Lebanon’s elephant in the room

As the public debt looms, many prefer to look away

Lebanon's new cabinet has $50 billion of debt weighing on its shoulders (AFP)

by Sami Halabi

Lebanon’s relationship with debt closely resembles an addiction to alcohol. For starters, it’s quite evident that the country wasn’t thinking straight when it took out loans with interest rates of more than 35 percent to fund its post-war reconstruction. Then, instead of accepting the inevitable fiscal hangover and reforming its institutions, the country continued to borrow money (mostly from its own banks) and spend it on those same institutions that never shaped-up. In order to remedy this situation, it may be wise to refer to the American Psychological Association’s summary of the ‘12 Step Program’, which has helped many overcome alcoholism. The first step states that recovery requires one to “admit that one cannot control one’s addiction or compulsion.”

Lebanon has yet to truly admit that it has a problem. At nearly $50 billion and 154 percent of Lebanon’s gross domestic product, the debt is mounting and the only policy the Lebanese government has enacted is to swap the short-term debt for long-term debt, in an attempt to keep its head above water just that little bit longer.
Now that Lebanon has a new government, a line is again being drawn in the sand between those who believe reducing the debt is the single largest economic problem the government must deal with, and those who consider it to be “perfectly sustainable,” as does Lebanon’s Central Bank Governor, Riad Salameh.

The “sustainable” theory goes that, given the high liquidity levels in Lebanese banks, they have the cash on hand to continue lending to the government to fund its spending; given Lebanon’s high GDP growth rate, government revenues in the form of taxes will grow, bringing down the yearly deficit and, given that the American dollar is forecast to drop in value and most of Lebanon’s debt is priced in dollars, the value of the debt will fall all by itself anyway. If Lebanon is attracting billions of dollars of investment inflows and registering record growth numbers, then why rock the boat? In time, the debt will reach a manageable ratio relative to GDP and the problem will solve itself.

That’s the rosy version, and a line put forward by prominent members of Lebanon’s banking sector, though such optimism may be easier when they hold around $110 billion in assets and are profiting from much of the debt anyway. The rest of Lebanon, however, hasn’t the luxury to be so cheerful while the country runs a deficit of 10.5 percent of GDP and has spent 20 percent more in the first three quarters of 2009 than it did in 2008. Even though these figures may be within global norms today, one must remember that elsewhere in the world government expenditures have skyrocketed to bailout their economies.

There are only two countries in the world that are in a worse state than Lebanon in terms of their burden of debt — one of them is Zimbabwe, where the local currency value has all but evaporated, and the other is Japan, the world’s second largest economy.

Japan already has some of the best infrastructure in the world; Lebanon doesn’t.

With the debt looming overhead, not only is the Lebanese government less able to provide or upgrade their antiquated public services, they also have less ability to fledge many sectors that people depend on such as agriculture or industry, not to mention protect their strategic and military interests. Lest we also forget that another conflict with Israel would completely wipe out Lebanon’s new-found investor confidence, or the fact that our politicians can hardly be trusted not to start another political debacle, putting us back in a situation of low, no or negative growth.
Those who believe Lebanon’s debt is sustainable because of the country’s economic growth tend to gloss over the fact that growth has not been uniform across all sectors, and that this is resulting in an economy that lacks diversification — the Lebanese are placing all their eggs in just a few very large baskets. To make matters worse, other untapped potential markets for development — such as water resources, refining and hydrocarbon development — are still taboo for Lebanon’s economic policy makers.

Basic economic theory, and history for that matter, dictates that for every boom there is a corresponding trough, which means that at some point in the near future the debt will not seem as manageable as some view it during this current growth cycle. Hence, as one European Commission economist stated last October, Lebanon’s fiscal situation is, and will likely remain, “unsustainable.”

Even the likely privatization of telecoms and electricity, from which the proceeds will go to reducing the principal on the debt, will not prove to be a panacea. At present valuations, Lebanon will not get much in return for these national industries due to their dismal state.

A focus on growth should always be a priority for an economy, but the kind of growth currently on the table boxes the economy in and tries to shield it from the inevitable reality of having to deal with the debt. An economy’s sustainability comes from its versitility and ability to grow on many levels — not just its ability to pay the interest on the debt it hopes will go away.

First published in Executive Magazine’s December 2009 Middle East issue

As the public debt looms many prefer to look away
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