Lebanon”s next cabinet to inherit staggering debt
Even before the next Lebanese government takes shape, it faces a considerable hurdle: a staggering national debt that will top 50 billion dollars this year.
"The next government inherits a dual legacy," said economist Charbel Nahhas.
"On the one hand, it is inheriting a massive rise in liquidity, so it will not face immediate financial stress or be in need of external financing," he said.
"On the other hand, it will also inherit a massive public debt and structural problems linked to public deficit, low investment and the high rates of migration of skilled people."
Lebanon”s debt-to-gross domestic product ratio dipped to 162 percent from 180 percent over the past three years, but at 47.2 billion dollars it is still one of the highest in the world.
The country weathered the worst of the global economic crisis and in 2008 witnessed GDP growth of eight percent, thanks in part to a steadfast banking sector and remittances from Lebanese working abroad.
The International Monetary Fund has predicted that growth in 2009 would reach four percent and lauded Lebanon”s "prudent macroeconomic and financial policies."
In April, the international credit and risk assessment group Moody”s Investors Service upgraded Lebanon”s sovereign ratings by a notch to B2, still relatively low on the agency”s scale.
It highlighted a substantial improvement in external liquidity, resistance of the public finances to shocks, and the ability of the banking system to finance fiscal deficits.
Lebanon”s debt will nonetheless climb another four billion dollars this year to more than 50 billion dollars, partly due to a lack of reform in sectors like the money-draining electricity department, according to Mohammad Chatah, finance minister in the current caretaker government.
The government”s third largest expenditure after debt servicing and salaries is the electricity sector which Chatah said alone will account for 1.4 billion dollars of the increase.
Most of the debt was incurred during the massive reconstruction after Lebanon”s 1975-1990 civil war led by slain ex-premier Rafiq Hariri, but his critics blame his fiscal policies for increasing the burden.
Hariri”s son and political heir, Saad, has been tasked by President Michel Sleiman with forming a new government after his Western-backed coalition won the June 7 parliamentary poll.
But his efforts to form a government have been hampered as rival politicians battle over the allocation of cabinet portfolios.
Chatah said he was confident that Lebanon — which has endured years of wars, sectarian strife and political crises — has what it takes to make progress but insisted it must "get its act together."
"I think the sources of strength in the economy are there," Chatah said. "If we can somehow put together a government that can function better than this one, we can move to rapid and better quality growth."
The next government should keep borrowing and expenditure in check, Chatah added.
International donors have repeatedly set structural reforms as a condition for financial aid, but the political crises, governmental paralysis and violence have impeded economic reform.
Chatah said "the divisive politics" in the outgoing government — where the alliance headed by the Shiite Muslim Hezbollah movement had veto power — contributed to halting reforms in the country.
While Chatah said he is optimistic that the next government might be able to tackle the financial problems, Nahhas said is not entirely sure it can both capitalise on present prosperity and rein in the debt.
"Hope is limited because I fear the facility of one option — they will take advantage of sudden liquidity and perpetuate the fiscal status quo," Nahhas said.