Lebanon’s gross public debt remained virtually unchanged during the first half of this year, a report by Bank Audi said this week, registering two declines in January and February 2011, and three increases in March, April and May. Gross public debt fell again in June, reaching $52.5 billion at the end of that month, a 0.1 percent decrease from December 2010. At around 133 percent, Lebanon’s debt-to-GDP ratio is one of the highest in the world. Credit agency Moody’s rates the country’s bonds at B1, on par with Albania, Vietnam and the Dominican Republic. Lebanon’s Finance Ministry reported Tuesday that the budget deficit had fallen by LL65 billion in the first half of 2011. Government debt will finance the greater part of this deficit by the end of the year.
The statement noted that for the first time in many months, the revenues from the telecoms sector were included in the state’s gross income. “It is worth noting that the telecoms revenues in the first half of this year were added to the government’s revenues although these telecoms revenues still remained in the account of the Central Bank,” the statement said. The deficit now totals LL1.304 trillion ($860 billion). Domestic debt fell by 0.6 percent during the first half of the year, totaling $31.8 billion. Foreign currency debt increased by 0.6 percent during this period, amounting to $20.7 billion. Domestic debt decreased due to a drop in commercial banks holdings, which offset a simultaneous rise in Central Bank holdings.
The rise in foreign debt is seen by Bank Audi to have been brought on by a January 2011 Debt Replacement Agreement, undertaken by then-Finance Minister Raya al-Hasan, which saw the country take out an additional $265 million in Eurobonds. Increased withdrawals from the Central Bank’s public sector account, which led to a 14.5 percent drop in those finances, or $0.9 billion, is seen as another driver behind the slight drop in overall gross debt levels.
Net public debt, said the Audi report, increased by 1.3 percent during the first half of 2011, amounting to $45.6 billion. The figure excludes public sector deposits at commercial banks and the Central Bank. “I don’t think the [slight drop] in public debt is such a tremendous indicator of the state of the economy,” said economist Louis Hobeika. “You expect the debt to be high, because the budget deficit is high, but mid-year debt is not easy to take seriously,” he added.
A significant increase in debt levels is expected to occur at the end of the year. It would finance costs incurred during a year of relative economic and political uncertainty, argues the Notre Dame University professor, because it is at the end of the year when the government will make the majority of its yearly payments. But there is more at stake than this year’s debt. The government must deal with sky-high debt-to-GDP ratios, which has long marred Lebanon’s economic landscape, warding off foreign investment and stalling economic recovery. It has been the crux of political debate since the post-war reconstruction years of the 1990s.
Tax structures, tax-collection processes and expenditure items must be closely reviewed, said Hobeika. Government bureaucracies, notorious for being a black-hole for sound financial planning, should be cleaned up. “If we’re not acting on the issue now, on lowering expenditure, on improving administration … we’ll get to a point where we’ll have to do what Spain, Portugal, Greece and Ireland are doing,” said Hobeika. Not all analysts agree, however, that a cutting down on public spending and tax rises are in order.
Former finance professor at the American University of Beirut Antoine Sabbagh believes it is a simple question of good management. Revenues, argues Sabbagh, are in good supply. A lucrative telecommunications industry, a predominantly vibrant tourist sector, a LL5,500 tax per 20 liters of gasoline, and steadily rising values of gold – gold holdings stand at more than 280 tons in Lebanon – represent major gateways to financing the enormous debt, said Sabbagh. “Manage the revenues well, and invest some of it generating investment, and you can solve the debt problem,” said Sabbagh. “In the absence of a credible and transparent system, I do not advocate a raising of taxes and the cutting of spending,” he added.
