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The Lebanon Report
Number 1
Spring 1996

Debt and More Debt: Debtor's Prison*

* This article is drawn from a project on Lebanese fiscal policy funded by the International Center for Economic Growth (ICEG) and the Center for International Private Enterprise (CIPE).

The latest figures put Lebanonıs gross public debt at $7.6bn, up from $6.7bn in June 1995. Gross public debt as a share of GDP increased from 70% to 76% during the same period, assuming a current GDP of approximately $10bn. This ratio, however, should be taken with a spoonful of salt since there are no accurate figures for Lebanonıs GDP. There are, instead, many ³interpretations,² the result of an interesting mix of educated guesswork and politics. As someone once said, Lebanese economic data is a matter of opinion, not of fact.

In spite of the paucity of reliable national economic data, it is clear that the public debt has reached dangerous proportions. One need only look at the following figures:

  • The debt burden is growing and is likely to slow down the economy. The ratio between the net public debt and GDP has increased from 34.4% in 1993, to 44.4% in 1994, and to 51.5% in 1995. Assuming a real GDP growth rate of 8% in 1996, this ratio will jump to 58.6%.[1]

  • The burden of the debt on the budget is growing at an alarming rate, reducing the governmentıs ability to devote more resources to investment or much needed social programs. In 1992, 16.8% of the budget went to payment of interest and principal on the internal and external debts. In 1993, this ratio jumped to 30.4%, to 23.5% in 1994, to 28.6% in 1995, and is budgeted to go up to 40.3% in 1996.[2]

  • It is becoming more and more difficult for the government to service the public debt because it is accumulating faster than revenues are increasing. Debt servicing, which consumed 16.2% and 40% of actual government revenues in 1993 and 1994, respectively, is estimated to have consumed 72.3% of revenues in 1995. This is a particularly alarming statistic because it indicates the growing difficulty the government is facing in controlling the debt. By comparison, Jordan, which has a much higher net public debt to GDP ratio than Lebanon ­ 101% compared to 51.5% for 1995 ­ spends about 20% of its government revenues on debt servicing.[3]

  • Finally, because the government is unable to service its debt from revenues, it is currently borrowing merely to cover its debt servicing obligations. In 1994, the stock of net public debt grew by L£1,688bn while debt servicing totaled L£1,595.6bn. This meant that 95% of new debt in 1994 went to pay the interest on the old debt . In 1995, the stock of net public debt grew by L£4,660bn while debt servicing reached L£2,278bn; this meant that 49% of the new debt in 1995 went to repay the interest on the old debt. In 1996, 89% of the new debt is projected to go towards repaying interest and principal on the old debt.[4]

    The Lebanese economy is caught between a rock and a hard place. Reconstruction cannot be sustained without borrowing to finance at least part of the public investment program. Although there is nothing inherently wrong with borrowing, borrowed money has to be put to productive uses: it must generate enough revenues for the borrower - in this case the Lebanese state - to meet its obligations in a timely fashion. Public sector borrowing, however, leads to a crowding out of private investment as well as a redistribution of wealth in two different ways: first, it leads to a further concentration of wealth because of a greater return on capital through higher interest rates; this is to the benefit of owners of capital who thus effectively benefit from a transfer of taxpayers' money. Second, it leads to a redistribution of wealth from future generations to current generations. Both effects have to be contained and countered by wise fiscal and monetary policies.

    A great deal more also needs to be done. The first thing is to get the budget deficit under control by cutting non-investment items, including reducing the public-sector wage bill. This can only be done in the context of far-reaching administrative reform which is long overdue. Second, the government has to better manage its debt and must seek lower-cost financing and longer-maturities. Multilateral institutions and public creditors, such as foreign development agencies, offer much better terms than the Euromarket which Lebanon has already tapped twice in the past two years. Third, the government must develop a new strategy for the financing of reconstruction, one which sets investment priorities by order of economic urgency ­ investments which eliminate bottlenecks ­ and by revenue-generation. This strategy should provide a more explicit role for the private sector and privatization, preceded by the development of a public regulatory capacity.

    Note

    1. Debt figures are taken from the Banque du Liban bulletins.

    2. Budget figures are taken from the finance ministry. The Debt Service item in the 1992-1995 budgets has been revised to make it consistent with the definition of Debt Service in the 1996 Budget.

    3. For 1993 and 1994, the figures are for actual revenues and actual debt service. For 1995, the figures are estimates, not actual figures.

    4. The stock of net public debt is projected to grow to L£11,869.5bn and the debt service item on the budget is budgeted at L£2,600bn (in current L£).

    Lebanon Report Spring 1996 Index | Publications Index