Bankrolled: the backers behind Beirut

With its finances unsustainable and a debt burden that has put pressure on its currency, pledges by donors at an international conference in Paris gave Lebanon, once dubbed the Paris and Switzerland of the Middle East, a breath of fresh air

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By  Massoud Derhally Published  January 5, 2003

|~||~||~|Lebanon’s cash flow problems got a little bit easier in November when several countries agreed to grant the cash strapped country US $ 4.3 billion in credit and soft loans. The goal is to alleviate its burgeoning debt, which was US $31 billion at the end of 2002, and which is equivalent to 175% of gross domestic product.

Just about every person you speak to in Lebanon has an opinion about the state of the Lebanese economy. But they all agree that the government’s approach to its finances, perhaps mirroring that of the average Lebanese citizen – live beyond your means and to hell with the consequences – is no longer fashionable.

In Paris, old relationships were key. Lebanese Prime Minister, Rafic Hariri, convinced close confidant French President Jacques Chirac, and a number of the 18 countries that attended the meetings in Paris, that Lebanon had much to gain from the financial commitments that it would deliver on its promises, because the alternative would be far grimmer than is already the case. “Despite the strong attempts to control the deficit, the government needs our help to check the increasing public debt,” Chirac said.

Hariri pitched a 30-page presentation on how his government would reduce the budget deficit and check the debt. While he highlighted the positive impact of the US $5 billion that privatisation would bring in, he went to pains to stress the importance of reducing the burden brought on by high interest rates.

“The sustainability of this debt becomes tenuous given that the average annual interest rate is 12%, which results in a debt service cost of approximately 18% of GDP,” said Hariri.

The audience responded in kind. Saudi Arabia, which has its own economic woes to deal with, led the creditor countries by pledging US $700 million to Lebanon, followed by France, the European Investment bank, the Kuwait Investment Bank, the Arab Development Fund and a number of Arab countries. While the US provided moral support in the run up to the meetings in Paris, it did not pledge any assistance and neither did Britain.
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It is natural that the majority of aid would come from Arab countries for two reasons, economic and political. Michael Young, a political analyst and commentator for the Daily Star, says that’s simply because that’s where Hariri has more relevance.

“Thanks to his support in Saudi Arabia, other Gulf countries came along. Also, Arab investment in Lebanon is more substantial than that from other regions,” Young told Arabian Business. “The economics of it is that neighbours are most closely affected by negative spillovers or externalities from countries not doing well, and so they are the ones most apt to help and want to see things improve,” says Florence Eid, assistant professor of economics and finance, the American University of Beirut (AUB).

Speaking to journalists at a press conference, Chirac said, “We felt we should not take the risk of adding a potential financial crisis to the political or military crises we all know of in this region. This was what motivated the friends of Lebanon; especially traditional friends from the Arab countries, foremost among them the ever-generous Saudi Arabia.”

The US $4.3 billion though, is not aid. The pledges are loans with longer maturities and lower rates, to replace part of the existing $30 billion debt stock that war torn Lebanon piled up over the years. As a result of the pledges, the Lebanese government will save US $300-$500 million in its annual budget deficit, which in 2002 was close to $3 billion. Proceeds of planned privatisations and securitisations, in addition to all primary surpluses, will be deposited in the treasury retire portions of the debt and insure that debt service obligations are met.

Hariri said the path of privatisation and the other comprehensive package of measures he put before the audience would, “usher the Lebanese economy into a virtuous circle that balances the budget by 2006 and reduces the debt to GDP ratio to less than 100%.”

The Lebanese Prime Minister said privatisation, coupled with securitisation of revenue proceeds, will yield approximately US $5 billion of revenue in 2003, reducing debt servicing by $700 million a year. The 2003 budget law, Hariri said, registers a deficit decline of $1.2 billion, which is a 43% improvement over the previous year and represents an improvement of 7 percentage points of GDP.
Yet the challenge for Lebanon remains.

“It will have to bring down the cost of the public debt while lengthening its maturity so that servicing the debt each year becomes cheaper, thus contributing to lowering the budget deficit,” says Ziad Maalouf, vice president at Lebanese-based Middle East Capital Group.
No sooner had news of the agreement in Paris leaked, than analysts, economists and politicians were debating the implications.

“There exist a number of questions on the sum allocated. The sums lack transparency, and neither the conditions, the period nor the process of utilising credits is clear, neither in the final statement of Paris II or in the table distributed to journalists,” said Lebanese Finance Minister George Corm.
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In his forthright Op-Ed piece, “The pawning of Lebanon” in the Daily Star, Michael Young pulled no punches about the situation Lebanon finds itself in today. “Here is the grand co-opter himself [Hariri], who liberally threw the republic’s money around in the early 1990s to purchase support for his reconstruction program, compelled to pawn his power to ensure his survivability. Hariri is a hostage to the debt he created,” Young said.

Lebanon’s Daily Star newspaper ran a hard-hitting editorial dubbing the Paris II donor conference as “Lebanon’s last chance to get it right.” The paper said, “The premier’s fans have to realise that he could not have succeeded in the absence of other factors: French interests in the Eastern Mediterranean, the indefatigable resilience of the Lebanese private sector, and the belated arrival at an acceptable modus vivendi between Hariri and President Emile Lahoud.”

While the agreement with the various creditor nations at the Paris Club is supposed to help the country find a sustainable solution to payment difficulties, curb the deficit spending and avoid a default on payments in 2003, some analysts say it will only bring temporary respite. They say unless the government instils an economic liberalisation programme that will engage the private sector and put in place a privatisation plan that will promote investment, the debt burden will continue to exist, and the pressure on the Lebanese pound will intensify.

Michael Young says it is definitely only temporary. It’s a short-term effort to buy time and allow the government to advance economic reforms, he says. “The soft loans, which come out to about $3 billion, as opposed to the balance, which is development funds, only cover around 10% of the total debt,” Young says.

“It was an important boost to confidence and a breath of oxygen to the Lebanese economy when it was nearing the red lines. The results were significant as highlighted by the drop in local interest rates and the increase in demand for the Lebanese pound,” says Maalouf.
But Paris II will obviously not be enough for Lebanon.

The government should proceed with privatisation. Hariri’s government, analysts say, should do what international financial institutions have long been demanding: cut spending, mainly through a reform of the public administration and cutting a substantial number of redundant employees; cut spending on the army and security forces; privatise, particularly the cell phone, electricity and water utilities; dramatically curb corruption; and increase revenues, mostly by distributing the revenue burden evenly, since Beirut and its surrounding areas tend to pay more.
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Michael Young says it is, “imperative that the authorities create investment incentives, since what we have, in reality, is a situation where economic policy is stifling investment. One way to do so would be to lower domestic interest rates, after negotiations with the banking sector.”

The lowering of interest rates on debt, the reduction of government outlays, including a lower budget deficit, will all contribute to reducing the debt. All of this, of course, is helped and accelerated in the presence of high positive rates of economic growth, says Eid. “Given global economic conditions, Lebanon is not doing badly at all on this last front,” says Eid. “Lebanon has a very special potential that it is beginning to capitalise upon, which is basically it’s homegrown entrepreneurial talent and high value added, export-oriented small and medium enterprises,” says Eid.

The firms, says Eid, have significant potential to attract capital, create jobs and add value to the economy. Such firms also tend to survive economic downturns better than larger firms, as international experience has shown, she says. Eid points to Lebanon’s domestic entrepreneurs who have great potential. She says the young business brains at work, which created programs such as the nation-wide business plan competition for start-up ideas (www.enetworklebanon.org) might go regional in 2003 and allow other countries in the region to leverage the same potential.

Overall, the pledges are a desirable development. They have created optimism in the market, and expectations traditionally play a very important role in the way markets evolve, says Eid. The International Monetary Fund welcomed the efforts madeat Paris II as regards the economic reforms and reducing the Lebanese public debt. It took note and welcomed the efforts of the international community to grant Lebanon long-term loans on the best terms possible to help it in its effort to reduce its debt burden. It confirmed its will to pursue close dialogue with the Lebanese authorities.

Overall some analysts say, Hariri has succeeded in putting IMF recommendations on the back burner. “The whole Paris II event was important in the sense that very few countries, certainly ones the size of Lebanon, can mobilise so many heads of state and manage to commit funds the way it has been done for Lebanon,” says Eid. “The last such event over the past 15 years was the rounding up of funds to shore up the Mexican economy in the mid-1990s, and Mexico is not Lebanon in terms of its economic role globally and regionally.”

BREAKDOWN OF CONTRIBUTORS(US$)
Saudi Arabia $700 million
France $500 million
Arab Development Fund $500 million
United Arab Emirates $300 million
Kuwait $300 million
Malaysia $300 million
European Investment Bank $350 million
Italy $200 million
Qatar $200 million
Canada $200 million
Bahrain $200 million
Japan $100 million
Arab Monetary Fund $100 million
Belgium $70 million
Oman $50 million

Sources: Arabian Business, Government of Lebanon

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