Is Lebanon The New Greece?

The war in neighboring Syria has taken its toll on Lebanon’s economy, which is demonstrating lackluster growth and high levels of public debt. Could the upcoming May parliamentary elections restore growth and investor confidence?

Beirut Lebanon 640
Beirut, Lebanon

Since 2011, Lebanon’s economy has navigated troubled waters. The Syrian crisis spillover is one reason; institutional mismanagement is another. So far, the financial sector has proved strong, but serious reforms are needed if the country is to remain afloat.

All eyes are now set on the upcoming parliamentary elections. Seven years after the start of the Syrian war, Lebanon’s economy hasn’t managed to bounce back. Annual growth, which stood at 8% in 2010, has plunged to a timid 1% to 2% since 2011. The nation’s gross public debt to GDP ratio is the third highest in the world after Japan and Greece, reaching 150% at the end of 2017.

The Syrian crisis brought more than a million refugees to Lebanon, giving it the highest refugee-per-capita ratio in the world. Political and diplomatic tensions also drove away precious Gulf tourists and investors, who were pillars of the Lebanese economy since the end of the civil war in 1990. According to the Lebanese central bank, Banque Du Liban, real-estate prices declined by 10% in 2017.

The election of a new head of state in 2016—after two years of institutional paralysis and a political vacuum—brought back some stability, with the formation of a cabinet and the voting of some long-awaited laws. But the situation remains extremely volatile. In November 2017, Prime Minister Saad Hariri suddenly resigned and then disappeared for three weeks, plunging the country, once again, into turmoil.

The backbone of the economy remains the banking sector and its ability to attract unilateral transfers and remittances from a very large diaspora. Along with foreign direct investment, these account for a steady 40% of GDP, but even this is being put to the test. Decelerating inflows since 2011 pushed the central bank to roll out an important financial-engineering scheme in 2016. Short-term results were met with capital inflows reaching a record high of $20 billion in 2017, an 18% increase from 2016. Still, international institutions are raising the alarm.

The IMF was particularly harsh in its latest Lebanon Mission conclusions, published in 2018. “Lebanon’s debt is unsustainable under the baseline scenario,” the IMF wrote in its report. “In the context of Lebanon’s low growth and rising global interest rates, debt dynamics will deteriorate further and public debt will increase rapidly to just below 180% of GDP by 2023 … A fiscal consolidation plan with front-loaded fiscal adjustment embedded in a credible budget is urgently needed.” The IMF recommended reforms such as a raise in the VAT and significant cuts in energy subsidies.

In August 2017, ratings agency Moody’s downgraded Lebanon’s profile from B2 to B3, while Fitch and S&P maintained B- and B3 ratings, respectively. Analysts point to the fact that a prolonged crisis could result in a devaluation of the local currency, which would have dramatic effects on the economy. Some went as far as comparing Lebanon to Greece.

Mismanagement and Corruption

Although Lebanon’s possible bankruptcy is the talk of the town, key financial institutions remain confident, pointing to domestic mismanagement and corruption issues, rather than an intricate financial deadlock.

“Lebanon is not facing any technical bankruptcy,” says Freddie Baz, vice chairman of Bank Audi, Lebanon’s largest bank. “Even if debt is high, State-owned assets are higher, which maintains the country in a positive net equity position.”

Baz says the real issue is cash flow. “Lebanon’s current revenues are not enough to finance its expenses, and that is largely due to the fiscal administration’s inefficiency,” he says. “There is a budget revenue gap of $4.5 billion dollars annually, or 8% of GDP. At the same time, the primary revenue required to curb debt ratios represents 3.5% of GDP. If we are able to reduce the level of corruption and wasted resources, what is required from us is not huge.”

Lebanon has one of the highest levels of corruption in the world. In 2017, the NGO Transparency International ranked it 143rd out of 180 countries, an all-time low. According to the IMF: “The government acknowledges that corruption is widespread and is associated with large social and economic costs.” Every year of delayed reforms represents $15 billion of foregone income, says Baz. “The Lebanese economy’s current utilization rate is only 70%.”

If there were better governance, Baz says the economy could perform at 90%. “With 20% more production, we could raise GDP from $50 billion to $65 billion. For households, this means roughly $7 billion extra a year, or or $800 of additional monthly income for each household. It’s a huge difference. Who’s to take responsibility for that? Politicians and decision-makers.”

With all eyes on them, Lebanon’s rulers are taking action. In January, they called consulting firm McKinsey to the rescue. For six months, experts will identify potential growth sectors and suggest a reform plan—but not everyone is convinced.

“What if McKinsey has the solution to our crumbling economy? Who’s going to put it in place?” says Najib Mitri, a popular Lebanese blogger. “Who’s going to hold politicians accountable for their actions? Which head of state or PM or chief executive will admit that he’s been wasting money?”

In late 2017, the parliament approved a budget—Lebanon has somehow survived without one since 2005. “We worked on cutting expenses, increasing revenues and took measures that will push the economy forward,” says Ali Hassan Khalil, the Lebanese minister for Finance. “Hopefully, by the end of 2018, we may have a chance to achieve a growth rate that exceeds the expected 2% to 2.5% or 3%.”

But most of all, Lebanon is asking for cash. A major donor conference will take place in Paris on April 6 and the Lebanese authorities plan to use their refugee-hosting country status to raise $16 billion for infrastructure projects. With respect to long-term growth, the country expects growth opportunities to arise from the Syrian reconstruction and future oil and gas exploration.

The May parliamentary elections, the first ones to be held in nine years, will bring new insights. “Politicians now realize that the war is over and that they cannot continue like before,” says Saad Azhari, chairman and general manager of Blom Bank, Lebanon’s second-largest bank.

Long-awaited reforms might also come from newcomers in Lebanon’s political game. The 2018 elections are the first to incorporate proportional representation, and in some electoral districts civil society candidates that emerged during the 2015 anti-government protest are expected to win seats. Their main promise is to put an end to corruption.