Lebanon banking on strong growth to reduce debt

AFP
AFP
5 Min Read

BEIRUT: Forecast to post economic growth of eight percent this year, Lebanon plans to launch reforms to slash its debt-to-GDP ratio, which remains among the world’s highest eclipsing even Greece’s.

"In the last two years we tried to further consolidate our debt position, but it’s still high," Finance Minister Raya Al-Hassan told AFP. "We have a long way to go."

Lebanon avoided the worst of the US-rooted financial crisis, but its ratio of public debt to gross domestic product surpasses even that of Greece, whose debt problems are behind the latest jitters on world markets.

Although it has dropped from a peak of 180 percent in 2006, Lebanon recorded a debt-to-GDP ratio of 148 percent last year, compared with Greece’s 115 percent.

However, the Middle Eastern nation’s debt tops $50 billion (€41.4 billion) against Greece’s $362 billion (€300 billion).

Most of that debt was accrued after Lebanon’s devastating 1975-1990 civil war.

The International Monetary Fund has predicted Lebanon’s GDP growth could exceed eight percent in 2010 thanks to improved domestic stability and prudent policies.

"We saw high growth rates especially after 2008 because we have a very good and robust banking sector and there was peace and stability," Hassan said.

"Because of the lack of investment opportunities outside, we were able to attract a lot of deposit inflows, which increased about 22 percent between 2008 and 2009," the minister added.

Remittances from Lebanon’s diaspora, which is at least twice the size of its resident population of about 4.2 million people, are a pillar of the local economy.

They are estimated at between six and seven billion dollars annually, equivalent to 22 percent of GDP.

"The fact that you have a sustained inflow of money coming from abroad helps us to always serve our debt and to sustain an inflow of money to the country," Hassan said.

Lebanon’s falling debt-to-GDP ratio came thanks to a combination of high growth and rising primary surpluses, and despite years of political paralysis, unrest and even an all-out war between the Shiite militia Hezbollah and Israel.

But Andreas Bauer, IMF mission chief for Lebanon, this month warned that Lebanon’s economy remained vulnerable unless the government addressed "structural weaknesses, including important infrastructure gaps, most notably in the electricity sector."

Electricity costs the government more than one billion dollars annually and is the third largest expenditure after debt servicing and salaries — an expense Hassan says the state is paying close attention to.

"We are increasing our capital expenditures in telecoms, electricity, road networks, public transportation," she said, adding the government intended to double expenditure to 3.5 percent of GDP from 1.5 percent.
But others argue real growth remains impossible unless the state rethinks its fiscal policies entirely.

"Since the end of the civil war, governments have focused on policies that attract foreign investments and grants," said Kamal Hamdan, executive director of the Beirut-based Consultation and Research Institute.

Hamdan points out that Lebanon’s high growth rates are not a result of productive fiscal policy but stem from tourism, real estate and financial services.

"In terms of the real economy we are not using our resources," he told AFP. "We are not competitive: our industries are not viable and agriculture is in permanent decline.

"Even the sophisticated sectors, such as information and technology, are not tied to the Lebanese economy, which pushes young professionals to emigrate."

Hamdan says productive growth is only possible if and when the economy ceases to depend on remittances and importation.

"We continue to import 40 to 45 percent of our GDP. We need to stop thinking like stockholders and merchants and start producing."

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