Banking on joblessness

This foreign worker has the most to gain from lending to real estate (Photo: Sam Tarling)

Since the end of the civil war, Lebanon has developed a relationship between its economy and banking sector that resembles an old beat-up truck carrying a heavy load on a road to nowhere. The banks keep the truck (in this case the economy) running with the money they pump into the gas tank. In return, the driver (the government) agrees to take on a heavier load of debt as he drives the economy aimlessly toward a destination of which even he is not really sure. Whenever the truck slows down everyone gets worried that it has finally given out and the price of gas to keep it going will be too high for the driver to pay. When that happens the mechanic, in this case the central bank, comes along and makes an arrangement with the government and with the banks so that the fuel can be afforded. So far the arrangement has kept the truck running. But the further the truck travels, the more beaten-up it becomes, and the less it delivers to its owner, the people.

“The system is not creating jobs,” says Jad Chaaban, acting president of the Lebanese Economics Association (LEA) and assistant professor of economics at the American University of Beirut, in relating the banking sector’s contribution to GDP. “Its creating consumption but this is not sustainable because there are no jobs and the incomes to finance it. It’s just creating a debt cycle.”

An economy of consumers

At the end of the first quarter, Lebanon’s commercial banks held $30.9 billion in loans to the private sector and $28.2 billion in loans to the government, according to Banque du Liban, Lebanon’s central bank.

Since gross domestic product is comprised of several components, it can be calculated either by looking at expenditure (the sum of consumption, investment, government spending and net trade) or various income approaches. But because Lebanon’s lack of accurate or timely GDP statistics on many of the elements needed to compute output using the income approach is useless as a basis for analysis. The only way to make an assessment of how banks contribute to the economy is to consider how the money they pour into the country affects the elements of the national accounts — the numbers that come together to make up national output or GDP — using the expenditure approach.

Lebanon calculates national output by adding consumption, gross fixed capital and changes in inventory (in other words gross net investment), and exports, then subtracts imports from that figure. Looking at the last available national accounts from 2009, consumption accounts for $32.45 billion, equal to 92 percent of total GDP at nominal prices that year. Gross net investment, by comparison, totaled $11.98 billion, equivalent to just 34 percent of nominal GDP.

Effectively, that means Lebanon’s economy is heavily dependent on how much it can consume.

Consumption requires income, which comes primarily from wages, as well as remittances, which came in at $8.2 billion last year, according to the World Bank.

Official employment figures are scant and widely believed to be inaccurate; figures on wages are pretty much non-existent, but one does need a job to have a wage. In this regard the banks do not contribute as much as is popularly thought; the Association of Banks in Lebanon puts the number of employees in the banking sector at 27,268 in 2009, the latest figure available. Total wages and allowances during that year came to $732 million, or just 2 percent of nominal GDP during the year.  Indirectly, however the banks’ private sector loan portfolio supports different sectors that spur some consumption and investment.

“We play a major role. Lending for the economy is like blood for life,” says Freddie Baz, chief financial officer and group strategy director at Bank Audi.

The latest available figures from the central bank for how loans are split up in the financial sector date to the end of 2010 and were released in May; total loans to the private sector from the financial sector were $38.7 billion, up from $31.56 billion a year earlier. Of that figure, 77.68 percent of the total number of borrowers had taken out individual loans.

The LEA’s Chaaban explains that the predisposition toward consumption is a matter of a glass being “half full or empty” — Lebanon needs consumer spending to spur confidence but at the same time the banks have become “almost partners in setting up fiscal policy,” and have an interest in seeing consumption in the economy maintained. According to Baz and other bankers Executive has spoken with, loans go to the economy according to its structure. At present, the economy is not just heavily tilted toward consumption but also consumption of imports as well as goods and services produced by specific sectors.

You are what you fund

Economies are defined by their primary, secondary or tertiary activities. Primary activities are those that produce raw materials and basic foods whereas secondary materials use the former to produce finished products. These first two activities are commonly agreed to be characteristics of classical productive sectors. Tertiary activities are those associated with the services sector and in developed economies account for the overwhelming majority of jobs.

According to the 2009 national account, the proportion of loans given to what economists label as “productive sectors” is scant at best. Agriculture and livestock made up 4.8 percent of output ($1.7 billion at nominal prices) that year, constituting a 6.9 percent real contraction, while industry made up only 6.4 percent of output ($2.6 billion at nominal prices), also falling 4.2 percent in real terms. The only secondary productive sector that saw an increase in output was construction, making up 13 percent of output ($4.7 billion at nominal prices) constituting a real expansion of value-added by 10 percent.

Assuming that the economy is relatively similar a year later, the first discrepancy with regard to the allocation of loans to sectors according to their output is obviously the loans to the government to finance the public debt, which currently stands at more than 130 percent of GDP. Government expenditure constituted 9 percent of output in 2009 ($3.16 billion at nominal prices), an expansion of 8.5 percent on the year previous.

More is not spent on much-needed public services and infrastructure for several reasons, including the government’s inability to pass a budget for the past six years, the large fiscal burden for civil service employee salaries, and predominately because the government has to pay its interest on the public debt, which is majority-held by the same local banks that dole out the loans.

One also notices that loans to construction constitute 16 percent of total credits to the economy ($6.3 billion), which is roughly the same as output. If one considers all the elements of the real estate industry together (construction, real estate rents and housing loans) the figure rises to 35 percent of total loans ($13.6 billion). This, however, could be an oversimplification of the sectoral risk the real estate sector poses — especially given the recent decline in retail prices — because a housing loan is backed by a real asset, requires a significant down payment by the buyer and the amount of refinancing on retail property is ostensibly nothing compared to that seen in US when the housing crisis triggered the global financial crisis in 2008.

“The process of building is development but the process of selling is different,” says Marwan Iskandar, economist and chairman of Banque de Crédit National.

Even so, walk by any construction site in Lebanon and one will notice that the majority of workers are not Lebanese. Stroll into any real estate broker’s office, however, and the opposite is true. Since most construction workers are paid off the books and breakdown figures for real estate jobs are not published, it is difficult to gauge how many jobs are being created for locals and what the net income effect on the economy is for the sector that can go to construction.

The only indicator is the national accounts, which showed the output of the construction services sector to be some $398 million at nominal prices in 2009, below 10 percent of nominal construction output for that year. Ergo, the net effect on job creation, and thus local wages and the economy, is presumably much less than in a country that employs local labor in that sector.

Those who are quick to accuse the banking sector of not creating jobs often point to their contribution to the tertiary sector. “Does a large farm produce as much as two expert doctors?” responds Iskandar rhetorically to the idea. “Jobs, maybe more so. But if you are concerned about the national income you have to weigh these things. Is it really a good thing to employ many people who produce a little, or a few people who produce a lot and then allow you to invest because their savings go into facilitates? This is debatable.”

Make up the breakdown

But even so, here the loan breakdown formula propounded by banks doesn’t make much sense: total contribution of market services and trade at nominal prices in 2009 was $20.6 billion constituting 59 percent of the total. If transport and communications are added to this figure it becomes $23.3 billion or 66 percent of the economy. Loans to “trade and services” at the end of 2010 came to almost $14 billion, or 36 percent of the total. Adding financial intermediation and “others” — which includes health, social work, defense, public administration and regional organizations — that figure increases to just 48 percent.

The difference between the bankers’ formula relating to loans and output can be explained by the loans that go to individuals. In total at the end of last year $9.1 billion went to individual loans (including housing loans at $4.5 billion) making up some 24 percent of the total. This allows for further consumption that is not predicated on actual labor and output. “The banks also give interest on deposits, mostly to consumers, which also inflates the GDP,” says Chaaban.

How productive that money is for the economy also depends on how it is spent. “If you buy cars and homes then, yes, you are contributing. But if one takes out a personal loan just to have a good time then not really,” says Nassib Ghobril, head of economic research and analysis at Byblos Bank.

What is certain, however, is that the loan portfolio of banks is heavily skewed toward consumption. This inherently creates a problem for output because when import prices rise — as is the case presently because of rising commodity prices — GDP suffers as people’s ability to consume decreases but their dues to the banks stay the same.

Moving away from such a model will require concerted public policy and regulation to steer the economy toward a model that can produce locally and shield the economy from external shocks.

“Today in Lebanon, increasing the job component of growth can only be possible by shifting our growth model from internal demand as a major driver to external demand,” says Baz. “If the Lebanese economy is a tertiary activities economy and a services industry economy, it is not up to us to make miracles and shift it overnight to a manufacturing economy… It’s like a tanker — when you want to change the direction it takes time.”

How long it will take, if that is even the intention of Lebanon’s so-called economic policy makers, is as unclear as the still non-existent government’s policy of job creation. In the meantime, the banks will likely continue to contribute to the economy in the same way they have since the end of the civil war. As for the Lebanese, it also seems they will have to wait and see if the system is maintained or, perhaps at their own accord, it eventually crumbles.

“You don’t decide if it’s sustainable and neither do I,” says Baz. “History will always tell if it is sustainable or not.”

First published in Executive Magazine’s June 2011 issue


Author: Sami Halabi

Sami Halabi is a policy consultant who covers a range of policy issues and analyses development programmes, particularly in the Middle East and North Africa. Sami specialises in analysing policies and programmes in order to provide evidence-based recommendations to policy-makers and international development agencies. Sami holds a Master of Public Policy with Distinction from The University of Edinburgh.

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