The issue of public debt occasionally occupies front pages, headlines, and debates in cafes around the 22 Arab countries. But the topic always slips back to the last pages, and gets completely forgotten. In difficult times such as those experienced in Egypt in 2012 and Dubai in 2008, public debt is dominant in daily life and took priority in government policy.
There are two kinds of public debt. The first one is denominated in the national currency, which can be managed through fiscal policies; and the second is denominated in foreign currency, which is much more difficult to control, and often causes financial and economic crises.
Any country that produces goods and energy, and has a skilled labor force is able to borrow from the international market. The borrowing cost itself, is determined by the country’s credit rating. It is expected that good governments borrow from the international capital markets to finance the three pillars for a dynamic economy: education, healthcare, and infrastructure. Today, debt is an integral part of a fiscally responsible policy. Governments with no debt or low debt levels can be accused of neglecting the welfare of their citizens. Debt denominated in the local currency is easier to control, but under normal circumstances, develops only after a country has established its credit in the international markets.
Debt issuance pricing and demand is associated with government transparency, bank reserves, fiscal budget management and the efficiency in fiscal management. In ideal circumstances, the national currency becomes the primary store of value and a local debt market will flourish.
Debt is necessary for economic growth. It is also an efficient form of taxation, especially in Arab countries, where the tax system faces huge challenges. When your government borrows, it imposes a tax on your living standards and the future of citizens. It basically mortgages the future generations.
An indebted government does not mean a government in crisis. Governments should borrow responsibly and spend efficiently on the infrastructure, education, housing, and other vital services. The following table lists the Arab countries from most to least indebted, and compares them to relevant benchmark countries for clarification.
Using the debt per capita indicator, the 22 Arab countries can be broken down into three categories: Wealthy nations that borrow to optimize growth, and invest in their people and infrastructure; countries with high debt levels because they are mostly servicing existing debt and military spending thereby sinking further in indebtedness due to a combination of mismanagement, corruption, and political circumstances; and lastly, countries that have no debt because they cannot borrow, since their regimes are classed as “rogue” by the international community.
Lebanon tops the list of indebted Arab countries and ranks ninth in the world on a per capita basis. Debt service as well as military and government spending account for most of the budget and such debt is expanding every year, spiraling the government into a struggle to service debt at the expense of the development of the country and its citizens.
Libya is the least indebted country in the Arab world. This is due to several factors, most notably the accumulated liquidity, but also the fact that investors had no interest in Libya, which was classified as a rogue nation. More importantly, the former regime was uninterested in investing in its people. Both the examples of Lebanon and Libya are in contrast with the Turkish model, where borrowing was undertaken to spur economic growth according to a well-defined plan.
In Jordan, where the public debt has reached about $27 billion, only 10.6 percent of the budget in the first nine months of 2013 were spent on capital investments, while the remainder was injected into the general budget, that is, was not invested in infrastructure. In contrast, we find that federal spending in the UAE is directed to social services and development, which account for half of the budget, in addition to high allocations for military spending.
Turkey is a classical model of a monetary policy based on debt issuance. Turkey’s debt levels reached 80% of GDP, but its prudent investment in infrastructure and services resulted in economic development, and increased tax collection. Public debt in Turkey today is relatively small. The Turkish model can be applied in a few Arab countries that have a critical mass, whether in consumption, industry, tourism, or in the three areas combined, such as Morocco.
This article first appeared on Raseef22 in its original Arabic version on 21.06.2014