Recently, there has been much talk about the possibility of Arab countries declaring bankruptcy due to successive economic crises, which were perpetuated by the Russian war in Ukraine.
The term "bankrupt state" remains a terrifying term for the government of any country, as well as for international economic institutions, because of the devastating consequences for the country's image externally and the explosion of social crises at home.
What does state bankruptcy mean?
“State bankruptcy” remains a literary term to express the situation in which the state is unable to pay its debts, because unlike companies and individuals, there will be no seizure of their property, as the state has its sovereignty, even if it is unable to pay its debts.
The state reaches the point of bankruptcy when the interest on debts accumulates, and its budget becomes unable to pay these interests, when it announces to the institutions that lent it, whether it comes to the internal market or international institutions, that it is no longer able to pay these debts.
Then the state can enter into negotiations with the International Monetary Fund, which economists describe in their literature as “the last party that can be resorted to”, to solve this problem, as the Fund will not accept the help of this state except when it accepts, in turn, to implement many of its sometimes harsh policies, as The state is required to reduce public expenditures on health and education and to reduce the mass of public servants' wages.
Which countries are most at risk of declaring bankruptcy this year?
The credit rating agency Fitch warned that developing countries are the countries most at risk of declaring bankruptcy, as investors do not accept loans to these countries except at very high interest rates, and this ratio moved from 4.4% to 5.1% within the past ten years.
According to the figures provided by the agency, the amount of money paid by poor countries as an interest rate for debt is the same as the amount of money paid by rich countries, which amounted to approximately 711 billion dollars, and this is because rich countries obtain loans at a low interest rate unlike poor countries.
The agency confirmed that the Corona epidemic contributed to the exacerbation of the crisis, which will lead to the presence of 5 countries in the list of countries threatened with bankruptcy since 2020, which are Argentina, Ecuador, Lebanon, Suriname and Zambia, and the agency expected that the situation will become darker this year.
Which Arab countries are the most indebted?
It must be emphasized that the phenomenon of high indebtedness is a global phenomenon, especially since 2020, the year of the Corona epidemic, because the countries of the world borrowed in that year alone the sum of what they borrowed for 7 years before it.
The volume of global debt amounted to about 226 trillion dollars by the end of last year, which is a record and unprecedented in history.
It continues to rise due to the Russian war on Ukraine and the global price hike, which is expected to reach 300 trillion this year.
On the Arab level:
Sudan leads the Arab countries in terms of borrowing with 177 percent of the gross domestic product, the third highest in the world.
Then Lebanon with 157% of the gross domestic product.
Bahrain is in third place with 100% of the gross domestic product.
Jordan accounts for 94% of the gross domestic product.
Egypt is in fifth place with 86% of the gross domestic product.
There is a lot of talk about the Egyptian situation and the rise in its debts more than other Arab countries, given the size of the Egyptian gross domestic product, which is the third in the Arab world (331 billion dollars).
How does the state reach the stage of bankruptcy?
The state becomes bankrupt when its debt ratio gets out of control and becomes uncontrollable, meaning that the growth rate becomes insufficient to bear the costs of the debt interest rate, making it enter into a vicious circle that cannot be exited.
This situation is called by economists the "debt snowball", meaning that the more the state defaults on its debts, the higher the interest rate on the debts that it will obtain, which means an increase in the size of the debt, and so on until the state reaches a stage where it cannot pay these interests.
The level that the indebtedness should not exceed, compared to the gross domestic product, remains linked to many economic factors, the most important of which are the economic growth rate, the volume of the gross domestic product, and the interest rate on debts obtained by this country.
For example, Japan is considered the most indebted country in the world, with its debt reaching 250% of the gross domestic product. However, this situation remains normal for the Japanese economy and is not a cause for concern given the size of Japan's gross domestic product and the growth rate. It also obtains Lowest interest rate debt in the world because donors trust the strength of the Japanese economy.
What should the state do when it declares bankruptcy?
When the state declares bankruptcy, the real challenge becomes finding someone to lend it money, as it becomes almost impossible for any donor to trust it, and for this it is:
The first step she takes is trying to balance her economic accounts by cutting her expenditures drastically, so that her tax incomes are equal to her expenditures.
And if it is unable to do so, it resorts to using citizens’ savings in order to obtain hard currency, a step that leads to major political and social crises, and this step may lead to a major flight of capital outside the country, as happened in Cyprus and almost happened in Greece.
As for the last step, it is resorting to the sale of state property, i.e. resorting to privatization. Here, too, it may encounter a problem in finding an investor capable of investing in public utilities in a country threatened with bankruptcy.
And the last solution is to hand over its economic decision to the International Monetary Fund, which presents its recipe for a solution, which will always include controlling public expenditures and reducing the wages of government employees.