From Egypt to Lebanon .. What is the relationship of protests to excessive dependence on debt?

The reliance of Middle Eastern governments on borrowing has fueled pain and anger among their citizens, a Bloomberg report says.

According to an article by the writer Amr Adly on the Bloomberg website, the demonstrations roaming the streets of Lebanon come in the wake of protests against the deteriorating social and economic conditions prevailing in many other Middle Eastern countries, especially in Iraq and Egypt.

Although the protests take place in different national political and economic contexts, protesters share many grievances, such as rampant corruption, deteriorating public services, the suffering caused by government austerity programs, and the rise in indirect taxes.

Foreign investors who are wondering how to deal with the protests should keep a close eye on the burdens of public debt that have burdened these countries.For several years now, public debt has been a major attraction for investors in many MENA countries.

Stagnation and poverty
Net foreign direct investment inflows have either stagnated or declined, and governments in the region - especially those that have long suffered from low tax revenues and a persistent balance of payments deficit - are heavily dependent on external and domestic debt for financial sustainability.

Egypt and Lebanon are illustrative examples. In Egypt, while intensified foreign borrowing has led to an economic recovery, the government's severe austerity measures as part of an IMF loan package have caused high levels of poverty and a general decline in the purchasing power of Egyptians from both classes. Central and poor, says the writer.

The writer added that Lebanon is known for its long history of dependence on debt due to the limited state's ability to impose taxes on the productive sectors, which forced the economy to resort to debt and remittances from abroad.

As a result, foreign loans are essential for both the Lebanese and Egyptian economies.

Obtaining loans depends on the state's ability to achieve macroeconomic stability by reducing expenditures and increasing tax revenues, or often imposing VAT and sales taxes.

In a bid to counter popular protests, the governments of the two countries have already made concessions, including backtracking on their plans to impose further austerity, raise taxes, or both.

For Egypt, the government froze further reductions in fuel subsidies and lowered fuel prices, as well as reintroducing 1.8 million citizens into the food subsidy program after their names were removed a few months ago, the writer said.

In Lebanon, the so-called "Internet tax" that sparked the recent protests has been canceled, and the government has announced plans to freeze consumption taxes.

Wealth taxes
The lesson to be learned by governments is that it has become difficult to tackle financial problems using traditional means of curbing public spending and increasing indirect taxes.

Current protests demonstrate that countries in the Middle East cannot continue to rely on debt for growth, but need to address structural financial problems by raising tax revenue ratios to GDP.

Moreover, these countries should increase revenues by imposing direct taxes, especially taxes on wealth since they are easier to register and collect and do not negatively affect investment, growth or employment, as well as limit speculation and stimulate the use of assets for investment In productive activities capable of creating jobs and real growth.

Reducing dependence on public debt would free up capital and allow it to invest in productive private sector, a better form of bank lending to governments seeking to finance expenditures.

These resources are desirable to be used in tradable sectors such as manufacturing, agriculture and services that require highly skilled labor, as they will not only create jobs, but improve the balance of payments situation in these economies, according to the Bloomberg report.

In the long run, this will reduce governments' excessive dependence on external debt to keep their economies together.

Such ideas were likely to be unpopular in the Middle East and North Africa, particularly since the streets were infuriating, and in turn decision makers should take those solutions into account.

It is noteworthy that Lebanon is one of the most indebted countries in the world, where the ratio of debt to GDP reaches 140% and the value of some data indicate that it exceeds 79 billion dollars, while Egypt has external debt exceeds 93 billion dollars.