Saturday, May 22, 2010

The Onerous Cost Of Sovereign Debt In Lebanon



There is nothing wrong about debt. A modern developed and efficient society is often differentiated from a developing and less sophisticated one by the relative importance of its financial sector whose primary function is to intermediate between those that save and those that demand funds for investment. As business enterprises grow they exhibit a voracious appetite for capital in order to build new factories, laboratories and undertake research. The typical life cycle of the average citizen is also highly dependent on the world of finance. Great sums of money are required to nurture individuals as they are growing up. Most people do not start producing a surplus until the late twenties or early thirties but then they retire at say the age of sixty five. Governments are not any different. As soon as it was shown that macroeconomic performance of a state can be enhanced through an activist role by government then the idea of deficit finance became arguably the most important tool in the quiver of fiscal policy. But as any tool in any field borrowing can be productive and helpful when used appropriately and it can be destructive when abused.

Not to be outdone by governments that have accumulated irresponsible levels of debt t he Lebanese Government opted for the easy path solution of borrowing itself into prosperity. We all know the figures; debt/GDP stands at over 150%, debt service/GDP is over 10% while debt service/ Annual Budget amount to an unconscionable 40%.

Government officials never tire of assuring us that the large sovereign debt is under control and that this level of indebtedness poses no risk to the health of the Lebanese economy. Let us assume that the government is right (I do not believe it for a minute) and let us take a cursory look at their proposed budget for 2011. Budgets are important documents because they reveal the priorities of the preparers and offer a strong clue about what they hold dear. So let us see how the current government wishes to handle the Lebanese burgeoning national debt.
The following table has been assembled out of the various schedules supplied by the Ministry of Finance.

..………………………..2011……………..2013

GDP………………....$40 Billion………$45.5 Billion
Debt Service…..10.4%..............8.9%
Budget Expen….34.2%.............29.5%
Budget Rev……..24.4%.............23.8%
Deficit……………..9.8%..............5.7%

So what does the above table show? A callous government that has no concern for the level of welfare of the average citizen .Despite a GDP growth from$40 billion to $45.5 billion the actual level of expenditures by the government; excluding debt service; decreased even in nominal terms. That is very highly irresponsible in a growing economy and a great cause of concern about the fraying social fabric of society. Once the above percentages are expressed in actual numerals then this is what we find out:

……………………………………2011…………………2013
GDP…………………………….$40billion………..$45.5
Debt Service………………$4.16 billion………..$4.05billion
Budget Expen…………..$13.68 billion………...$13.42billion
Budget Rev…………………$9.76billion………..$10.83billion
Deficit…………………………$3.92………………….$2.59

Note that the level of Expenditures once the debt service is excluded drops from $9.52 billion in 2011 to $9.37 billion during 2013. Yes you heard it right. The Lebanese state wishes to decrease its primary expenditures by $150 million even though its projected revenue had increased by $1.07 billion during the same period. There is only one explanation for this. The level of sovereign debt has become so high that the authorities feel the need to divert every available dollar into debt service. The debt monster threatens to swallow us all unless we get the courage to ask for rescheduling/forgiveness/moratorium or even a selective default. Studies have shown that countries that default are most of the time capable of meeting their obligations but at a great pain. Lebanon is in that situation. Please also note that as we pay all this debt service by not spending on education, health care and other social services the debt is also increasing. Actually the absolute increase in debt is greater than the projected growth in the GDP. A government that presents such a budget cannot be described except as callous and indifferent.

6 comments:

Sebouh said...

True, credit borrowing like any other tool could become productive and abused.
In Lebanon, unfortunately as we all know past and present governments were either directly or indirectly responsible in creating this unsustainable debt.
The other day Lebanese central bank chairman was asked this question. He replied in less sanguine manner by saying that Sovereign debt crisis can be averted as long as foreign inflows are continuously coming.
Then we ask this question how sustainable is this strategy in the Medium to long term horizons.

Moreover, Mr. Karam, in my opinion the budget figures that you obtained from the ministry of finance is all based on three essential elements.
1. Continuous foreign capital inflows.
2. The controversial privatization of state enterprises.
3. Biased taxation system that still favors the rich and penalizes the Middle class and the Poor.
Let there be no doubt that these budget plans are very much in line with the current austerity measures that are being prepared in most European countries that if implemented will come at huge social expense.
Finally, Mr. Karam let us suppose for once that if all goes well in Lebanon then what will your budget forecast be for the year 2020. This includes the National debt, GDP, Debt service, Budget Expenses, Budget Revenue, and Deficit.

ghassan karam said...

Sebouh,
The Lebanese budget is more austere than any in Greece or any other country although it shouldn’t be. The Greek government borrowed , to a large extent, in order to finance social expenditures that it could not afford and so it makes some sense to cut back on these expenditures that were beyond its reach in the first place. Lebanon, on the other hand, borrowed and squandered the funds on expenditures that did not benefit most of the people that are being asked to pay the price.

If Lebanon is to avoid a debt crisis , which is debatable, then my quick back of the envelope projections , based on the proposed 2013 figures would be the following:
2020 GDP…….$55-57 billion
2020 Debt……$75-80 billion
Debt Service…$5.5-6 billion
Expenditures…$16 billion
Revenue……..$12 billion
Deficit……..$4 billion

Exp.- DebtServ.. $10 billion i.e an increase of less than 5% from the level projected for 2011!!!!

AM said...

I agree on much of the terms above, however ghassan’s solution of sov. debt thru defaulting isn’t the solution in lebanon cause the debt is mostly internal. Interest rates will speed up and capital outflows will affect us.
So doing restructurig indirectly, as the gov is trying to do, through pressuring banks to either buy t-bills with minimal interest rates or through their help in electricity partnersip is much better…. Through this we will keep our sovreign rating fixed and our CDS within limits.

Our debt is ofcourse our biggest problem nowadays but it is nothing compared to the greek problem. Look at Japan who has a 200% debt to gdp ratio and mostly internal as ours and is doing wonders.

ghassan karam said...

AM,
It is important to use the correct data when discussing Macro aggregates. As of 2009 40% of the Lebanese sovereign debt was denominated in foreign currency, USD being the dominant one. So as you can see , technically you are right that most of the debt is internally held but 40% is not exactly peanuts.

As to the comparisons to Japan and others, again it is not only the Debt?GDP that counts but it is the ability to service the debt that is the issue. Lebanon is currently allocating close to 40% of the budget to debt service. That is probably one of the highest if not the highest such proportion in the world. By contrast the US has less than 7% of its budget allocated to debt service. To put the same issue in different terms, Lebanese debt service /GDP is over 10% while debtservice/GDP in the US is 1.4%. ( I used the data for the US since I do not have at the moment the exact figures for Japan).

ghassan karam said...

(The above 4 posts were originally posted in response to the above article but on Yalibnan.com)

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