Lebanon's Public Debt - Background

Calling in the Fund
Oxford Business Group
Lebanon, Volume 126
21.04.2006

Both at home and from abroad, these days Lebanon's government is being
bombarded with calls to act fast to reduce its debt levels. The pressure was
also recently cranked up again with calls for the IMF and the World Bank to
be brought in to supervise economic change.

As of April, Lebanon's debt level was running at $38.6bn, the equivalent of
183% of GDP, one of the highest ratios in the world.

While living beyond its means is nothing new for Lebanon, which for a decade
or more has been falling increasingly into the red, the situation is
becoming complicated as the government has to balance the expectations of
the population against market necessity.

As far back as the end of 2004, there were increasingly strident alarm bells
being rung warning over Lebanon's mounting debt. In December that year,
World Bank Vice President Francois Bourguignon described Lebanon's $35bn
debt as totally unsustainable. Since that time, little has changed except
the level of indebtedness.

One measure that successive Lebanese governments have put forward, and
indeed tried to put in place, is a reduction of spending, in the form of
cutting the state payroll, streamlining the operations of service providers
and privatising state-owned industries.

The other spoke in the pitchfork touted to prod the debt level towards the
black is the use of tax rises and the principle of user pays.

Yet partly due to the lack of political determination and concerns over
opposition from the divided electorate, attempts at implementing these
unpopular reforms have been either stalled or at best piecemeal.

However, on April 6, Finance Minister Jihad Azour offered a carrot and stick
approach to the electorate and the market over proposals for new tax hikes.

"Tax increases are not inevitable but what is certain is that we must reduce
the public debt, and this requires cutting public spending," said Azour
during an interview on Voice of Lebanon radio.

Under the proposals, still before the cabinet, subsidies on the price of
fuel would be abolished, levies on earnings from deposits in banks would
rise to 7% from the current 5% and VAT would be increased to 12% this year
and 15% by 2008.

Overall, the draft proposals, part of a five-year economic plan, which
includes cost-cutting measures and a speeding up of the privatisation
process, is intended to bring down Lebanon's debt to GDP ratio to 135% by
2010. The proposals are also aimed at encouraging economic growth of 5% this
year.

Azour said that Lebanon had the opportunity to tackle its debt difficulties
and so allow its economy to progress.

"However, if we miss this chance then Lebanon will have a serious problem in
the medium term," the minister said.

However, soon after the initial blueprint for reform was released, it
received a vote of less than confidence from Francois Bassil, the president
of the influential Association of Banks of Lebanon, who said that the
government should call in the IMF to oversee the implementation of the
restructuring.

"I don't see any problem if the IMF supervised the implementation of the
draft economic reform," he said in an interview with Lebanese paper the
Daily Star on April 20. "We can't afford to miss the chance of cutting the
budget deficit as we did in the past."

Bassil favoured the carrot offered by the finance minister, saying that
state expenditure needed to be slashed rather than taxes raised, adding that
the economy in its present situation could not bear more levies to be
imposed.

"Taxes are not the solution," he said. "What we need now is to address all
the problems in public departments."

Another person now warning that time was running out for Lebanon to bite the
bullet over debt and economic reform was Washington's ambassador to Beirut,
Jeffrey Feltman.

In a strongly worded address to the American-Lebanese Chamber of Commerce at
the end of March, the ambassador said that the country's present system was
not sustainable.

"The reality is that Lebanon - economically - is living on borrowed funds
and borrowed time," he said. "Lebanon's educated youth and talented women
remain unexploited resources. You know that for Lebanon's economy to
prosper, transparency must triumph over corruption and cronyism, and that
capital markets need greater development."

Citing the failure of previous economic programmes, the ambassador said that
Washington did not believe that Lebanon could move forward unless the
government entered into a serious programme with the IMF.

"The IMF can help certify that progress is being made and can mobilise more
resources than any single donor would be able to do," Feltman said.

In co-operation with the Fund the Lebanese government should work to put in
place what the ambassador called "made in Lebanon" benchmarks that would
indicate to the Lebanese people and to the international community that
progress was being made.

While there is no sign as yet that the government of Prime Minister Fouad
Siniora is prepared to call in the IMF to oversee its latest restructuring
efforts, there are indications that the messages are being heeded. During a
visit to Washington in mid-April, Siniora gave assurances that there would
be an overhaul of Lebanon's political and economic systems.

Local and international observers will now be watching to see if words can
be turned into deeds.


.

Relevant Pages

  • Re: Is ANYONE dumber than conservatives?
    ... worried about Iran at the time, as you point out, and because Saddam ... deal of the time the US government supports rotten and undemocratic ... they may be necessary in a capitalist economy in the short ... If the government now goes into debt during the recession, ...
    (sci.econ)
  • Re: NBC: America IS Fiscally Responsible
    ... I recently talked about the people in the "Debt Doomsday" crowd and their ... inability to see the federal government's debt and deficits in context. ... Government spending now, under President Bush, is much the same as it was ... frame of reference is how big the economy has grown. ...
    (rec.music.artists.springsteen)
  • NBC: America IS Fiscally Responsible
    ... I recently talked about the people in the "Debt Doomsday" crowd and their ... inability to see the federal government's debt and deficits in context. ... Government spending now, under President Bush, is much the same as it was ... frame of reference is how big the economy has grown. ...
    (rec.music.artists.springsteen)
  • Critics decry destroy and lend Lebanon policy
    ... Critics decry 'destroy and lend' Lebanon policy ... which will place a long-term drain on the government. ... the International Monetary Fund (IMF) said the damages ... And this, debt watchers say, will in turn plunge the country ...
    (soc.culture.lebanon)
  • Re: NBC: America IS Fiscally Responsible
    ... For one thing his arguments are opposite of traditional conservative thinking: "Government is not supposed to be run like a business", ... I recently talked about the people in the "Debt Doomsday" crowd and their inability to see the federal government's debt and deficits in context. ... we are given a bunch of nonsense about deficits choking off economic growth or how the "skyrocketing" deficit will drive up interest rates. ... Government spending now, under President Bush, is much the same as it was under Clinton, when viewed as a percent of the economy. ...
    (rec.music.artists.springsteen)