This is how Lebanon fell into the debt crisis .. What about solutions?

Abdul Hafiz Al-Sawy

In the last months of 2019, the Lebanese protested the economic policies of the Saad Hariri government, accusing it and other state officials of corruption, and the country witnessed political turmoil, which ended in the formation of a new government headed by Hassan Diab.

Riad Salameh, the governor of the Lebanese Central Bank, has been raising the alarm since the beginning of 2020, about the need to search for a way to reschedule the foreign debts owed by the government in March, estimated at $ 1.2 billion.

This was achieved on March 7, when Hassan Diab announced that his country was unable to pay the value of international bonds due to creditors on March 9, and that they would seek to negotiate with creditors, to postpone payment, and to reschedule.

According to the data of the report of the Association of Lebanese Banks, the country's external public debt amounted to $ 91 billion at the end of 2019, and that government bonds represent the backbone of this debt by up to 94%, which makes negotiation difficult, as debt via Eurobonds is done through markets Money and away from the mechanisms of bilateral agreements with governments or international financial institutions.

Explode the crisis
What has been done in Lebanon can be read by announcing its inability to pay the creditor’s dues to the government, through the international bond mechanism, as a result of several things, chief among which is the neglect of the issue for years, and the successive governments ’reliance on borrowing from abroad to finance its current spending in the state’s public budget, which has been over the course of The period (2005-2015) is frozen, and it is not discussed or approved by Parliament.

In light of Parliament’s neglect of accountability for the economic conditions in general, and the value and size of external debt in particular, over the period from 2005 to the present, the crisis has worsened.

In 2005, the value of Lebanon's external debt was around $ 22.7 billion, according to World Bank database numbers.

The political crisis that the country witnessed in late 2019 has led to a crisis of confidence in the Lebanese banking system, and the Lebanese have tended to withdraw a large part of their deposits from banks, whether in the local currency or the dollar.

As everyone went to "dollarization", which led to a significant devaluation of the local currency, bringing the price of the dollar higher than two thousand pounds in the parallel market (while the price of the dollar before the crisis was 1500 pounds), as well as the resort of local institutions to announce the suspension of their dealings in the local currency, And accepting foreign currencies only.

The foreign exchange crisis in Lebanon was exacerbated by the exit of Lebanese money abroad, according to statements by the Governor of the Central Bank, which indicated the exit of a billion dollars from Lebanon during the period from October to December 2019, while some accuse Lebanese politicians of having removed their money. From Lebanon during the crisis, which made matters worse, inside the Lebanese banks.

In general, Lebanon relies heavily on the outside in the conduct of economic life, and this is clearly shown negatively through the data of the trade balance, where there is a large gap between exports and merchandise imports.

The report on the Association of Lebanese Banks at the end of 2019 shows that merchandise exports to Lebanon in the period 2016-2019 ranged between $ 2.08 billion and $ 3.7 billion, while merchandise imports during the same period ranged between $ 19.1 billion and $ 19.5 billion, so The trade deficit during the period averaged $ 16.1 billion.

Consequences of delaying payment
The way politicians and economists in the Arab region develop with the debt issue - according to the debt sustainability rule promoted by the International Monetary Fund - is narrow-minded, and the absence of a development strategy.

The sustainability of the debt means, that the country has always been able to pay the debt burdens in installments and interest, without asking to postpone the payment, or stop paying it, because it has a financial position that allows it to continue to rely on debt for financing.

Hence, Lebanon fell, just as other countries fell into the debt spiral, and the way out, with more debt, is the trap that the Lebanese government seems to resort to, but it will face a severe challenge, through confrontations with the Lebanese street, who will reject austerity measures, And the negative social consequences that will result from any agreement with the Bank and the International Fund.

In late February, Standard & Poor's issued a negative credit rating against Lebanon, at (CC) with a negative outlook, after (CCCC), which means that Lebanon is thinking about borrowing from abroad. He will suffer major problems, foremost of which is the high cost of financing, which is not commensurate with the severe financial situation there.

While Lebanon’s economists complain that the Lebanese pound has experienced a significant decline in rates since last October’s crisis, the escalation of the debt crisis in Lebanon would lead to a further decline in the local currency, higher inflation, and increased poverty rates, which Lebanese Prime Minister, about 40% of the population.

Analgesics are not a solution
Following the statements of the Lebanese Prime Minister, as well as the Minister of Economy, or the Governor of the Central Bank of Lebanon, he notes that everyone is focusing on the issue of debt restructuring , seeking technical support from the International Monetary Fund, working to activate previous promises of a donors' conference held during the Saad Hariri government, and pledged to provide $ 11 billion.

The truth is that the Lebanese economy needs a complete review of its structure, not just debt restructuring. It must be turned into a productive economy, which works to reduce the gap in the trade balance, and provides stable job opportunities and high added value.

It is also imperative to confront real corruption in the government administration, and get rid of sectarian legacies and the quota system in government jobs. The origin in government jobs is efficiency and the extent of the need for work for employees, and not the distribution of a number that leads to convincing unemployment.

There must be a national agenda for direct foreign investment, which does not depend on speculation in real estate and tourism projects, but rather to build a real production base, and the presence of a service sector that has added value, especially in new activities, such as the communications sector and the production of information.

It is very important for politicians in Lebanon, as well as the administrative structure of the state, to know that there is a great crisis of trust between them and citizens, which led them to withdraw their deposits from banks, to put them at risk, because they know that the country is on the verge of a crisis, and that officials were quick to get their money out first.

Finally, Lebanese officials will go to the World Bank and the International Fund, as evidenced by the Prime Minister and Economy Minister’s meetings with representatives of the Bank and the International Fund in February, although their statements indicate that the interviews focused on the Bank and the Fund providing technical advice.

In light of the complexities of the financial situation, and the Lebanese officials' perception of a solution to the crisis by waiting for the donors ’conference funds, or aid by some Gulf countries, it is necessary for the Lebanese government to think about a national development agenda, and not just to reach a temporary solution to the economic crisis in Lebanon, and prepare for an arduous round With the bank and the International Fund, to avoid signing unfair terms.