Open Letter to Prime Minister Saad Hariri: Lebanon Needs Less Debt Not More

In your recent visit to Washington DC, Prime Minister, you announced that the Lebanese government wanted to get the country back into strong economic growth, in order to create jobs. For this to happen, you declared that your government’s plan requires the world to pitch-in to the tune of about $14 Billion in grants and soft loans over a seven-year period. I hate to break it to you Prime Minister, but the sort of economic help you are passing the hat around for will not likely be forthcoming—not in the short, medium, or long term. The reasons for this rather austere assessment are several:

First, the world is currently not placing Lebanon in the priority column. It has been a quarter of a century since Lebanon’s civil war ended, and the country has received its fair share of financial support through multiple international donor conferences. At a time when places such a Yemen, Syria, and Libya are being torn apart with massive destruction, social displacement, and economic calamity, the international community has much more pressing regional matters. That is not to say that Lebanon may not be supported (militarily or for hosting Syrian refugees), but expectations will need to be more grounded.

Second, the international community has quite serious concerns on the merit of guardianship of large sums of grants and soft loans by a government, which has done little to tackle reform and corruption. Lebanon ranks quite dismally when it comes to Transparency International’s Corruption Perceptions (as of this writing, it is ranked 136 out of 176, with a very low score of 25 out of 100). Lebanon’s fiscal mismanagement is well known in international circles. At the end of the civil war, the nation’s debt was a mere $3 Billion, which was 30% of GDP. Now it is a whopping $71 Billion, which is more than 146% of Lebanon’s GDP (Credit Libanais, 2016), with very little to show for in terms of infrastructure and public services. Debt servicing now takes up more than 50% of the government’s budget with little room left for any fiscal stimulus programs. Ironically, almost all this debt occurred under governments led by your party. Is it a wonder then, that the little (non-military) aid that Lebanon recently received has rarely ever gone through the Lebanese government, but rather through International NGOs?

Third, Lebanon’s Central Bank (BDL) currently has more than $53 Billion in International Reserves, which is almost 120% of GDP. Lebanon’s reserves are higher than Kuwait’s, Denmark’s, Sweden’s, Colombia’s—and even Egypt’s—a country with 20 times the population and almost 10 times the GDP. Furthermore, Lebanon has advertised quite heavily its reserves of oil, and has even invited global oil companies to participate. It is estimated that the reserves could sum to somewhere between $200 Billion and $600 Billion. This begs the question: Why would any other nation support a country that sits on this type of wealth?

Fourth, assuming all the above concerns are somehow miraculously overcome, there is no reason to believe the Lebanese themselves want their nation to be burdened with more debt. What they seem to prefer is a sustainable economic model that provides opportunity and shares in the wealth. Unfortunately, Lebanon’s economy has become an oligopoly of sorts with a vast and growing chasm between the few rich and the growing poor. Lebanon’s Gini coefficient according to the World Bank, is among the world’s highest with 0.3% of the population owning 50% of the country’s wealth—a powder keg waiting to explode. Barring the Lebanese banking sector and some limited (albeit encouraging) recent activity in a nascent tech sector (also funded by the Central Bank), there does not seem to be much emphasis on other sectors such as agriculture, industry, or transportation—all decimated after years of abandon. Tourism is also suffering due to the country’s embarrassingly short-sighted abuse of its environment and beaches. Beirut’s sewage spewing into the Mediterranean can literally be seen by anyone flying overhead. The ill-named, sadly-positioned, and terribly malodorous garbage dumps north and south of the capital are a daily reminder of mismanagement; ironically while Lebanon’s infamous Costa Brava dump on the Mediterranean turns tourists away, Spain’s famous Costa Brava attracts them in hordes with 75 million expected this year alone. Is this the sustainable economic model that will induce increasingly thrifty European or American policy-makers to believe in investing in Lebanon’s future?

Prime Minister, with all the above in mind, the last thing the country needs right now is more international loans (soft or otherwise). It first needs to plug the holes of wasteful infrastructure such as energy and water. It should then launch small business job-inducing projects (industry, environment, and agriculture). Most importantly, the government should seriously consider having the Lebanese Central Bank pay down part of the national debt from its $53 Billion foreign reserves. This would give the government the ability to fund more growth-inducing fiscal policies from the resulting savings on interest. If, for instance, we calculate that $13 Billion of the national debt can be paid off at an average interest rate of 8%, this would save the government over the next 7 years close to $7 Billion, which could be deployed to reduce national unemployment, improve national infrastructure, and boost industry and growth. Lower debt-to-GDP will also work to improve confidence, debt ratings, and in the process lower interest rates. BDL would still have a safety net of $40 Billion in reserves, almost equaling the nation’s GDP.

In conclusion, the Lebanese government needs to start thinking in terms of self-sufficiency at dimensions that the Lebanese are willing to accept and the international community to digest. The government should abandon the quest for more loans; Lebanon needs less debt not more.