The road to Marrakech: US-China tensions loom over IMF/WB spring meetings

The spring meetings of the International Monetary Fund (IMF) and World Bank (WB) that concluded last week in Washington, D.C., were an important occasion for financial and economic leaders from the Middle East and North Africa region to meet with their counterparts from these international financial institutions (IFIs) and major bilateral donor countries. Many MENA countries, like a lot of their counterparts around the world, face acute debt sustainability challenges spurred on by the recent shocks of the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine. Meanwhile, China has emerged as a major global lender rivaling the IMF, WB, and traditional creditors in the United States and other Western countries. As a result, attempts to manage this latest regional and global debt crisis require coordination between Beijing and the West. But with rising U.S.-China tensions and their very different patterns of lending and debt management, such coordination remains absent. The IMF/WB spring meetings made some progress in fostering meaningful discussions between the two sides, but much more progress is needed before an effective response can be mounted. At the same time, last week’s meetings serve as a lead up to the important annual meetings that will be held in Marrakech, Morocco, in the fall — the first time they will be hosted by an Arab or African country.

The economic and financial outlook for the MENA region is a tale of varied trajectories, although overall projected GDP growth for 2023, of 3.1%, is lower than the 2022 growth rate of 5.6%. The Gulf Cooperation Council (GCC) countries will continue to fare reasonably well, but their growth, too, is expected to decline year-on-year. For the regional oil importers, conditions are also varied but, on the whole, very challenging. Lebanon’s economy and currency has already collapsed, with Egypt and Tunisia dangerously on the brink. In the wider Middle East, both Pakistan and Ethiopia are facing similarly dangerous debt distress. Morocco, Jordan, and Iraq are doing relatively better but still confront daunting challenges of slow economic expansion, high poverty and unemployment rates, and persistent food insecurity. This is not to mention the desperate conditions of the people of Yemen and Syria, to some degree Libya, and, as of a few days ago, Sudan, who are left to fend for themselves in largely stateless conditions.

The needs and suffering of several MENA countries is part of a world-wide phenomenon. Global growth is set to decline in 2023 to 2.9% compared to 3.4% for 2022, while inflation and interest rates remain high. And after the international economic and fiscal disruptions of the COVID-19 pandemic and the multiple impacts of the Russian war on Ukraine, over 55 countries around the world have entered into acute debt distress. Having borrowed to navigate the challenges of the 2020-22 period, the cost of sustaining this debt in the face of high interest rates and tighter global monetary markets has become crippling.

The IMF/WB meetings last week grappled with a deepening geopolitical fault line in the global economy and sovereign debt management approaches. As tensions between the U.S. and China grow, the two economies are gradually decoupling, and that is creating fragmentation in global trade and investment flows, with the two economic superpowers carving out regional trading blocs. This de-globalization is slowing overall growth around the world, and developing countries now find themselves caught between two rival economic blocs.

The fragmentation also makes it that much more difficult to find viable solutions to the worsening debt crisis that looms over the Middle East and the wider world. In previous decades, the IMF and WB, along with the U.S. and Europe, dominated the global lending and debt management landscape. Today, China has become the world’s largest official creditor, with up to $900 billion loaned out globally over the past decade — more than the WB, IMF, and Western lenders combined. Within the MENA region, the financial liabilities of Morocco, Tunisia, Egypt, Lebanon, and Jordan are still largely with the West and its IFIs; but in Pakistan and Ethiopia, China is the dominant debt holder. Even in Egypt, Beijing is gaining a larger footprint.

China and the Western lenders remain divided over debt management. The IMF and WB generally offer sovereign credit at below-market interest rates, are responsible for emergency rescue efforts, and, hence, are usually not expected to write off loans as part of a debt restructuring; Western private lenders, on the other hand, have historically and repeatedly had to accept major haircuts or write-offs as part of restructuring. Beijing’s large-scale lending carries an average interest rate twice that of the IFIs, and China has not yet found consensus with its Western counterparts on major write-offs or haircuts as part of a global emergency debt crisis response.

While the impacts of the COVID-19 pandemic, Russian aggression against Ukraine, as well as the gathering effects of climate change have driven many countries in MENA and around the world into acute debt and socio-economic stress, the growing tension between the U.S. and China further exacerbates those strains and weakens the international capacity to address their effects. What the poor of the MENA region and the world need are more serious talks between the Washington and Beijing to avoid the worst effects of a full economic decoupling — something that U.S. Treasury Secretary Janet Yellen called for in a statement this week — and to rebuild and adapt the global institutions of international financial lending and debt management. Such steps must reflect the new global realities and address the urgent needs of countries that are falling off a fiscal precipice.

Salvaging and adapting this global financial architecture will be critical in the next decade, as the region and the world face the multiple shocks — some predictable and others less so — of climate change, future health crises, and the disruptive effects of military conflict.

Paul Salem is president and CEO of the Middle East Institute. He focuses on issues of political change, transition, and conflict as well as the regional and international relations of the Middle East.

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