Can the Lebanese Government Assume More Foreign Currency Debt to Close BDL’s Financial Gap?

According to the reform plan prepared by the Lebanese Government and presumably approved by the IMF, BDL’s financial losses or gap was estimated, not surprisingly, at $60 billion[1]. What is surprising, however, is that it was left to the banks’ owners and depositors to shoulder the full burden of the gap, while the Government shoulders none at all. Though not mentioned in the plan, the purported reason for not allowing the government to share in the burden of the financial losses is that it would make foreign currency public debt unsustainable — as all the losses are in USD – and the negative implications of that on Government finances and growth.

We believe that this is a good argument, but only if it is true. And what we would like to do in this brief note is to test the validity of this argument. To begin with, we note that sustainability is defined as the ability of the government to service its debt in a timely fashion without further borrowing and without accentuating the debt burden thus maintaining the debt ratio (debt to GDP) at a reasonable or acceptable level. So we need to find the sustainable foreign currency debt ratio for Lebanon and then check whether the Government can afford to absorb part of the financial losses without accentuating the debt burden or without exceeding this sustainable level. Of course, this assumes that the government is in a post-crisis mode, and is embarking or has seriously embarked on a reform and recovery program with the IMF.

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Can the Lebanese Government Assume More Foreign Currency Debt to Close BDL’s Financial Gap?

 

[1] This agrees with estimates by BLOMINVEST Bank that calculated the gap at end March 2022 to be around $76 billion excluding gold. So if we include gold – valued at about $16 billion – the gap would amount then to $60 billion.

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