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A waste of space

Lebanon

by Nicolas Photiades

Since its independence, Lebanon has always been gold rich. In fact, during the prosperity years of the 1960s and early 1970s, the country was a net buyer of gold, increasing its gold reserves to a total of 9.22 million ounces today. Lebanon is considered to have the largest gold reserves among Arab countries and is ranked in the top ten countries and supra-nationals worldwide in terms of gold tonnage held. Indeed, with 286.8 tons of gold, Lebanon ranks 19th in the world behind countries such as the UK (with 311.3 tons, ranking 17th), Austria (307.5 tons, ranked 18th), Russia and India (14th and 15th respectively). The top countries in gold tonnage are the US in first place, Germany in second, the IMF in third, France in fourth, Italy in fifth and Switzerland in sixth.

A hefty sum indeed

At today’s prices (as at the 11th of May, 2006) of $707.2 per ounce, Lebanon’s gold reserves, which are held with the Federal Reserve in New York, the Banque du Liban (BDL) vaults, and in London (most probably at the Bank of England), are now worth a little bit more than $6.5 billion. A hefty sum indeed, when considering that Lebanon’s GDP is roughly $20 billion and national debt is almost $40 billion. In other words, today’s gold reserves account for 32.5% of GDP and could theoretically repay 16.25% of the country’s debt and save an average of $650 million (or more, if you repay Lebanese pound debt, which carries an average interest rate much higher than 10%) a year in interest payment on the debt. Instead, Lebanon’s gold reserves are sitting idly in vaults, yielding absolutely no return and costing the government storage and safe keeping charges.

Lebanon’s gold reserves were built up by previous Lebanese governments as a store of value and a safe haven in times of crisis. Gold and other precious metals are unique assets in that they are tangible (i.e. real) and liquid (i.e. easily traded), unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible (i.e. a share certificate is just paper). It was also believed that in case certain events occurred, such as war or economic crisis, gold would have a positive influence on any investor interested in Lebanon, unlike any other forms of investments and assets.

In a way, the government was proved right, as some investors continued to invest in Lebanon during difficult periods, thinking safely that gold would be a serious backup if things turn sour. However, a law issued in the 1980s forbidding the sale of gold reserves or their use as collateral for borrowing or as a hedging tool canceled out the positive influence gold has on foreign investments. Indeed, what’s the use of gold if it cannot be liquidated or used as part of a structured financing? By being blocked, gold reserves do not have a positive influence on investments, as investors treat them as if they do not exist. Former Premier Salim Al-Hoss, in his address to Parliament in July 1999, clearly stated that “gold is the main pillar for having confidence in the Lebanese economy”. In normal circumstances, such statement is correct, but with the specific law forbidding the sale or use of gold, Al-Hoss’ statement does not hold. With a policy of uncontrollable indebtedness, such a law puts Lebanon in a maximum handicap situation.

With gold prices hitting 25-year highs and the country drowning in a quagmire of public indebtedness and opposition to structural reforms, it is only fitting that the law blocking the use of gold reserves be lifted and national gold be used as part of a solution to repay public debt. Gold price cycles are very long, and if the world’s political tensions smooth down, they will inevitably fall again. Moreover, if one of the large holders of gold reserves in the world decides to take advantage of the high prices to sell part of it reserves, then prices will be affected negatively as well. It is therefore clear that Lebanon must take advantage of the current price cycle by abrogating this obsolete law and selling part, if not all of its current reserves.

The only solution to the debt problem

The sale of gold is the only right solution to the debt problem, as the proceeds could be used to buy (for the same amount) more liquid, interest- or income-yielding assets, which would, in time, cumulate to equal and meet the current amount of debt. Using gold as collateral for cheap indebtedness or as part of a complex structure to repay debt would only sort out things temporarily, and result in the postponement of the problem. Although essential, privatization is not a solution for debt repayment. Even if the government privatizes everything it has got, the proceeds of privatization would be grossly insufficient to repay the public debt. The current high gold prices present the country with a unique opportunity to use an asset it had long forgotten. Let us hope that at least one influential character within the government or elsewhere realizes this opportunity.

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Nicolas Photiades


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