The size of Lebanon’s public debt — which at $48.5 billion amounts to 1.5 times the country’s gross domestic product, one of the highest debt to GDP ratios in the world — is a constant feature in the nation’s political and economic debates. It is blamed, rightly or wrongly, by the public, the politicians and even some economists for most if not all the socio-economic problems that Lebanon faces: youth unemployment, migration, immigration, the cost and reliability of power supply, high business costs, the lack of economic diversification such as low contributions from agriculture and manufacturing, and even red tape and corruption.
The word “unsustainable” has been used since 1996 to describe Lebanon’s debt dynamics; since then, Thailand, the Philippines, Indonesia, South Korea, Russia, Brazil, Argentina, Turkey and Iceland, to name a few, have all defaulted, while enjoying significantly better ratings and hence more “sustainable” debt dynamics, ex-ante, than this humble Mediterranean state that has been ravaged by civil war, invasions, assassinations and sectarian strife, all in its recent history.
But why is the debt level so central to the political, and even social debate of our nation? Japan has a debt to GDP ratio that is higher than Lebanon, and it is barely mentioned in the national socio-economic debate, let alone the political debate.
The debt is a liability inheritance that one generation leaves to another. It is a negative inheritance in the sense that future generations will have to pay more in terms of taxes to cover the debt. But Lebanon’s tax rates are low when compared to other countries. The Lebanese pay around 15 percent of their total income in taxes (this includes income tax, VAT, and social security contribution). This compares with a tax contribution of 26 percent in Jordan, 27 percent in Tunisia, 28 percent in Russia, and 44 percent in France. Of course, the return on these tax payments does not match the Lebanese citizen’s expectations, and he or she would probably be willing to pay more in return for universal health coverage, better education and, above all, law and order in the country. But reforms and progress on these fronts have been hindered, not by debt level but rather by the complexities and limitations of the political system. Even the modest economic reforms outlined in Paris III have not been implemented, which ironically would have allowed Lebanon to get still-pending grants from donors and reduce the debt.
The debt level would also be relevant when the cost of servicing it crowds out the private sector. But in Lebanon the total assets of banks are around three to four times the size of the economy. Lebanese banks have enough deposits to fund the public sector, the private sector and to maintain some of the best liquidity ratios in the world. In fact, loans to the private sector grew 16 percent in 2006, 15.8 percent in 2007, 18.6 percent in 2008 and now stand at $23 billion, or 70 percent of GDP — a very decent ratio for a country with an income level like Lebanon’s. By comparison, loans to the private sector are around 33 percent of GDP in Turkey, 41 percent of GDP in Russia, 47 percent of GDP in Egypt, 65 percent in Tunisia. At 70 percent, the ratio does not reflect much crowding out in Lebanon.
Last but not least, a high debt level is usually worrisome when a significant portion of that debt is held by foreigners, leaving the country’s future prey for “barbarians at the gate.” Ask the Argentinians, the Uruguayans and many Africans about being at the mercy of foreign investors and they would tell you horror stories. But in Lebanon, most of the debt is held domestically. In fact, out of the $48.5 billion gross public debt outstanding, less than $6 billion is currently held by foreigners, and most of it to bilateral and multilateral donors rather than by international investors. Some people confuse external debt, which is the debt held by foreigners, and foreign currency debt, which is the debt denominated in foreign currency that could be held by either local or foreign investors. But on that account Lebanon also fares well. Its foreign currency debt has been slightly declining both nominally and as a percentage of total debt, and now stands at $21.3 billion — 40 percent of total debt — down from 50 percent of total debt only a couple of years ago. This is also less than the $25 billion in foreign currency reserves held by the Central Bank of Lebanon, not counting gold of course.
How has the debt then emerged to be the centerpiece focus of the Lebanese public debate? My belief is that the debt issue was and remains a tool to politicize the economic debate, and use it to condemn a whole era of Lebanon’s recent history: an era that saw the rebuilding of the country, of its airport, ports, roads, schools and hospitals, an era that saw its re-emergence as a primary tourist destination and as a financial service provider for the region. This era has put Lebanon back on the map. Blaming the high debt for all our problems is a call to condemn this era and hold it responsible for what should actually be blamed on the shortcomings and limitations of our political system, and on the abnormalities that we have gotten used to by now, such as foreign interventions in local affairs, and the lack of ability by the state to impose law and order and exercise its sovereignty on its entire territory. It is also a way to distract attention from the need to push ahead with key reforms that could significantly increase the productivity of the economy. And many of us, sadly, fall for it.
Lebanon should reduce its debt, no question about it. High debt creates an unnecessary vulnerability, it scares foreign investors, and it keeps the sovereign rating low, imposing a floor on interest rates and a cap on the ability of the financial sector to develop and grow. But its effects on the Lebanese economy and on the wellbeing of society have been completely blown out of proportion. What really matter are growth, investment and job creation. Take the last three years for example: the economy has grown (in real terms) by 7.5 percent in 2007, 9 percent in 2008 and is on its way to achieve 7 percent growth in 2009.
These are rates that are not only unprecedented in Lebanon, but they are also among the highest in the world. They have also helped reduce the debt from 180 percent of GDP in 2006 to around 150 percent of GDP in 2009, at a time when debt to GDP ratios have increased in most countries due to the global financial crisis. And yet if you ask the Lebanese on the street, or even on a university campus, few if any know about these real economic growth rates, but they can all recite that the national debt is $50 billion.
Finally, here is a thought just for the sake of alternative analysis. Much of Taoism revolves around Yin and Yang. The belief that there is no absolute good or absolute evil and that there is actually a bit of both in everything. This may also apply to the Lebanese public debt. Not convinced? Ask yourself this question: what would a very liquid and sizeable Lebanese banking sector have done with all its accumulated liquidity over the last few years, beyond lending locally, if there was no indebted government to lend to?
The answer is simple: invest and lend abroad.
What would have been lost abroad in a financial crisis so massive that the government would have been forced to step in and bail out the banks, like most governments around the globe did? Now those governments have debt ratios of more than 100 percent of GDP and fiscal deficit ratios of 10 percent of GDP. These figures are now completely normal all over the world, especially in industrialized countries.
But these are also the figures we have in Lebanon. Except we also have an airport that is expected to have received 2 million tourists by the end of 2009, who in turn contributed to a 7 percent growth rate and kept almost all of us employed. Not a bad deal, after all.
Mazen M. Soueid is chief economist at BankMed and advisor to former Prime Minister Fouad Siniora
