Middle East Debt Surges as External Influence Deepens

Arabian Post

14 hours ago

The debt burden across the Middle East and North Africa has escalated markedly over the last decade, with many governments relying heavily on borrowing to sustain public spending amid economic challenges. This growing fiscal strain, combined with an increasing dependence on external donor funding, has amplified the influence of foreign actors on both domestic policies and regional geopolitics, raising concerns about the long-term economic sovereignty of these states.
State borrowing in the MENA region has expanded substantially due to a combination of declining oil revenues, rising public expenditures, and the economic fallout from global disruptions. Countries that historically relied on hydrocarbon wealth to finance budgets have faced persistent pressures to diversify revenue sources, but with uneven success. The persistence of conflict, political instability, and the lingering impacts of the COVID-19 pandemic have exacerbated fiscal deficits, pushing governments to turn to international lenders and multilateral institutions more frequently.
The Gulf Cooperation Council members, traditionally seen as relatively debt-resilient, have witnessed a gradual uptick in sovereign borrowing. For instance, Saudi Arabia and the United Arab Emirates have issued substantial sovereign bonds in international markets to fund large infrastructure projects under their economic diversification agendas. Nonetheless, their debt-to-GDP ratios remain relatively contained compared to other MENA nations. Meanwhile, countries like Egypt, Jordan, and Lebanon have accumulated debt at levels that alarm economists and credit rating agencies. Egypt's public debt has exceeded 90% of GDP, while Lebanon remains mired in a sovereign debt crisis, with its economy contracting sharply and international lenders demanding stringent reforms.
ADVERTISEMENT
The rise in borrowing often comes with conditions attached by international creditors, including the International Monetary Fund and World Bank, as well as bilateral donors such as the European Union, the United States, and Gulf allies. These conditions frequently mandate structural reforms, austerity measures, and adjustments in subsidy programmes that affect large segments of the population. Such fiscal tightening has stirred public discontent and occasionally sparked protests, underscoring the delicate balance governments must strike between fiscal responsibility and social stability.
The reliance on donor funding has widened the scope for foreign influence in national decision-making. Some nations find themselves aligning their foreign policies to appease key donors, ensuring continued financial assistance. This alignment manifests in diplomatic stances, regional alliances, and participation in international coalitions, sometimes at odds with local priorities or public opinion. For example, the strategic partnerships between Gulf states and Western powers have intensified, with financial aid often linked to military cooperation or counterterrorism initiatives.
Beyond geopolitics, the conditionality of donor funding can limit the policy options available to governments, constraining economic strategies and reform agendas. This external pressure has raised questions about sovereignty and the capacity of states to chart independent development paths. Economists warn that a cycle of debt dependence could undermine the very economic growth that these countries seek, trapping them in a cycle of borrowing and reform fatigue.
The structural challenges that fuel debt accumulation in MENA are multifaceted. Demographic pressures, with a large youth population entering the job market, heighten the demand for public services and employment opportunities. However, the private sector remains underdeveloped in many countries, unable to absorb the expanding labour force or generate sufficient revenue to alleviate public finances. High unemployment rates and income disparities compound the strain on state budgets, forcing governments to maintain subsidies on essentials such as fuel, electricity, and food, which constitute significant fiscal burdens.
Energy transition trends and volatile global markets further complicate the fiscal landscape. The drive towards renewable energy and reduced reliance on fossil fuels threatens to erode the traditional income bases of hydrocarbon-exporting countries. While some Gulf states have embraced ambitious clean energy projects and economic diversification, the transition carries upfront costs that add to borrowing needs. Non-GCC nations that rely on oil and gas revenues for budgetary support face more acute vulnerabilities, with fluctuating commodity prices directly impacting their fiscal stability.
ADVERTISEMENT
Policy experts advocate for enhanced fiscal reforms focused on broadening the tax base, improving public financial management, and fostering private sector growth. Greater regional cooperation on debt restructuring and coordinated economic policies could also alleviate pressures. Yet, political instability and entrenched governance challenges hamper implementation efforts in several countries. Transparency and accountability deficits remain a significant obstacle to efficient debt management and the effective use of external funds.
International financial institutions have called for a balanced approach to lending and aid, one that supports immediate fiscal needs while promoting sustainable development. This includes encouraging greater domestic resource mobilisation and reducing reliance on donor funding in the medium term. Failure to address these issues risks escalating debt distress and diminished policy autonomy, with potentially destabilising repercussions for the entire region.