Figure 4.2. Composition of Foreign Currency Debt, 2020

indicates the extent to which a country’s debt service burden can be financed by government revenues without borrowing more. It also shows how much of government resources are diverted to paying interest instead of funding current expenditures on education or health or growth-enhancing investments.6

This calculation focuses solely on the rise in the interest rate burden. A full analysis of debt dynamics and debt sustainability is much more complex and beyond the scope of this update. For example, this analysis does not examine the changes in debt stock due to exchange rate movements or inflation. Readers interested in a comprehensive analysis of debt dynamics and projections for MENA countries should consult the Sovereign Risk and Debt Sustainability Framework for Market Access Countries7 and the Debt Sustainability Analysis for Low-Income Countries (LIC-DSA),8 jointly produced by the World Bank and the International Monetary Fund.

As shown in column two, almost all developing oil importers have debt-to-GDP levels above the middle-income and world medians. Lebanon and Jordan are at a particularly high level (above 100 percent) but so too are Egypt (92 percent), Tunisia (82 percent), and Morocco and Djibouti (around 70 percent). In contrast, countries differ markedly with respect to the share of foreign currency in their debt—with Egypt (22 percent) at the lower end and Tunisia (63 percent) and Djibouti (almost 100 percent) at the high end. This compares to the middle-income median of 66 percent and the world median of 59 percent.

Countries also differ with respect to the composition of their external debt. Djibouti’s debt is made up entirely of multilateral and bilateral debt, with non-Paris-Club debt representing more than two-thirds of total debt; whereas Lebanon’s is mostly market-based, with over 90 percent in the form of bonds. The other countries have a mix of multilateral and bilateral debt and market-based debt, with multilateral and bilateral debt accounting for between 53 percent (Jordan) and 74 percent (Tunisia) of total foreign currency debt (see Figure 4.2).

Figure 4.2. Composition of Foreign Currency Debt, 2020

Percent of Foreign Currency Debt

D iboutij

Morocco

Jordan

Tunisia

Lebanon

E pt,gy Arab Re .p

To estimate the increase in the debt service burden for 2022, the analysis focuses on domestic and market-based foreign currency debt. Multilateral and bilateral debt are mostly provided with long maturities and often on concessional terms. As such, their terms and the interest payments associated with servicing these debts are in many cases not affected by the recent movements in global interest rates.

0 20 40 60 80 100

J Multilateral J Bilateral, PC J Bilateral, non PC J Bonds J Commercial Source: International Debt Statistics (IDS); World Bank. Note: PC = Paris Club.

Since the start of the Ukraine war, domestic interest rates for developing oil importers have increased markedly—and their market-based bond yields have risen dramatically. For domestic rates, the increase in three-year and five-year yields has varied from no change in Lebanon to close to a 3 percentage-point increase in Egypt. By contrast, the impact of tightening global financial conditions on market-based bond yields has been much larger. Bond yields reflect the

6 Moody's Investors Service: Rating Methodology: Sovereign Ratings Methodology, 25 November 2019. 7 https://www.imf.org/en/Publications/Policy-Papers/Issues/2022/08/08/Staff-Guidance-Note-on-the-Sovereign-Risk-and-Debt-Sustainability-Framework-for-Market-521884. 8 https://www.worldbank.org/en/programs/debt-toolkit/dsa.

annual interest rates lenders in international financial markets demand to hold a country’s debt. In addition to being a function of global rates, they also include a country risk component, which varies by country and can respond differently to the current terms-of-trade shock—with countries more exposed to the shock seeing a greater deterioration in their lending terms. Besides the very large increase in yields for Lebanon, which is currently in debt distress, yields have also increased for all developing oil importers. For example, yields on Tunisian market-based foreign currency debt increased 8.0 percentage points and Egypt’s rose 4.9 percentage points.9

Table 4.1. Increased interest payment expenditures and weakening debt affordability

Country 2021 Govt Revenues 2021 Debt

2021 Local Currency Debt

2021 Foreign Currency (FC) Debt

MarketBased FC Debt

% GDP % GDP % Debt % Debt % FC Debt Change in Domestic Bond Yields

Change in Market Based FC Yields Annualized Change in 2022 Interest Payments 2021 Interest Payments/ Govt Revenues 2022 Interest Payments/ Govt Revenues

% % GDP % %

Djibouti Morocco Jordan Tunisia Lebanon

19.4 71.7 1.9 98.1 24.2 68.9 86.7 13.3 22.9 0.4 2.2 0.1 8.7 9.1 25.3 113.7 77.0 23.0 45.9 1.7 2.6 0.9 17.3 20.6 25.8 82.4 37.1 62.9 24.1 1.8 8.0 0.8 10.9 13.5 6.6 172.5 44.5 55.5 93.1 0.0 35.2 Egypt 17.5 92.4 78.4 21.6 22.1 2.9 4.9 1.2 51.0 55.6 MICs Median 25.0 65.7 47.4 52.6 World Median 26.8 59.0 46.3 53.7

Source: Macro Poverty Outlook October 2022 (2021 Debt % GDP, 2021 Foreign and Local Currency Debt % GDP, 2021 Interest Payments and General Government Revenues); Bloomberg L.P. (Change in EUR and USD Bond Yields for all countries and Change in Domestic Bond Yields for Egypt and Morocco); Central Bank of Jordan; Central Bank of Tunisia; Association of Banks in Lebanon; International Debt Statistics (IDS); World Bank staff calculations Note: Interest Payments for 2022 are calculated as the sum of the annualized increase in Domestic Interest Payments and Foreign Interest Payments plus initial Interest Payments in 2021. The increase in Domestic Interest Payments is equal to Local Currency Debt multiplied by the change in Medium Term Domestic Bond Yields (3-year bond yields for Morocco, Lebanon, and Egypt and 5-year bond yields for Jordan and Tunisia) between January and September for Morocco, Tunisia, and Egypt; January to July for Lebanon; and April to September for Jordan. The increase in Foreign Interest Payments is equal to Market-Based Foreign Currency Debt multiplied by the change in Medium Term International Bonds Yields (4-to-6-year EUR and USD denominated bonds) between 1/31/2022 and 9/7/2022.

To get a sense of how this increase in yields affects the debt service burden of developing oil importers, a country’s additional interest payments are calculated on the assumption that it must roll over one-third of its domestic and market-based debt stock in the coming year. Although countries vary by the amount of debt that they must pay off each year, the assumption that one-third of the domestic and market-based debt stock will be refinanced during a 12-month period is reasonable, given the short average maturities for the MENA developing oil importers.10

Leaving aside the special case of Lebanon, which does not have access to international financial markets, the interest payments that developing oil importers would have to pay as a percent of GDP would increase by between 0.15 percentage point (Morocco) and 1.5 percentage points (Jordan). These calculations take into account each country’s 2021 domestic and market-based debt levels and the change in their respective yields since the start of the war in Ukraine.11

As shown in the last two columns of the table, this translates into a marked increase in the ratio of interest payments to government revenues for all countries. Most notable are the increases for Tunisia (2.6 percentage points) and for Egypt and Jordan (around 5 percentage points). Furthermore, at 56 percent of government revenues, Egypt’s interestpayments-to-revenues ratio is very high.12

9 Data on domestic and market-based yields were not available for Djibouti; hence, Djibouti is not treated in the subsequent analysis. 10 For example, Moody’s reports that the average maturity of Egypt’s debt stock was 3 years in 2021: Moody's Investors Service: Government of Egypt: FAQ on external, fiscal and social risks, 16 June 2022. 11 Hence these estimates are conservative because they do not take into account the impact of currency depreciations, which raises the interest payments burden in domestic currency units.

And they are also under-estimated if the increases in debt service costs turn out to last for several years; here we are assuming that they affect only one-third of domestic and foreign currency debt. 12 For example, Moody’s Investors Service considers that interest-payments-to-revenues ratios above 25 percent are associated with high risk of debt distress: Moody's Investors Service:

Rating Methodology: Sovereign Ratings Methodology, 25 November 2019.