Mar 21, 2014

There is no doubt that the main economic challenge before the new Lebanese government is the burden of the public debt, which has recently grown at an alarming pace. The lack of growth and the widening fiscal deficit are putting great pressure on public finances. This puts the central bank in front of serious risks, not least of which is the high inflation rate and what may happen at the monetary level if the appropriate monetary policy is not implemented to support the Lebanese pound.

By the end of January, Lebanon’s public debt had reached $64 billion and its debt-to-GDP ratio has reached 163.1%. It should be noted that the debt in Lebanese pounds reached the equivalent of $37.8 billion, up 12.6%, while foreign currency debt increased by 6.7% to reach $26.1 billion. The rate of growth of the public debt is worrisome because it has exceeded 10%, and gross domestic product (GDP) growth for 2012-13 didn’t exceed 2%. In other words, the debt is growing faster than the economy at a rate exceeding 500%. One doesn’t need to be well-versed in economics to see that the country is heading for bankruptcy.

Lebanese banks are carrying the bulk of this debt, according to data by the Association of Lebanese Banks. In 2013, Lebanese banks constituted 53% of the sources for financing the public debt denominated in Lebanese pounds, while the Central Bank holds 30.5% of that debt. Lebanese commercial banks hold 75% of the total Eurobonds portfolio.

The Lebanese banking sector is the primary funding source of government spending. On the one hand, this is a blessing because the internal debt is not subject to external economic pressures. But this blessing may turn into a curse if the public debt becomes a large part of Lebanese banks’ solvency.

It is true that the tragedy of the public debt is not recent. It started worsening in the mid-1990s to later become a structural dilemma. One of the reasons behind the growing debt is the irrational spending, the rampant corruption, the lack of reform and the semi-paralysis of the oversight mechanisms at all levels of the state, starting with the parliamentary committees and ending with the judicial and administrative organs tasked with monitoring government spending.