Source: Al-Wafd Newspaper
Prof. Dr. Ali Mohammed Al-Khouri
Sovereign debt in Arab countries has, over the past two decades, become a fundamental determinant of development trajectories and the limits of national decision-making. Historically designed to finance investments and infrastructure, this instrument has, in many cases, become a suffocating constraint on developing economies, restricting their social and political choices and weakening their ability to withstand shocks in international markets. Within this context, Arab states find themselves at a critical juncture, caught between internal pressures to reform their situations and external pressures imposed by global economic conditions and the policies of international financial institutions.
The logic of sovereign debt
Sovereign debt is defined as the financial obligations of governments to domestic or foreign lenders, whether through issuing bonds and treasury bills, or through direct borrowing from international institutions such as the International Monetary Fund and the World Bank, or from commercial banks and investment funds. This debt is often justified to cover budget deficits, finance major infrastructure projects, or address emergencies. However, the danger arises when the debt exceeds the economy’s capacity to generate sufficient resources to service it, transforming it from a tool of financial management into a comprehensive crisis with repercussions that extend to growth, social stability, and even the legitimacy of public policies themselves.
Structural imbalances in developing economies
The debt crisis in developing countries is fundamentally linked to an unbalanced economic structure. Many economies rely on exporting raw materials or low value-added primary commodities, while simultaneously incurring high import bills for food, medicine, technology, and capital goods. With a weak and highly competitive industrial, agricultural, and service production base, these economies struggle to generate stable foreign currency, while their external debt service obligations remain largely denominated in dollars or euros. With each rise in global interest rates or strengthening of the dollar, the cost of debt servicing increases, and the fiscal space available for development spending shrinks.
Financial dilemmas and social consequences
Meanwhile, many developing countries suffer from imbalances in public financial management, with a large portion of government spending directed towards recurring expenses such as salaries and consumer subsidies, at the expense of productive investment. When these imbalances are compounded by the conditions of adjustment programs imposed by international financial institutions—which typically include subsidy cuts, tax increases, and reductions in social spending—the burden on low-income and vulnerable groups intensifies, and the trust gap between society and the state deepens. These countries then enter a vicious cycle of borrowing to repay previous debts, leading to inflated interest rates, limited policy options, and reduced investment in human development and productive infrastructure.
The absence of an economic project
Faced with this complex equation, developing countries have pursued a range of approaches to address their sovereign debt burdens. These approaches have included debt rescheduling, negotiating with creditors to extend repayment periods and reduce annual burdens, and issuing new debt instruments to repay existing obligations—an effort focused more on managing the timing of payments than addressing the underlying structural cause of the problem. Many countries have also implemented economic reform programs to increase tax revenues and rationalize spending, taking advantage of international initiatives such as the Heavily Indebted Poor Countries (HIPC) Initiative, and attempting to attract foreign direct investment as a less costly alternative to short-term borrowing. However, unless these measures are integrated into a comprehensive plan to restructure the economy, they remain more about managing the crisis than overcoming it.
Financing challenges in Arab economies
When we examine the Arab world in its specific context, the picture becomes even more complex due to the interplay of economic, political, and security factors. A significant portion of Arab economies rely on oil and gas as a primary source of public revenue, making budgets vulnerable to the fluctuations of energy prices and markets. In the absence of genuine diversification of productive sectors, periods of high prices translate into waves of expansionary spending, while periods of low prices become financial shocks that force governments to borrow more or adopt austerity policies with severe social consequences. Non-oil-producing countries, on the other hand, face a different dilemma: limited domestic resources and weak competitiveness, coupled with a growing need to finance budget deficits and essential infrastructure projects.
Furthermore, parts of the Arab world are facing protracted political and security crises, ranging from armed conflicts and civil wars to structural deficiencies in state institutions. These conditions weaken investor confidence, divert human and material resources from the production cycle, and force governments to increase spending on security, reconstruction, and social support at a time when revenues are declining. Under these circumstances, borrowing becomes almost inevitable, but it is also more costly and riskier. The problem is exacerbated when high debt levels are coupled with rising unemployment and poverty rates, placing governments in a difficult position of having to balance maintaining social safety nets with adhering to fiscal discipline. In addition, the
lack
of genuine economic integration among Arab states has deprived the region of the opportunity to build a regional market capable of absorbing shocks and generating shared growth opportunities. If intra-Arab trade, the movement of capital and labor, and investment in cross-border projects had reached higher levels, many countries would have been less dependent on external financing with its harsh conditions, and more balanced regional safety nets and development mechanisms could have been established. However, the reality is that Arab economic relations remain far below their potential, leaving almost every country in a position of negotiating individually with global markets and international institutions. Faced
with the choice between restructuring or perpetuating the vicious cycle
, Arab countries need a different approach to dealing with debt—an approach that makes every borrowing decision part of a broader vision for reshaping the national economy. This begins with restructuring public budgets, redirecting spending to sectors capable of creating added value and sustainable employment opportunities, such as advanced manufacturing, smart agriculture, logistics, and knowledge-based services. Simultaneously, diversifying income sources becomes an existential necessity through serious investment in sustainable tourism, modern agriculture, renewable energy, and the digital economy. This opens new horizons for generating foreign currency and reducing dependence on a single resource or market.
Tax systems
are another equally important area of focus. Reforming the tax system in Arab countries is crucial. Tax systems that rely excessively on indirect taxes and consumption levies often disproportionately affect the most vulnerable segments of society and fail to produce a system that reflects each group’s contribution in proportion to its actual capacity.
Transitioning to more equitable and efficient systems, capable of broadening the tax base and curbing the informal economy, opens up greater opportunities for domestic development financing and reduces the need for increased external borrowing. Within this framework, serious consideration can be given to establishing joint Arab financing funds with transparent governance rules. These funds could serve as a partial alternative to excessive reliance on international institutions, directing their financing towards productive regional projects rather than short-term consumer spending.
Debt as a sovereign and development issue
Ultimately, sovereign debt cannot be treated as a purely financial issue to be managed behind closed doors between finance ministries and banks. Rather, it is a matter of sovereignty and development, linked to a nation’s ability to manage its resources, shape its future options, and safeguard its economic independence. For developing countries in general, the greatest challenge lies in transitioning from a rentier or consumer-based economic model, reliant on volatile external flows, to a sustainable, productive model grounded in knowledge, innovation, and the development of social and economic opportunities. In the Arab world, overcoming the debt crisis will be impossible without broad structural reforms and long-term strategic visions that prioritize economic diversification, human development, and genuine Arab cooperation. Otherwise, the region will remain trapped in a recurring cycle of borrowing, crises, and restructuring.
The new role of the state
However, the question that reveals the essence of the situation is not merely about the mechanisms of public debt management, but extends to the state’s ability to renew its approach to society and transforms the very foundation upon which state institutions are evaluated. New challenges, from the digital revolution to climate change, from the reshaping of global value chains to the rise of new economic powers, mean that countries without proactive visions and long-term policies will remain in a weak position on the international stage, no matter how successful they become in improving the terms of their debt financing.
As for the countries that take the initiative to renew their development project and invest in human and knowledge capital, they will be better able to use debt to finance strategic productive and technological sectors, enabling them to enter global value chains in a way that allows for the creation of a productive base capable of generating new quality opportunities and breaking out of the closed circle that prevents structural transformation and reproduces the same imbalances.
