Lebanese Public Debt: Size and Composition

* Includes public, public institutions, and non-bank financial institutions; ** International Development Institutions; *** Foreign Governments; **** Eurobonds foreign and domestic holders

It is widely believed that it is mainly the large and rapidly rising public debt that triggered the Lebanese economic crisis, especially the wage and rank increases of 2017-2018. So it is interesting to ask now, what has happened to total public debt since then? As the above table shows, it has risen from 131.3 trillion LBP in October 2019 (the date the crisis officially started) to 151.7 trillion LBP in March 2022 (the date latest data are available). This increase has happened despite the fact that since March 2020 the country has defaulted on foreign debt (and stopped paying interest and maturing principal) and despite the fact that since January 2021 the MOF has stopped paying interest on BDL holdings of domestic TBs. On the other hand, during that period, the LBP exchange rate against the USD depreciated from 1,507 to around 24,000, rendering the real value of at least the domestic debt way, way down.

If we start with domestic debt we find that it increased from 82.3 trillion LBP to 92.4 trillion LBP. But what is interesting is the changing composition of its holders: banks’ holdings fell from 26 trillion LBP to 18.9 trillion LBP, whereas BDL’s holdings increased from 44.9 trillion LBP to 58.9 trillion LBP, an increase of 14 trillion. That is of course an obvious case of debt monetization. But the interesting thing is that during that period currency in circulation (CC) increased by close to 30 trillion LBP, from 7.3 trillion LBP to 36.7 trillion LBP; so only half of that was due to debt monetization, the rest was due to CC increasing as a result of Circulars 151 and 158. It is also interesting that MOF ran a budget surplus in most of 2021 (around 1.4 trillion LBP by October 2021), but net TBs holdings by BDL, Banks, and Others increased by 3.5 trillion LBP, the result of which is that public deposits (not shown) increased by close to 4 trillion LBP to 19.3 trillion LBP in 2021. But why issue more debt and for what? The answer could be that MOF was amassing enough money of budget to cover increasing social assistance payments to public employees. Moreover, and on a different note, at an exchange rate of 24,000, the real value of domestic debt in USD was only around $3.8 billion in March 2022.

Moving to foreign debt, or debt denominated in USD, we see that – after converting it to USD at the rate of 1,507 — it has increased from $32.5 billion to  39.3 billion. But the majority of the foreign debt is of course in Eurobonds that increased from $30.5 billion to 37.3 billion. However, this increase of around $7 billion is due to arrears in both principal and interest payments, where the latter constitutes close to $4.5 billion out of the $7 billion. So effectively, the foreign debt in Eurobonds must have stood at around $35 billion ($30.5 billion + $4.5 billion) by March 2022. Though not shown, in October 2019 commercial banks held about $14.5 billion in Eurobonds, but by March 2022 that had dropped to about $6.3 billion. And given that BDL holds $5 billion in Eurobonds, then the local holdings composition of Eurobonds is around $11.3 billion – or 37% of the original total of $30.5 billion; the rest are held by foreign investors.

Lastly, it is estimated by the World Bank that GDP was around $21.8 billion in 2021; then the ratio of total debt to GDP ($38.8 billion/$21.8 billion) must have reached 178% or 23% higher than the ratio of 155% in 2018 before the crisis. So unless the country gets some real break on its foreign debt from foreign creditors (at 25% recovery rate or even less), then the debt burden will remain odious even after the crisis is over!