TURISTS CAN have not returned to Egyptian beaches and historic sites, but portfolio investors are back. Since May, foreigners have taken on more than $ 10 billion in local currency debt, reversing a massive sell-off since the early days of the covid-19 pandemic. A similar enthusiasm exists across the region. The six members of the Gulf Cooperation Council issued a record $ 100 billion in government and corporate debt in the first ten months of the year. Treasury bills are also wooing local investors, but not always successfully: the Tunisian government was pushed back when it asked the central bank to buy treasury bills.

The Arab states are on a borrowing frenzy. Even before the arrival of Covid-19, many were taking on new debt to cope with low oil prices and sluggish economies. The pandemic has only increased their needs. By next year, public debt ratios in many of these countries will be at their highest level in two decades (see graph). The 11 oil and gas exporting countries in the region owed an average of 25% of GDP from 2000 to 2016. Next year the IMF projects that this ratio will reach 47%. The increases are smaller in states without energy resources, but only because they already had high debt levels.

Other oil-producing states appear more fragile. Bahrain’s debt toGDP The ratio is expected to reach 131% next year, against an average of 34% from 2000 to 2016. Oman will need 89%. Both were largely excluded from the bond markets earlier this year. Oil markets offer little hope for their budgets: renewed lockdowns in Europe and increasing cases in America pushed prices down in October.

Elsewhere in the region, the pandemic reversed years of tax reforms. Egypt cut subsidies and introduced a value-added tax after borrowing $ 12 billion (over three years) from the IMF in 2016. It reduced the deficit by 11% from GDP in 2016 to 7% last year and it was on track to reduce its debt ratioGDP to 79% in 2021. However, the pandemic sent it back to IMF for a loan of $ 5.2 billion. Next year, its debts are expected to rise to 91% of GDP. Jordan will follow closely behind at 89% and Tunisia at 86%.

For now, at least, investors are enthusiastic about Egyptian debt. Yields are high – the last batch of six-month treasury bills paid around 13.5% – and the authoritarian regime of Abdel-Fattah al-Sisi has wiped out concerns about political instability. But the feeling can be fickle. Between March and May, $ 12.7 billion came out of local markets.

All of these loans offer limited returns for Arab states. Over 70% of Kuwait’s budget is spent on salaries and public sector subsidies. He is taking on debt not to finance reforms but to support a bloated bureaucracy. Arab states have also been stingy with their covid-19 stimulus packages. They allocated on average 2% of GDP for pandemic aid, up from 3% for all emerging markets, in part due to limited fiscal firepower.

The loan helped them cope, but it also exacerbates this problem (Egypt is already spending around 9% of GDP on debt service). Oil prices are expected to remain low next year, and vital industries such as tourism will be slow to recover. Heavier indebtedness will limit the extent to which Arab governments can shake up their sluggish economies. ■

This article appeared in the Middle East and Africa section of the print edition under the headline “Do not flatten the curve”