The recent gridlock around the formation of a government is hurting confidence. According to the Central Bank of Lebanon, the growth in total private sector deposits slowed from 7.2% in 2016 to 3.8% in 2017 and 2.86% by September 2018. Meanwhile, on the lending side, loans to the resident private sector fell by 0.46% year-on-year to reach $52.18 billion by September 2018, hinting at a crowding-out effect of the private sector by the public sector due to higher interest rates. The crowding out of the private sector is likely to continue if confidence is not swiftly restored as the slim growth in deposits will be directed towards financing the country’s debt service.
Accordingly, questions about how much more strain the Lebanese economy can take have gained traction lately. With yet another prolonged political deadlock in Lebanon, we are still only talking about reforms rather than implementing them. The current context includes higher interest rates, recovering oil prices, $11 billion of loans and grants pledged for Lebanon by the international community during the CEDRE conference, higher inflation and weaker growth. This set of new givens compels us to take another look at the sustainability of Lebanon’s debt, which earns it the third global spot in terms of debt to GDP ratio.
The recommendations for lowering our debt burden are now known to experts and non-experts alike. Fiscal consolidation is still the key to putting debt on a more sustainable path. Currently, the bulk of government spending does not generate any value-added to the Lebanese economy as it is centred on servicing our debt, paying the salaries and wages of public sector employees and covering the deficit of the national electricity company EDL. We must at least ease the spending on one of those three fronts in order to rein our debt levels back in.
Debt levels must always be looked at in relative terms and not absolute terms. Debt should be weighed against the economy’s GDP and against the efficiencies of its allocation. It is only when debt levels are largely inflated relative to the economy’s size and when they are accumulated towards no growth-boosting targets that they are frowned upon. This means that once Lebanon gains more fiscal space and reduces inefficiencies in fiscal spending, it will and should be able to borrow again, but this time, direct the borrowed funds to the long-neglected and much-needed capital expenditures.
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