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Daily News Analysis

Is Lebanon’s Economy About to Collapse?

Khalil Umar

Until January 31, 2019 Lebanon has been without a formally constituted government since its last parliamentary election in May 2018. Amid negotiations to form a new government, many politicians, journalists, analysts and most recently foreign ambassadors have predicted an impending economic collapse due to the rising level of government debt, as if debt has only suddenly soared.

Lebanon’s debt-to-GDP reached around 150% in 2017 according to the Lebanese Ministry of Finance and this trend continued in 2018. In simple terms this number means that public debt is 1.5 times the Lebanese GDP in a year. Indeed, this is not a positive indicator but this ratio had reached more than 180% in 2006, the year of high political turbulence as well, yet the Lebanese economy did not collapse. If the economy was about to collapse in 2006, then somebody or something must have saved it then or is there another explanation?

To understand the situation of debt in relation to a state, let us briefly consider the example of an individual. If a person is in deep debt which both the borrower and the lender know will not be able to pay back in the future, then what can keep the borrower going? One possibility is that someone agrees to keep “recycling” the borrower’s debt. That is, each time there is a payment due, a lender agrees to make a new loan to help make the payment. The debt keeps on growing, which makes the person more vulnerable but as far as the loan tap is open, things keep going. Of course, this depends on the willingness of the lender(s) to continue the scheme, whatever the lender(s’) motive in keeping the person from failing. However, once the debt flow stops, the person borrowing the money is in trouble.

In case of government debt, politics usually plays an important role in the decision to open and close the debt tap and in Lebanon everything is political. It seems that debt lenders—international financial institutions—have a vested interest in keeping the debt cycle going.

With the above in mind, the Lebanese political system can be viewed as an ill-functioning multinational corporation with shareholders being rival regional and global powers with local representatives (for the most part). As a result, in addition to domestic reasons, it is the rivalry between those powers that causes instability, yet it is the geopolitical interests of at least some of those powers that keep the system from collapsing, whether politically or financially.

Hence, the geopolitical importance of Lebanon for those who provide loans, combined with domestic corruption, mismanagement, and economic model choices is what caused the drastic increase in Lebanese government debt over the past three decades. This made the Lebanese political and financial system more fragile and open to foreign pressure. It also created an opportunity for corrupt local officials to milk foreign powers for more money to act as their leverages. Also, domestic banks (whoever owns them) made fortunes out of lending to the government and earning high interest.

It appears that powerful Western financial institutions decided to keep the debt tap open in order not to destabilize Lebanon for now. Why? Instability in Lebanon will negatively affect the Zionist entity and its allies in Lebanon. Since 2006, Israel and its proxies are the weaker parties within Lebanese socio-political landscape. The emergence of any crisis will be wisely utilized by the Islamic resistance in Lebanon Hizbullah as has been done previously.

Returning to the question of its economy, it does not mean that Lebanon has run out of options to turn it around. A large portion of Lebanese government debt is held by domestic banks. These entities can be forced to make concessions to support the economy. In addition, it is not unheard of that governments default on their external debt. In fact, two countries which did so in the last two decades—Mexico and Argentina—are now part of the G20 group of the world’s biggest economies. Moreover, if current lenders close the tap, others will happily open it, as many have offered on previous occasions.

Finally, Lebanon is expected to join the club of oil/gas producers soon. However, that would require an independent, honest, and willing leadership backed by a popular majority to use the tools to turn things around. Unfortunately, these characteristics are lacking in most of those who are part of the Lebanese political and economic landscape.

So, is the Lebanese economy about to collapse? The answer is probably not yet, unless there is a surprise shift in political events. In any case, it has little to do with whether or when a new government is formed. Thus, effect of the delay in forming a new government on the economic and financial situation is a minor consideration in Lebanon.

(The writer is a PhD in Economics)


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