion), compared to the IMF’s October projections.

Moreover, access to highly indebted countries in MENA will remain limited over the short term, and high financing needs will likely be covered mostly through domestic bank financing, further exacerbating sovereign-bank linkages and hampering private credit provision in several countries.

In this respect, the report highlighted the Ras El-Hekma development deal Egypt signed with the UAE in November with total foreign direct investments amounting to $35 billion.

According to the report, “the $35 billion investment deal between the Abu Dhabi Development Holding Company and Egypt would help ease the country’s near-term financial pressures and reduce dependence on the local financial system”.

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