No Oil? Then Don’t Use Debt to Grow

Amr Adly

(Bloomberg Opinion) -- A decade after the international financial crisis and local political upheavals, many of the non-oil exporting nations in the Middle East and North Africa are undergoing a process of redefinition of how they are linked with the global economy. It is not going well.

Egypt, Tunisia, Morocco and Jordan are becoming more dependent on external borrowing than on foreign direct investments compared to the pre-2008 period. This is visible with declining ratios of FDIs to GDP, in contrast with increasing ratios of foreign debt to GDP and total exports.

Growth through debt rather than investment will have a long-term negative and sustainable impact on the ability of these nations to develop their economies. They will have a hard time servicing their external obligations and will likely miss opportunities for attracting badly needed foreign investments for growth and employment generation.

Foreign debt witnessed an unmistakable leap in all four countries. In Egypt, the ratio of external debt to GNI more than doubled from 17% in 2010 to 36% in 2017. The change was as pronounced in Tunisia, were the ratio jumped from 54% to 83%. In Morocco and Jordan, the ratios changed as well from 65% and 29.6%, to 47% and 75%.

The ratio of external debt to total exports of goods, services and primary incomes was even more dramatic for all four countries. This is a proxy of the capacity of these economies to service their growing external obligations. Between 2010 and 2017, the ratio increased from 75%, 99.6%, 97.6% and 125% for Egypt, Tunisia, Morocco and Jordan re2spectively, to 190%, 178%, 125% and 198% in 2017. All the figures exceed the 77% limit that, in the World Bank’s reckoning, foreign debt has a negative impact on growth.

Even though the overall levels of foreign indebtedness are not yet as high as the late 1980s and early 1990s, the rate at which external borrowing has been climbing is alarming. In contrast, the ratio of FDI net inflows to GDP has declined dramatically since the financial crisis of 2008.

The 2008 worldwide financial meltdown and a contraction in global trade took a heavy toll on FDI in these economies. This was followed a couple of years later with the Arab Spring popular uprisings that unleashed longer-term dynamics of civil war, state collapse and mass population displacement.

Egypt and Tunisia were directly affected by the uprisings even though neither witnessed state collapse or protracted civil strife. Morocco and Jordan were more stable internally—Morocco even managed to initially benefit from the turmoil in Tunisia and Egypt and attract more foreign investors fleeing uncertainty in the two neighboring countries. However, Morocco and Jordan were not immune to the broader regional and global contexts.

In the case of Morocco, the international economic slowdown and the recession in the Eurozone exacerbated many of the country’s structural financial and economic weaknesses. The Jordanian economy was hit by the collapse of oil prices—in the presence of strong rentier links to the oil-rich Arab states—and the security and political hazards tied to the civil wars in Syria and Iraq.

The relative political stabilization in all four countries as of 2014/2015 did not allow them much room for full-fledged recovery due to the global economic slowdown. This made it harder for all of them to achieve export-led growth and attract FDI, leaving them with foreign borrowing as the only viable option. Foreign debt accounts for much of the apparent recovery, as expressed in growth rates.

How to fix this? In the current global climate, it may be too much to count on expanding exports or more FDI. International capital markets are unstable and global trade is contracting. Governments should instead target local investment in brick-and-mortar sectors that can deliver real growth, create jobs and possibly reduce the dependency on some imports.

These countries should also make better use of the net inflows of capital they have received for years in the form of remittances. Instead of channeling them into non-tradable sectors like real-estate, as has been often the case, they should be used to finance investment in more productive sectors that could eventually improve chronic balance of payments problems.

The governments of these countries should also work to upgrade regional linkages that have existed within the Arab world for decades. These ties have tended to be informal rather than institutional, and confined to flows of labor and capital rather than trade in goods and services. There are already efforts to tighten political ties with the Arab oil-rich nations, manifested in the formation of a regional block against Iran. These should be accompanied by trade-oriented regional integration, opening markets in oil-rich countries. There might be room also for adding a regional dimension to plans for industrial diversification by Saudi Arabia and the United Arab Emirates, by coordinating flows of investment and technology and skill transfers in sectors like petrochemicals and hi-tech services.  Such measures would generate growth and employment for poorer allies and cement regional geopolitical arrangements.

(Corrects debt ratios for Morocco and Jordan in the fourth paragraph.)

To contact the author of this story: Amr Adly at

To contact the editor responsible for this story: Bobby Ghosh at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Amr Adly is an assistant professor at the American University in Cairo. He is the author of "State Reform and Development in the Middle East."

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