The Gulf states are key lenders of last resort, playing a significant role in rescuing distressed states in the Middle East, North Africa and beyond since the 1960s. This new report examines in depth how the Gulf states have pursued bailout diplomacy to cultivate influence and shape their wider region.
Since the oil shock of 1973, the Arab Gulf states have emerged as powerful geo-economic actors. They have developed an impressive arsenal of economic and financial tools to shape their region’s political and security environment. From the Iran–Iraq War in the 1980s to the 2011 Arab Spring and its aftermath, the Gulf states have used aid, investments and other capital flows to play a central role in Middle Eastern geopolitics. Whereas policymakers and analysts have devoted much attention to China’s Belt and Road Initiative, the Gulf states’ geo-economic strategies – though no less consequential to the Middle East and North Africa (MENA) region – are comparatively poorly understood.
Unmatched in scale by traditional Western and multilateral donors, the Gulf states play a unique role as providers of bailout assistance to the wider MENA region. Between 1963 and 2022, the Gulf states disbursed an estimated US$363 billion (constant 2020 USD) to 22 countries in the wider MENA region and beyond. They have disbursed more bailout aid to the MENA region than most traditional bilateral and multilateral donors, including the IMF, which spent just over US$162bn (constant 2020 USD) in loans to those countries over the same period. By providing bailout assistance at such a scale, the Gulf states have established themselves as central players in the MENA region’s development-aid landscape.
A new study carried out by the International Institute for Strategic Studies (IISS) sheds light on one of the Gulf states’ key methods of projecting geo-economic power beyond their borders. ‘Bailout diplomacy’, defined as the practice of disbursing large packages of financial or in-kind assistance to bail out states facing financial or economic crises, has been a key instrument of Gulf foreign policy since the early 1970s. Given the speed and scale at which the Gulf states can deploy budgetary support, central-bank deposits and oil and gas assistance to rescue distressed nations, they are often able to dramatically shift the political calculations of target states in their favour.
Understanding Gulf Bailout Diplomacy
Despite its magnitude, Gulf bailout diplomacy is not fully understood. The Gulf states do not systematically report on disbursements of bailout aid, nor do they regularly articulate the objectives of these disbursements. Although national-development agencies in the Gulf states have increasingly adopted the Organisation for Economic Co-operation and Development’s (OECD) reporting standards on Official Development Assistance, bailout aid – which often circumvents these agencies – is not normally disclosed in the same way. The lack of data makes it difficult to grasp the real scale of Gulf bailout interventions or weigh up their implications for Middle Eastern geopolitics.
This IISS report quantifies Gulf bailout interventions and assesses their geostrategic implications, producing a novel insight into a key dimension of the Gulf states’ foreign policy. To this end, the IISS has built an original dataset comprising nearly 500 data points of general budget support, central-bank deposits, oil and gas assistance, debt write-offs, purchases of government bonds, credit default swaps and other instruments deployed by the Gulf states during the period between 1963 and 2022. The study also examines Gulf bailout diplomacy in six country case studies (Egypt, Iraq, Jordan, Pakistan, Sudan and Yemen), to identify its objectives, evaluate its success and track its evolution over time. By drawing on the dataset and the in-depth case studies, it highlights the Gulf states’ growing agency in shaping their region and captures key trends in how the Gulf states have mobilised financial resources at times of global and regional uncertainty.
Six Decades of Gulf Bailout Diplomacy: Altruism or Realpolitik?
For six decades, the Gulf states have used their bailout capabilities to protect their core interests from seismic shifts in the region’s geopolitics. Although some have attributed the political turn in Gulf foreign aid to the Arab Spring, bailout packages motivated by security or political considerations can in fact be traced as far back as the early 1960s, with the aforementioned approximate US$363bn (constant 2020 USD) in bailout aid having been provided to the 22 MENA countries since then. While Gulf assistance helped rescue distressed countries in the region from bankruptcy on multiple occasions, most of the aid was provided in response to regional shocks that presented a direct threat to Gulf interests.
Gulf bailout diplomacy has gone through five key phases that correspond closely to the MENA region’s geopolitical trajectory. The first phase began with the 1978 Baghdad Summit, during which the Gulf states pledged to provide Jordan, Lebanon, the Palestinian Liberation Organization and Syria with a total of US$3.5bn per year for ten years., At the 1979 Tunis Summit, the Gulf states also committed to providing Lebanon with US$0.25bn in aid per year between 1980 and 1984. The Baghdad Summit, held in the aftermath of the 1978 Camp David Accords between Egypt and Israel, rallied the Arab states against Egypt. Despite their initial reluctance to isolate Egypt, the Gulf states suspended all aid to Cairo and committed to providing Egypt’s competitors in the region with financial support.
Gulf support for Arab states during the 1980s overlapped with the 1980–88 Iran–Iraq War. During the war, the Gulf states provided Iraq with colossal amounts of bailout support. Fearful of Iran’s designs for exporting its revolution of 1979 and fomenting unrest, the Gulf states bankrolled Iraq’s military campaign during the war. The Iran–Iraq War was the most significant episode of Gulf bailout intervention, accounting for nearly 27% of all Gulf bailout assistance disbursed since 1974. The war presented an opportunity for the newly independent Gulf states, which were awash with oil revenues thanks to the 1973 oil shock, to influence regional-security outcomes and shape their own environment.
The Gulf states’ experiment in bailout diplomacy shortly backfired, however, when Saddam Hussein, emboldened by this economic support but still in need of further finance following the Iran–Iraq War, invaded Kuwait in 1990. During this second phase, the Gulf states used bailout diplomacy to rally international support for Kuwait’s liberation and reward its regional allies, notably Egypt, Morocco and Pakistan, for standing by their side. The 1990–91 Iraqi invasion of Kuwait was an existential moment for the Gulf states. In addition to annexing Kuwait, Hussein also presented a real threat of overrunning Saudi Arabia, prompting the United States to intervene militarily.
Following the 1991 Gulf War, Gulf bailout diplomacy entered a third phase in which it did not feature prominently within the Gulf states’ economic-statecraft arsenal. With Iraq weakened from the war, Iran pursuing a more moderate foreign policy under president Hashemi Rafsanjani, and the US stationing its troops in the Gulf region on a quasi-permanent basis, the geopolitical requirement for the Gulf states to intervene in their wider region was less pressing. Nonetheless, the Gulf states intervened to help Pakistan weather US sanctions imposed over its 1998 nuclear tests and to keep the 1989 Taif Accords, which marked the end of the Lebanese Civil War, extant by funding post-war reconstruction in Lebanon.
The fourth defining phase was the 2011 Arab Spring, a pivotal moment in the region’s history. The Gulf states found the fall of their longstanding ally Egypt (readmitted into the Arab League in 1989), the spread of unrest to Bahrain, Jordan, Morocco, Oman and Yemen, and the possibility that hostile Islamist forces could take over, deeply alarming. To stabilise friendly governments and influence political transitions, they disbursed over US$60bn (constant 2020 USD) in bailout aid to Egypt, Jordan, Morocco, Pakistan, Sudan and Yemen between 2011 and 2019. The Arab Spring also accelerated the UAE and Qatar’s rise as major practitioners of bailout diplomacy, sharpening intra-Gulf Cooperation Council rivalries. The Gulf states’ bailout interventions shaped the political transitions of Egypt, Sudan and Yemen and helped keep Jordan and Pakistan afloat, at least temporarily.
More recently, the economic repercussions of the COVID-19 pandemic and Russia’s invasion of Ukraine have inaugurated a new, fifth phase of Gulf bailout diplomacy. Struggling with high energy and food prices, many countries in the region face dire economic prospects. Meanwhile, the Gulf states enjoy a large windfall from those same energy prices. Between 2021 and 2022, the Gulf states disbursed a staggering US$34bn (constant 2020 USD) in bailout aid to Bahrain, Egypt, Jordan, Pakistan, Turkiye and Yemen, over half of which went to Egypt alone. Given the global economic headwinds, the Gulf states risk facing greater demand for additional bailout aid from distressed partners in the region.
Implications for Western Donors and International Financial Institutions
Gulf bailout diplomacy carries far-reaching implications for Western development players and international financial institutions (IFIs). The Gulf states are longstanding partners of IFIs; they contribute to their budgets and cooperate with them in multiple ways. In times of crisis, the Gulf states are regularly called upon by Western powers and IFIs to intervene. To illustrate, some of the IMF’s loans to the wider MENA region, such as the US$12bn package approved for Egypt in 2016 and US$1.17bn package approved for Pakistan in 2022, were enabled by complementary financing from the Gulf states. This provides the Gulf states with greater influence within those institutions and makes them key interlocutors for external powers in the region.
The Gulf states, however, have increasingly pushed for their own security and political interests independently from Western priorities. Although traditional donors such as the US and Japan have also practised bailout diplomacy, Gulf bailout interventions differ in some respects. While Gulf Overseas Development Aid practices have gradually aligned with Western standards, bailout support, which is usually decided by Gulf leaders themselves, has remained closely connected to top-level political interests described in greater detail in this report. Unlike IMF packages, Gulf bailout support is not usually conditioned on economic or governance reforms. It has sometimes been used as an alternative source of funding by recipient countries that did not want to submit themselves to such reforms. With other ‘emerging donors’, such as China, the Gulf states are challenging established development and financial practices. As the Gulf states assert their foreign-policy independence, their bailout interventions are more likely to evolve in ways that may not always align with Western priorities.
Between Economic Visions and Energy Transitions: A New Bailout Diplomacy?
The Gulf states’ ambitious economic visions and shifting attitudes towards economic and fiscal sustainability could have far-reaching consequences for their willingness to bail out other nations. Given uncertainty over the global, long-term demand for oil and gas, the Gulf states have adopted visions, most famously Saudi Arabia’s Vision 2030, intended to pave the way for a diverse and more sustainable economic future. Coupled with a more prudent attitude towards fiscal spending, the Gulf states’ economic designs and energy-transition plans may leave less room for generous bailouts. Although the increase in energy prices, exacerbated by the COVID-19 pandemic and the Russia–Ukraine war, is triggering a rebound in Gulf bailouts, the long-term direction of the Gulf states’ economic policies may accelerate their shift towards a more targeted and transactional approach to economic statecraft. Nonetheless, the core geopolitical drivers of Gulf behaviour, notably the desire to promote their national interests, assert their foreign-policy independence from the US, compete with regional adversaries and stabilise their allies in the region, seem unlikely to change.