In the red

Samir Makdisi explains why the economy looks no brighter despite the temporary reprieve granted by Paris II

It would not be difficult to state that 2003 did not witness the fulfillment of the economic and financial objectives, which had been announced at the time of Paris II meeting in November 2002. Indeed, the gap between the stated and realized objectives is quite wide. It might be recalled that by mid-2002 the Lebanese economy was facing a three dimensional problem: a slow, not to say stagnating economy, a rapidly rising public debt (over $31 billion at the end of 2002) and worrying depletion of the foreign exchange reserves of the central bank as a result of its attempts to defend the stability of the Lebanese pound. As of June 2002, the net foreign exchange reserves of central bank were negative. Indeed, the document presented to the meeting by the Lebanese government had warned that unless external support was forthcoming, the corrective measures that the government had planned to put in place would not, on their own, be sufficient to prevent a financial, and ultimately social, crisis. The financial support pledged in Paris provided the government with a financial reprieve it was badly in need of, and the market sentiment changed, permitting the central bank to try to recoup the losses it had suffered in the previous period. Further, it was able to enter into swap arrangements with Lebanese commercial banks for the purpose of reducing the interest rates carried by the exiting stock of public debt. Briefly, the support derived from Paris II, along with domestic measures (decreasing public expenditure and raising revenues) were supposed to reduce the outstanding public debt and the level of the debt burden, (i.e. to reverse the debt dynamics) and lead to a decline in rates on domestic debt and thus give a fresh impetus to economics growth, projected at about 3% for 2003. Prior to Paris II, the government had announced that the 2003 budget deficit was to be reduced to 25% of expenditure (in comparison with over 40%for the previous year) and that privatization measures were being planned.

In fact, a different picture emerged during 2003. While the central bank was able to regain its foreign exchange reserves (it publishes its gross but not net holdings of foreign exchanges), fiscal developments have been discouraging. The fiscal deficit for 2003 is expected to be close to 40% percent of expenditure instead of the announced 25%. The outstanding public debt has continued to grow, standing at $32.8 billion at the end of October 2003 compared with $31.4 billion at the end of 2002. The debt burden has not eased, being estimated at $3.1 billion for 2003, which is roughly the same level for 2002. The hoped for a decline in interest rates on domestic debt was more limited than had been expected. The process of privatization has stalled due to differences of opinion on how best to tackle it. Finally, the projected rate of growth is expected to be less than what had been projected.

Some observers tend to think that political disagreements are the major cause behind the deteriorating situation. While such squabbles may impact negatively economic and financial developments, they are not necessarily the major cause. Let us not forget that in preceding periods that witnessed political harmony, there also occurred a deteriorating financial and economic situation. In fact, the decline in Lebanon’s rate of growth began after 1994 and the rapid growth in public debt began after 1993. I do not wish to minimize the impact of political tensions and disagreements, but I think the problem goes beyond that. To a large extent it is related (along with other factors) to poor institutional performance, which has burred the distinction between public and private interests and constrained the proper formulation and management of economic policy. Had things been different in this regard, the national economy would not have faced the crisis of 2002, which could only be resolved through substantial external support. Of course it is possible that the national economy may pick up in the absence of proper governance, due say to favorable external circumstances, but then there is no guarantee that proper policy formulation would be in place to help cope with existing macro-economic imbalances or to avert potential future crises. While it is important to understand and appreciate the technical aspects of economic policy, it behooves us to place it in the wider political economy picture. Samir Makdisi is a Professor of Economics and the Director of the Institute of Financial Economics at the American University of Beirut