Lebanon’s Finance Ministry held an investor presentation on March 27, 2020 to update the country’s Eurobond holders on the government’s economic plans and the principles for debt restructuring. In fact, On Saturday 7 March 2020, Prime Minister Hassan Diab announced that Lebanon for the first time will not pay a $1.2B Eurobond due on March 9 and will seek to restructure its massive debt which reached $90B in 2019.
The presentation is composed of 4 sections mainly covering the current Lebanese situation and developing a recovery plan that it hopes to finalize before the end of the year.
The Lebanese economy faces an unprecedented economic and financial crisis. The presentation projects a GDP contraction of 12% for 2020 and a deterioration of the social indicators with a poverty rate of 45%, not taking into consideration impact of the Coronavirus outbreak. Moreover, inflation will rise to 27.1% fueled by the ongoing sharp depreciation of the Lebanese pound on the parallel market.
Lebanon is witnessing a large fiscal deficit, which pushed the stock of public debt to an unsustainable high level. The rise in deficit can be mainly attributed to the to the very high interest bill paid by the government, though not mentioned is the high wage bill caused by excessive public sector hiring and pensions. Lebanon’s economy has traditionally relied on foreign direct investment and remittance inflows from the diaspora to sustain economic activity and fund the fiscal and current account deficits. Declining cross-border capital inflows over the past few months have led the Banque du Liban (BdL, the central bank) to draw on its existing stock of foreign exchange reserves. In fact, according to the presentation, the BDL liquid foreign currency reserves reached $22B in January 2020. However, worth mentioning that BDL figures put foreign currency reserves at $29B! These conditions have weighted on the Lebanese banking. Besides, the presentation considers the size of our banking sector to be way above what is needed to fulfil its primary role of financing the development of a productive economy
The government revealed a four-point agenda of structural reforms, fiscal consolidation, banking sector reorganization and debt restructuring. After restructuring the commercial Banking sector in terms of size and organization, Banks should focus on providing credit to the real economy and most importantly separate the links between cash-strapped commercial banks and the central bank. On the fiscal level, the government will implement the Electricity Reform Plan to eliminate the deficit of Electricte du Liban (EDL). Moreover, the government aims to improve tax compliance. In fact, this will help realize the revenue potential of VAT and other taxes which would limit tax evasion and tax increases at higher rates. In term of debt, Lebanon’s gross public debt reached $90.35B in January 2020, of which $31.31B of Eurobonds, $57.07B of local T-bills and bonds and $2B of Bilateral & Multilateral loans.
|Lebanon main Economic Indicator|
|Trade balance of goods and services (% of GDP)||-24.80%||-26.90%|
|BDL Gross Foreign Currency Holdings (US$B)||32.5||29.6||29|
|Gross domestic product (US$B)||55||49||34.4|
|Real GDP growth||-1.9%||-6.9%||-12%|
|Inflation, Average CPI (% change)||6.1%||2.9%||27.1%|
|Fiscal balance (% of GDP)||-11.40%||-11.30%|
|Primary fiscal balance (% of GDP)||-1.60%||-0.90%|