Moderator

• Selma Hussein

Panelists

• Dr Hassan Sherry, Assistant Professor of Economics at the Lebanese American University.
• Ahmad Awad, Founder and Director of the Phoenix Centre for Economic Studies in Jordan.
• Niranjan Sarangi, ESCWA lead on the Programme on Fiscal Policy in the Arab Region.
• Allison Holland, Assistant Director Strategy Policy Review (SPR) Department, IMF.

A recording of this session is available here. 

Selma: Why do we need to hear Arab voices on nexus of tax, debt and climate change? Arab countries have a record 28 loans from the IMF alone during this decade. The region has the lowest tax to GDP ratio and an unjust tax structure and sits on the largest reservoir of fossil fuels.

Hassan: I will focus on the impact of IMF conditionality in the MENA region, debt and fiscal landscape in the MENA, what debt relief should look like. The economic and social reality of debt in the region – particularly the non-oil producing countries is a significant increase in debt stock and debt servicing levels. Public debt to GDP ratio is around 71% – higher than developing countries average and the least developed countries average in the region. Middle income countries like Algeria, Egypt, Jordan, Lebanon, Morocco and Tunisia account for over half the region’s debt. Low-income countries are in serious risk of default. External debt to GDP average is higher – 35% than developed countries, developing countries and the least developed countries. Public debt interest payments as share of revenue is very high – in at least six countries has been increasing over the last decade, rising to almost 50% in countries like Egypt and Lebanon in 2019 and 2020. Composition of debt has changed dramatically over past decade – bilateral creditors including Paris Club have declined, and private creditors have almost doubled from 29.8% in 2010 to 42.6% in 2022.

This trend is coupled with an alarming trend that concessional lending (affordable lending by International Financial Institutions [IFIs] and Multilateral Development Banks (MDBs) including IMF and World Bank Group [WBG]) has declined in the region by 42.6% over the past decade. Problem is that this rising debt stock and service levels, come at the expense of social spending, on public goods such as education and healthcare and climate mitigation. In the region, debt is a serious issue, not merely a financial issue but presents a moral and developmental challenge.

Drivers of debt sustainability – in mainstream economics it’s based on a country’s ability to generate primary surpluses – future surpluses are used to service existing or future debt. Debt challenges are internal and external. External shocks such as the world food crisis of 2008, the Covid-19 pandemic, the Ukraine war, and ongoing Israel-Palestine and Israel-Lebanon war all have a significant impact on fiscal and external balances which remain very sensitive to external disruption. Particularly true for non-oil exporting countries whose debt is denominated in US dollars like Egypt, Jordan, Lebanon, Sudan, and to a lesser extent Tunisia. On an internal level, public spending can contribute to erosion of the primary balance but there is good spending on public investment and bad spending which is driven by corruption and bad governance.

Is debt sustainable in the Arab region? The IMF and WBG Debt Sustainability Assessments (DSAs) for both low-income countries, but also market access or emerging economies, usually look at fiscal and external balances and try to form a view of whether the debt is sustainable. They usually argue that solvency risks are largely contained based on the premise that less and less defaults are taking place. But there are two caveats to this. Firstly, there are less defaults, but this is because under current lending arrangements these countries have to undertake fiscal adjustments, cut spending and this is not just in the Arab region but across the Global South.

You can say that liquidity should be injected into those economies to prevent default, but when you have a region that is very volatile and highly sensitive to exogenous disruptions it’s a tricky scenario. Secondly, DSAs don’t take into account large domestic debt, for example, in Egypt and Tunisia. The IMF sustainability assessment doesn’t take into account total external debt service revenue. Civil Society Organisations (CSOs) in the region and in Global South believe that this is a shortcoming. CSOs believe that debt is bordering on unsustainability – there is a debt crisis in the Arab region and, it’s not just a question of liquidity versus solvency because default is not just the only consequence, other indicators are important such as basic human rights, like healthcare, quality education, infrastructure, climate mitigation and achieving the Sustainable Development Goals (SDGs). There is an economic recession and stagnation facing countries in the Arab region – between 2023 and 2024 real GDP growth has dropped from 5% to 1.4%.

What should debt relief look like in the region? Arguable that some countries in the region may be suited to injections of liquidity in order to avoid default. But for external finance to improve debt sustainability, we know that it should lead to growth rates that exceed the interest rates on the debt, which means that it should be concessional, and it should stay in the country during downturns and recessions. The position of Arab civil society is that if the goal is to incorporate internationally agreed upon climate and development levels, many countries need more than liquidity financing, they need debt restructuring. We strongly believe that debt sustainability assessments should be linked to developmental outcomes, and should not stifle the fiscal space for spending on social protection and SDGs more broadly. Development finance should also look at addressing the underlying patterns that lead to liquidity challenges – focus on addressing increasing the industrial base, and reducing the reliance on commodity exports. The claim that there’s no debt crisis implicitly acknowledges that countries are not going to reach the level of investment required to or fight climate change or achieve the SDGs. There are voices globally that call for more inclusive debt architecture and global CSOs have called for processes such as the UN framework convention on sovereign debt and we hope to see these brought to fruition.

All of these alternatives are very crucial but they remain insufficient if the security dimension – the most urgent factor – is not properly addressed. The reason I could not be with you today is because of ongoing war on my country and other countries as well. Addressing this aspect is integral to any serious vision to pursue the sustainable development goals and genuinely uphold human rights.

Ahmad: I will talk about the connected challenges of debt, tax and climate. My intervention will focus on how to balance debt sustainability and financial stability with the fulfilment of people’s social and economic rights. The biggest challenges facing all Arab countries is linking tax and debt and the ability to mobilise domestic resources. There is a heavy reliance on indirect taxes like VAT, which are worsening poverty. Debt sustainability should not come as the expense of people’s basic rights, especially economic and social rights. The public debt situation globally and in the Arab region is unsustainable because of the high level of debt to GDP – it’s a ticking time bomb. Effective solutions are the shared responsibility of governments and IFIs, especially the IMF. In this context, UN efforts to develop a global tax convention will be a step in the right direction.

Tax reforms in the Arab region, especially in non-oil export countries, are crucial to addressing the debt crisis, this means implementing progressive income taxes, and reducing consumption taxes – in many Arab countries revenues from indirect tax are two thirds of the total tax revenues, for example, 76% in Jordan. And eliminating tax exemptions – especially in business sectors and foreign investment. These reforms are necessary to generate sufficient resources for financing development and achieve SDGs and social justice. Implementing these reforms requires good governance and actual political reforms – without this tax policies will remain unfair and tax evasion will remain an issue.

The continuation of unfair tax policies poses a significant risk to social spending, if they continue more Arab countries including Jordan, Egypt and Lebanon will find it difficult to finance social development and achieve the SDGs, which means more poverty, declining healthcare and education services and escalating public debt. Debt interest payments have reached unique levels, representing total public revenues, in some cases spending on interest only equals or exceeds spending on social services – for example, in Jordan in 2024 16.5% of public revenues goes to pay the interest only – a disaster for our society.

In this context debt sustainability is the ability of countries to repay without compromising provision of public service. How can we address these challenges? We are calling for cancellation of the debt because of the unfair nature of the structure of the global economy model and the distribution of power within it, we are calling for debt restructuring and partial cancellation of the debt, easing the financial burden. Similar ideas are being discussed all over the world – we must push for significant debt relief or cancellation. Special Drawing Rights (SDRs) can be used to support poor countries, not as in a few years ago when rich countries received the lion’s share. Debt payback funded by a mix of IMF resources and donor funds, and continuing to support international efforts to regulate debt issues is very important as helps us to ensure fair competition among countries and helps us to avoid capital flight.

Tax reforms needs real political reforms. We are talking about the colonial settlement conditions that Palestine has been experiencing for the last 66 years which must stop, put an end to successive wars and stop ethnic cleansing and genocide – these circumstances play a role in reforms.

The need to reform the International Financial Architecture – especially the IMF should not just change its narrative on development, fighting poverty and addressing unemployment and social and economic injustice, reforms should be conducted for example, increasing representation of developing countries inside the IMF, easing loan conditions to make them more flexible and reforming debt restructuring mechanisms, enhancing transparency and introducing accountability mechanisms. Enabling countries to file complaints and improving cooperation with other international organisations – for example, with International Labour Organisation (ILO), United Nations Economic and Social Commission for Western Asia ESCWA, UNDP, UNCTAD, etc., and strengthening the role of the institutions in reducing disparity between developed and developing countries. Finally, the debt crisis poses a real threat to Arab countries, and achieving social and economic justice and achieving sustainable development.

Niranjan: I will focus on what are opportunities for financing increase in fiscal space, looking at liquidity more than structural issues. How can debt swaps help to improve liquidity management? The IMF and World Bank are looking at the instrument as one of the basket of instruments that can help here. This is not just a challenge in the Arab region, it’s a problem more broadly. Concessional loans are declining and debt service is rising. In market access countries, private creditors borrow at higher cost, and this leads to a vicious circle that Stiglitz called a spiralling debt.

What are the casualties? I agree that default is not the only indicator. It leads to social and economic clashes and the cost is climate finance – it’s very difficult to channel revenues to climate finance while the budget is squeezed. Developing countries will pay 340 billion in debt servicing, 40 billion this year and 30 billion every year, 120 billion till 2030 on external debt service. The casualty is climate. They need climate finance of 570 billion and they are getting 35 billion.

One contributing solution is debt swaps because it enhances fiscal space for growth oriented project finance. This is important because it allows governments to address national priorities while contributing to global climate objectives. We established an interagency taskforce including agriculture, energy, industry, planning, finance and environment. To come up with a programme that is nationally owned with commitments on climate action and progress on Nationally Determined Contributions (NDC) implementation. Some part of it can be financed by the swap. It’s a pre-emptive swap. We have discussed it with the sovereign credit rating agencies and the view is that it improves credit ratings, rather than signalling adversely to the markets. It’s a bilateral debt swap that we’re advocating for in this context, to improve balance of payment and enhance public expenditure on climate and SDGs. With the key performance indicators, monitoring and verification is robust, a long-run process to develop a programme of one and a half years, in pilot cases – Jordan, Tunisia and Mauritania. We hope that it can be scaled up of by IFIs and MDBs.

We need to define programs which accelerate climate response and improve the lives of people who live in vulnerable areas – climate vulnerability analysis at the subnational level, and look at how it can be scaled up to be growth enhancing. We provide technical assistance from the member states, from the technical side. And we liaise with the creditors as it reduces moral hazard of not committing to climate response. A win-win situation for debtors, creditors and IFIs. Debt Sustainability Assessments never consider debt swaps – would be useful to include at least in terms of advancing liquidity but it’s not a substitute for other debt solutions.

Allison: Very rich amount of information shared today. At this annual meetings you will have heard the managing director talk about how we are in a high debt-low growth world, it’s a global challenge. We take some comfort from the fact that debt levels are stabilising and we don’t necessary see a systemic wave of sovereign debt defaults which is a very costly situation. We would like to help countries avoid that but it’s true that stabilising debt levels has been achieved with very hard work by our members to reduce primary deficits. Across low-income countries (LICs), the median deficit is 1% of GDP while the median emerging market is back in balance. Which should be good news and we should be seeing debt levels coming down but it’s not because of debt servicing which we’re very concerned about as it’s soaking up revenues and crowding out spending on development and climate issues. This is a big concern and been a theme of discussions at the meetings.

We’ve identified three pillars of actions. Firstly, what can countries do themselves. Countries need to do more to address the denominator issue of the debt sustainability equation. What can be done to boost growth, boost exports. There’s a need for structural reforms, with careful design – private sector investment, improve business environment coupled with efforts to improve domestic resource mobilisation (DRM). The Fund has identified a taxation threshold of 15% GDP as a level that is consistent with fiscal and debt sustainability. Highest debt MENA countries also have the lowest tax threshold. Its important to get the design right. The World Bank and IMF have launched a new DRM initiative, where the two institutions will look at taxation and public finance management, and local capital market development, bringing in the private sector. Reforms need to be country owned and country driven, and civil society can call for those reforms. Governance and transparency are critical and role of CSOs are crucial, here.

Alongside the advice is financing. Since Covid we’ve scaled up lending, refined rapid credit facility, the general SDR allocation was a unique response to a global shock. Two weeks ago the IMF executive board approved two reforms. One was surcharges bringing down cost of financing for market access countries, and reforms to Poverty Reduction and Growth Trust (PRGT) which is accessible to LICs providing financing at zero interest rates. Reforms mean we can sustain the increase in access limits and provide as cheap as possible financing to poorest members. In parallel IDA replenishment is going forward and we’ve seen important reform to capital adequacy frameworks to MDBs which effectively increases their firepower. We can’t do it alone, we need the official sector to come forward with more concessional financing, with grants but at the same time we know that donors have limits so we need to crowd in private sector financing.

There are pools of financing around SDGs, climate, energy transition, etc. How do we attract this? Debt swap initiative supported by credit enhancement by MDBs is very important as it releases a flow of debt savings that can be applied to these projects. But there needs to be readiness to reform to attract capital, through this we will hopefully bring down the cost of financing – the R-G relationship can be reversed and we can see debt come down more definitively.

Questions and answers

Katie McMahn: Examples of Tunisia, Jordan and Mauritania debt swaps – are any other countries taking these forward? And for Ms Holland, how do you operationalise the third pillar, does the impetus come from the Fund, do countries apply for these packages? What are the concrete next steps?

Jack Odiwa, Christian Aid: The debt problem is a structural problem that can’t be solved from a single standpoint. Wars, trade, food prices – all this is part of the architecture. Look at what happened in the SDR allocation of 2021, out of the 50 billion that was issued, ony 5% went to Africa because it’s based on the quotas of the Fund. These structural inequalities regardless of good intention means we get less.

Niranjan Sarangi: There is no money lying there at this point in time, we are trying to see how countries can be more committed to look at NDCs and national development plans, what opportunities do we see in building programmes that contribute to climate finance. Egypt has been successful in swapping some of its external debt service with Germany and China. It’s on the basis of the merit of the programmes. Even among Paris Club creditors there is a view that they are looking at it as additional financing rather than debt relief. The step is how we develop the project pipelines and the programmes that can be used as financing instruments. Key is coordination among different ministries and developing infrastructure requires a lot of capacity enhancement. It’s not just Jordan and Tunisia. Middle-income countries (MICs) are honouring their debt service, default is not the only indicator, if they’re committing to debt service and tax to GDP ratio is low, and concessional financing is low – they are paying a high price – the casualty is credit ratings, so market access countries are not going for debt restructuring because of the high cost – the casualty is climate, SDGs, so this enhances fiscal space for this.

Shereen Talaat, MENAfem: Debt swaps in relation to climate, it’s not climate finance to our countries because it’s not financing climate its financing the creditors, with revenues of 20% in the time of a huge ecological crisis. Secondly, the IMF published before the meetings, an advance chapter of the Fiscal Monitor called ‘Putting a Lid on Public Debt’ saying that the global debt is probably worse than it looks and what was projected. Kristalina Georgieva’s blog says more fiscal adjustment, for us this means more austerity. Surcharges reform isn’t satisfying for us – only 36% in the middle of a development crisis, genocide and war is not enough but I understand it’s not an easy process. So another focus is on SDRs. With the high debt rate that is significant according to the IMF, where is the discussion of debt forgiveness? On SDRs, covid was a crisis but is there any kind of mechanism for reissuing of SDRs?

Jon Sward, Bretton Woods Project: Ms Holland, you mentioned need for countries to increase export as part of their response to the crisis. We’re concerned about lingering commodity dependence in MENA, many of which are carbon intensive. Export boom was response to Asian financial crisis that involved clear-cutting Indonesia’s forests. How do you see this in terms of the evolving mandate, as transition management was a key pillar of the 2021 IMF climate strategy, how do you see the export basket within this approach?

Unknown: Asking about the second order effects of selling sovereign debt – we’re talking about private investors holding sovereign debt and going into a credit swap where they need to sell it maybe with a debt swap. What’s the prospectus for that country accessing credit afterwards? There’s going to be a new risk assessment and higher cost of borrowing.

Imene Cherif, MENAfem: Question about domestic versus IMF reform. We saw a lot of reforms in Egypt dictated by IMF and these have harmed people. We’ve been told we need to push our own governments on reform, but what do you decide is IMF and what is domestic reform?

Allison Holland: A lot of discussion of debt relief and debt forgiveness at same time there are very large financing needs to meet climate transition and SDGs. Debt relief absorbs resources that are necessary for new financing because new financing comes from the same pool of creditors. There are large pools of private sector financing that would like to deploy to meet climate objectives and they have not been able to because of the number of structural hurdles. Initiative to work with countries on developing KPIs is important for creditors, it takes time to build the infrastructure. Debt development swaps – you can work with a bilateral creditor – eg: working with official sector community, which is an important avenue that should be more readily available. The other aspect is buying back debt from private creditors and creating space for critical spending. They have to be organised carefully to avoid impact on credit rating. This might not be available to everybody – one example is El Salvador. A debt swap can release a small flow of resources over ten or twenty years but a sustainability-linked bond or thematic bond can release more capital up front and countries need to take advice on what suits. Where countries are in debt distress this will not solve the problem, and they need debt sustainability. On SDR issues – there has been some rechannelling supporting PRGT, we also work with partners to re-channel that to enhance balance sheets of MDBs.

Ahamd Awad: The IMF should think outside of the traditional instruments. Always they ask for more exports, more pressure on public expenditure. But what happens, more debt, less social protection and failure to achieve SDGs – why then are the experts or decision makers not thinking of using any tools, for example SDRs – we should provide funds for the poorest countries. When most of the non-oil export countries of Arab region are paying more on external debt than social protection, its dangerous. In Jordan we are implementing the 9th IMF programme. Economic growth is less than 3%, debt is 116% of GDP. The outcomes of your programmes are worse than before. That’s why we’re asking for a new approach.

Hassan Sherry: Some countries are suited for liquidity injections but that’s not the case with all. By not incorporating clearly developmental outcomes, including climate mitigation and SDGs, if these are not integrated within debt sustainability frameworks this will postpone restructuring and debt relief. Debt is a longer term structural issue and this should be addressed – we need to talk about it. IMF talks about a shared responsibility between debtors and creditors. But is the IMF willing to restrain private creditors and enforce the shared responsibility? That’s a political question. On the question of who is to blame, you have to think about domestic policies but the IMF is a global financial institution that wants to help – the question is, are they helping in the right way.