Public Debt Management for Lebanon: Situation Analysis and Strategy for Change

By Imad Jomaa

Prior to 1975, the Lebanese economy was one of the most dynamic in the Middle East. This, however, came to an end with the beginning of the Civil War (1975-1990), which exacted a heavy toll in both human and material terms, and resulted in fundamental changes in the economy. After the 15-year-long conflict, Lebanon faced formidable economic challenges in the context of severe fiscal imbalances and a particularly difficult external environment. The government deficit and real interest rates have been extremely high; the public debt ratio has risen sharply to unsustainable levels, and real GDP growth has slowed. Given the debt cost and debt level dynamics that had transpired, the debt management capabilities of the government took longer than expected to develop to acceptable standards. In the meantime, spending beyond the available means continued unabated. "Public Debt Management for Lebanon: Situation Analysis and Strategy for Change" questions the sustainability of Lebanon's public debt and asks some highly important questions. Is Lebanon on the right path of sound debt management strategy or is a crisis ultimately inevitable? What is the most effective debt management strategy? What is the relation of the debt service to debt, and at what rate does it increase the debt level? Who is benefitting from the high rates on the debt service? And, most importantly of all, how can the public debt be reduced?

• Language: English
• Publisher: Ithaca Press
• Release date: Jul 1, 2022
• ISBN: 9780863720130

Book preview

Public Debt Management for Lebanon

Situation Analysis and Strategy for Change

Imad Jomaa

ITHACA PRESS

PUBLIC DEBT MANAGEMENT FOR LEBANON

Situation analysis and strategy for change

Ithaca Press is an imprint of Garnet Publishing Limited.

Published by

Garnet Publishing Limited 

8 Southern Court 

South Street

Reading

RG1 4QS

UK

www.ithacapress.co.uk

Copyright © Imad Jomaa, 2007

All rights reserved.

No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review.

First Edition

ISBN: 9780863720130

British Library Cataloguing-in-Publication Data 

A catalogue record for this book is available from the British Library.

Jacket design by David Rose 

Typeset by Samantha Barden 

Printed in Lebanon

1

Introduction

Prior to 1975, the Lebanese economy was one of the most dynamic in the Middle East. The country’s stable macroeconomic environment, liberal economy, vibrant private sector, its traditional role as an intermediary between the developed economies of Europe and the developing countries of the Middle East, and its openness to capital and labor mobility made it quite unique in the region. Lebanon’s economic stability, characterized by low inflation, high rates of economic growth, a large balance of payment surplus, small budget deficits, a floating, stable and fully convertible domestic currency, and political stability made it a highly attractive business center. All this made Beirut the financial center for the Middle East in the 1960s and early 1970s, with the largest number of representative offices of foreign banks in the Arab world, and a hub for the regional headquarters of many international companies.

This, however, disintegrated with the beginning of the Civil War (1975–1990), which exacted a heavy toll in human and material terms and resulted in fundamental changes in the economy. Infrastructure and industrial facilities were destroyed, while foreign and domestic reluctance to invest in the economy resulted in the obsolescence of the remaining productive capacity. Moreover, there was a loss of professional and entrepreneurial skills through mass emigration. Emigration was accompanied by capital flight, and Lebanon’s access to flows of foreign capital was severely curtailed. Concurrently, public finances deteriorated significantly owing to a lack of central government authority and a weak and inefficient tax system, combined with the need to provide a basic level of public services. The resulting large fiscal deficits were financed primarily through the banking system. The consequent rapid growth in liquidity compared with economic activity, and the erosion of private sector confidence, led to continuous pressure on the Lebanese pound in the foreign exchange market, and to heightened inflationary pressures, and resulted in high levels of currency substitution.

After the 15-year long conflict, Lebanon faced formidable economic challenges in the context of severe fiscal imbalances and a particularly difficult external environment. The government deficit and real interest rates had been extremely high; the public debt ratio had risen sharply to unsustainable levels, and real GDP growth had slowed. Given the debt cost and debt level dynamics that had transpired, the debt management capabilities of the government took longer than expected to develop to acceptable standards. In the meantime, spending beyond the available means continued unabated.

Lebanon’s first significant attempts at addressing the issue of its indebtedness were witnessed with the Paris I and II conferences, where it was realized that left to its own devices, the country could not resolve its impending debt situation. These debt management attempts helped in decreasing the debt service that had been accumulating over the years. Continuous efforts to help Lebanon resolve its debt situation will be also taking place soon at the Beirut I conference which will be supported both regionally and internationally.

This study questions the sustainability of Lebanon’s public debt because it reached an alarming level of LBP 58,048 billion at the end of December 2005 with a debt service of LBP 3,534 billion. Is Lebanon on the right path of sound debt management strategy or is crisis ultimately inevitable? What is an effective debt management strategy? What is the relation of the debt service to debt, and at what rate does it increase the debt level? Who is benefitting from the high