The Banking Executive Magazine - April 2025

Since 2020, the global economy has endured an unrelenting series of dis- ruptions—from a global pandemic and inflationary pressures to geopo- litical tensions and monetary tighten- ing. And yet, despite these severe and successive shocks, the global economic system has, thus far, demonstrated a surprising degree of stability. However, this resilience masks a growing vulnerability that can no longer be overlooked: sover- eign debt. At the heart of the matter is a silent accumulation. According to recent global data, total debt has surged nearly 25% above its pre-pandemic peak—when it was already at an all- time high. This escalation is not merely a numerical concern. It has far-reaching implications for every economy’s capacity to respond to fu- ture crises, particularly in the face of renewed protectionism, rising tariffs, and prolonged policy uncertainty. For financial leaders in the Arab world, where economic diversifica- tion, foreign investment, and struc- tural reforms are top policy priorities, the consequences of unchecked debt trajectories are especially pertinent. The question is not whether debt matters—but rather how its manage- ment, sustainability, and long-term implications are factored into re- gional economic strategies. DEBT AS DEFERRED TAXATION: A Double-Edged Fiscal Tool Debt, by design, enables governments to un- dertake long-term investments or support national incomes during pe- riods of contraction. It is a tool— often indispensable—used in lieu of immediate taxation, allowing economies to maintain momentum in the face of external shocks. How- ever, debt is not free capital. It is a commitment deferred—a tax invoice sent to future taxpayers. The problem arises when the cost of borrowing consistently outpaces na- tional income. In such a scenario, debt is no longer an instrument for development but a liability con- straining growth. Taxes must rise, public investment must fall, or both. In this way, persistently high debt levels become a barrier to economic progress—not a bridge to it. This dynamic is playing out with stark intensity in many parts of the developing world. Over the past fifteen years, emerging economies— particularly low-income nations— have taken on debt at a pace of 6% of GDP per annum. For comparison, such rates of debt accumulation have historically been associated with a 50% likelihood of triggering a finan- cial crisis. The Arab region is not exempt from this risk. Several states, particularly those navigating post-conflict recon- struction or managing expansive welfare and subsidy programs, face mounting debt pressures. While Gulf countries may enjoy stronger buffers due to hydrocarbons and sovereign wealth funds, the broader Arab world must contend with rising bor- rowing costs, limited fiscal space, and demographic pressures. INTEREST RATE SHOCKS AND THE DEBT-SERVICE TRAP Compounding the debt dilemma is the reality of interest rate normaliza- tion. The world is emerging from a decade of ultra-low rates—a mon- etary era that encouraged govern- ments to borrow generously. But as central banks in advanced economies recalibrate toward tight- ening, the cost of servicing this accu- mulated debt has soared. Net interest payments in many devel- oping economies have doubled. In 2007, such payments averaged 9% of government revenues; by 2024, they exceeded 20% in many cases. These are not abstract figures—they are fiscal constraints that divert pub- lic resources away from essential sectors like healthcare, education, and infrastructure. This vicious cycle—where govern- ments borrow to fund current obliga- tions, then must cut development spending to repay those debts—is in- creasingly visible across the Global South. In particular, the 78 poorest countries eligible for concessional loans from the World Bank’s Interna- tional Development Association ISSUE 196 APRIL 2025 the BANKING EXECUTIVE 19