IMF Congress 2002
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Point Paper
Economic Stability of Lebanon

Over the last two years, the Lebanese government has been working to bring large public deficits and mounting debt under control, but with limited success. Lebanon's mounting debt problems and stagnant economic growth are making politicians increasingly willing to take drastic and unpopular measures to revert the situation. The critical state of the country's finances is forcing politicians to form a consensus on economic policy, though the exact form of those reforms isn't yet clear.

Last September the International rating agency Standard & Poor's announced it had lowered its credit rating for Lebanon to B+ from BB-. S&P said the main reasons for the downgrade were Lebanon's persistently high budget deficits and ballooning public debt. By the first of this year, it was reported that Lebanon's budget deficit widened by almost 64 percent last year as government efforts to curtail spending and boost revenue failed, according to data released by the Ministry of Finance. The deficit expanded to 5.82 trillion Lebanese pounds ($3.9 billion) from 3.59 trillion the year before as revenue fell almost 7 percent, and spending increased by more than 23 percent.
Debt servicing, which accounted for more than 40 percent of spending, rose 15 percent, the data indicated, and domestic debt- servicing accounted for about 85 percent of total servicing costs.
Revenue from customs, the government's single largest source of income, declined almost 11 percent to 1.75 trillion Lebanese pounds.

The government is under pressure to bring its finances under control because of the costs associated with spiraling public debt estimated at about $22.4 billion, equivalent to about 140 percent of gross domestic product. The government has been switching domestic short-term debt denominated in Lebanese pounds (Interest rates have a wide spread between the Lebanese Pound and the American Dollar) to cheaper longer-term debt in foreign currency. Total foreign public debt, most of which is Eurobonds, stood at $6.31 billion at the end of September.

Over the last three and a half years, the situation on this front has deteriorated, which prompted the downgrade of the country's rating to 'BB-'. Public sector debt will exceed 140% of GDP in the coming months, and there are no immediate signs of a reversion of this very worrisome trend. It is not too late to avoid this pile of debt - the highest of any rated country - spiraling out of control. Indeed, Lebanon has significant strengths that reduce the economy's vulnerability vis-a-vis other emerging countries - namely its developed financial system and the sizable assets held by Lebanese citizens overseas. But, to take full advantage of its strengths, it is essential that Lebanon address its public debt problem through a combination of fiscal discipline, privatization of public assets and debt restructuring. Lebanon's debt dynamics since 1990 are largely explained by the fiscal shortfall accumulated in an effort to rebuild infrastructure after the country's protracted civil war. Massive public investment programs have pushed the government's fiscal deficit well into double digits every year for over a decade. While these investment programs might be justified by the extent of devastation after the war, successive governments have been unable to meet budget targets and overruns have been frequent.

Politicians have not publicly discussed some of the real reasons for the dire financial situation until very recently due to fear of reprisals, however the people have always known the truth. The reasons are mainly due to the Syrian occupation and the unstable situation in the south.

Syria's occupation has siphoned off a large amount of Lebanon's resources primarily due to the massive influx of cheaper laborers who sent their income back to Syria. This prevented adequate paying jobs for Lebanese citizens and thus removed monies from circulation in the Lebanese economy. In addition to this situation there is the matter of the hundreds of thousands of Palestinian refugees living in camps.

This situation has precipitated a massive exodus of young educated professionals (mostly Christian) from the country who otherwise would have stayed to lend their talents to the rebuilding of their homeland, many never to return. The most severe consequence has been the widening disparity between the wealthy and poor classes practically erasing the large middle class.

Reconstruction Aid:

Humanitarian Aid:
a) South
b) Other Impacted Areas



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