tag:blogger.com,1999:blog-807039862321845767.post8838970912894649467..comments2023-11-03T05:44:53.557-04:00Comments on Rational republic: Can Lebanon Afford its Current Fixed Exchange System?Anonymoushttp://www.blogger.com/profile/00826733025674909285noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-807039862321845767.post-76462619780519928872010-04-29T22:32:57.322-04:002010-04-29T22:32:57.322-04:00Rayan,
The last question you raise is the ea...Rayan,<br /> The last question you raise is the easiest to answer: $0$ of the Lebanese budget is earmarked for debt service. This is huge. Many other countries with large debts allocate only a fraction of what Lebanon does for debt service because they pay much lower interst rates and because they their sovereign debt accounts to less than 147% of their GDP. A good example is the US whose public debt has ballooned to over 93$ of the GDP but whose interest accounts for under 7% of the budget. Some are viewing with alarm the possibility that interest on the public debt could become 20 %of the budget over the next decade if nothing is done to stop it. <br /><br />It is true that the economy might have turned a better performance under Hariri than the others. I do not argue that Mr. Hariri should not have borrowed. I do not like labels but if I were to use one I would be essentially a keynesian . That means that I favour debt as an active policy of the Government. That is not the issue. What is important is what you do with the debt and how you finance it. Lebanon has exceeded its carrying capacity a long time ago. That if a fact that we choose to ignore at our peril. Why did we exceed our capacity? I would argue that it is a combination of inefficient management a misguided policy objectives. But what is most important currently is noit to convert the debt into foreign denominated currencies , to lower the level of interest rate and to transform all of these huge deposits into investments if possible. Lebanon should learn from what is happening to Greece. Greece could have extended the pain over a number of years but by biting the bullet this year and nest they will be a better country eventually. Lebanon is playing the odds and the odds are not in our favour. Lebanon needs for everything to turn its way if it is to avoid a crisis. How likely is that in the Middle East? I would not bet on it.Anonymoushttps://www.blogger.com/profile/00826733025674909285noreply@blogger.comtag:blogger.com,1999:blog-807039862321845767.post-78095183224049165312010-04-29T15:09:27.435-04:002010-04-29T15:09:27.435-04:00Hi Ghassan,
Thanks for the clarification! In esse...Hi Ghassan,<br /><br />Thanks for the clarification! In essence, I guess you are describing the system as a Ponzi scheme. In some sense, you borrow to both pay debt and grow the economy - so that you can stop borrowing and pay the debt. But then your debt grows at pace with (or faster than) your economy and you are stuck. The reason for that is you have to offer high interest to attract investors to a shitty economy. On the other hand, you can't realistically hope for the value of the debt to magically decrease due to currency fluctuations since your currency is pegged to a major lending foreign currency. <br /><br />Sorry for the summary :) I just want to make sure I get your reasoning right. <br /><br />I recall from a previous post (+ comments) on this blog that: Numbers on Lebanese economic growth in past years have coincided with Hariri governments (when positive) and with Hoss/Karami goverments (when negative). The latter two were more conservative in terms of borrowing and more frugal in terms of public spending (arguably, an equally bad policy). On the other hand, that led to economic stagnation and thus the economy was not better positioned to grow faster than the debt. <br />One could argue that they did not lead for long and that did not give enough time for the necessary recovery.<br /><br />Any thoughts? <br /><br /><br /><br /><br />As a side note: You wouldn't happen to know what proportion of the Lebanese budget goes to debt servicing would you?Unknownhttps://www.blogger.com/profile/06415866633800903232noreply@blogger.comtag:blogger.com,1999:blog-807039862321845767.post-77607731831307422212010-04-28T14:00:18.022-04:002010-04-28T14:00:18.022-04:00Rayan,
It is OK to question the validity of ...Rayan,<br /> It is OK to question the validity of my arguments:-)<br /> The answer to your first point:<br />Capital funds usually flow into a country as investments. In the case of Lebanon a large portion of these capital flows are liquid funds in various bank deposits. They are not attracted to Lebanon except by the high interest rate. Lebanon cannot keep paying these interest rates that are above the world market. As soon as the interest rates drop to world level, in all likelihood a lot of these deposits will leave the country to better and safer pastures.<br /><br />The answer to your second point: The sovereign debt in Lebanon is very high as a proportion of the GDP (147%) ans so servicing this debt requires a huge portion of the Lebanese government budget. If the debt is to be serviced then it has to grow bsince the current resources are not large enough to service it and yet fulfill some domestic obligations of the government like spend on education, healthcare, police etc... As a result the Lebanese government finds itself in the unenviable position of not being able to reduce its debt and yet its need for larger expenditures. As a result deficit finance buys them time. Their hope is that the economy will grow at a faster rate than the debt and so the debt as a proportion of the GDP will decrease. So as you can see government needs to borrow in order to meet its obligations but in order to increase its revenue stream it needs to run a deficit which means more borrowing. <br /><br />Under a flexible exchange mechanism then the exchange rate would depreciate for a while but that should cause an improvement in the current account which would bring back the rates to their initial position.<br /><br />You are right when you say that a lower exchange rate would increase the burden of the foreign portion of the sovereign debt that is denominated in dollars. That is one reason why I have always arguesd against sovereign debt that is not in the local currency. As the dollar strengthens against other currencies then the Lebanese economy compared to these other economies becomes less competitive anyway. But under a flexible exchange mechanism if the Lebanese currency initially weakens but then strengthens then the weakness will be only transitory.<br /><br />In theory A fiscal expansion under fixed exchange rate would lead to the same result as a monetary expansion under flexible exchange rates. But for the above to be so then the interest rate that attracts the foreign capital cannot be above the world rate.<br /><br />Lebanon has to lower its sovereign debt if it is ever to be able to feel as if it is in contro; of its destiny. To do that through artificial high interst rates that merely attract capital flows to banks is a temporary fix at best. A flexible exchange rate will introduce some market discipline but for best results Lebanon has to seek major restructuring of its debt, preferably through write offs/grants/moratoriums. But if that does not work then restructuring is a must.Anonymoushttps://www.blogger.com/profile/00826733025674909285noreply@blogger.comtag:blogger.com,1999:blog-807039862321845767.post-64352040630773892712010-04-28T00:29:01.789-04:002010-04-28T00:29:01.789-04:00Hi Ghassan,
I am not questioning the validity of...Hi Ghassan, <br /><br />I am not questioning the validity of your reasoning but I would like to understand it better, so I would appreciate it if you could clarify a couple of points for me. This may be a bit long but I am not an economist and so I have plenty of questions :) <br /><br />From what I understood, you say that the Lebanese banks can pay high interest to attract depositors since their liquidity is then given to the central bank at (also) high rates (meaning the banks get to turn a profit). You then state that 1- this approach is not sustainable , 2- the funds being attracted are not needed, 3- the transactions are inefficient. <br /><br />So my first question is: could you clarify these 3 points? <br /><br />Second, you state that the solution to this apparent paradox is that the Lebanese government's need for more and more debt (why is there such a need) dictates growing the economy (I would have thought that growing the economy in Lebanon's case dictates more debt - at least that seems to be the official line).<br /><br />From there you move to tie this to the exchange rate. My (limited) understanding of your point is that if the currency is allowed to fluctuate then repaying the debt should be easier (why? isn't the debt in foreign currency and doesn't that depend on whether the Lira appreciates or depreciates). <br /><br />As you can see, I am no expert, so any explanation would be much appreciatedUnknownhttps://www.blogger.com/profile/06415866633800903232noreply@blogger.comtag:blogger.com,1999:blog-807039862321845767.post-74730526360090275792010-04-25T18:24:57.292-04:002010-04-25T18:24:57.292-04:00I do not think that many Lebanese understand the d...I do not think that many Lebanese understand the difference between fixed and flexible exchange rates . They can care less and that is a fact.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-807039862321845767.post-89187828218502253542010-04-25T11:30:52.472-04:002010-04-25T11:30:52.472-04:00Lebanon has to stop using a fixed exchange system ...Lebanon has to stop using a fixed exchange system no matter what the cost of the change. Artificial rates are simply wrong.Anonymousnoreply@blogger.com