Academic journal article The Middle East Journal

The Lebanese Central Bank and the Treasury Bills Market

Academic journal article The Middle East Journal

The Lebanese Central Bank and the Treasury Bills Market

Article excerpt

Since their introduction in 1993, the securities issued by the Lebanese Treasury have had considerable success. But with returns sometimes approaching 40 percent, a strain has been placed on Lebanon's fragile economy as the internal debt hits record levels. Yet the Lebanese Central Bank has been paying spectacular rates despite a demand for Lebanese Treasury Bills (LTBs) which is far outstripping supply at the weekly auction. There is a concern that the Central Bank is playing conflicting roles in conducting and overseeing the auction.

After a long and devastating war, Lebanon embarked, in 1992, on a massive reconstruction effort. The government estimates the capital needs for reconstruction to be around $14 billion over the next ten years, with the private sector expected to be the most important source of funds.1 To meet the challenge, Lebanon has borrowed on the international market and its foreign debt has been rapidly rising since the appointment of Rafiq Hariri as prime minister in October 1992. Lebanon's foreign debt, virtually non-existent up to 1994, grew by 67 percent to US$ 1.29 billion in 1995.2 Another $100 million Eurobond3 issue was launched, in May 1996, to raise money for reconstruction. This has put Lebanon's total current external debt at about $1.4 billion,4 a moderate figure relative to the country's size.

More alarming, however, is Lebanon's internal debt, which has been rising almost exponentially. A report of the Lebanese Banks Association, a grouping of Lebanon's 79 banks, shows that the net internal public debt rose to about seven billion dollars in 1995.5 The Association's report adds that the rise in public debt represents a deficit of expenditures against revenues. Currently, the association estimates the public debt interest service payments at 45 percent of the government budget deficit. This means that $0.45 out of each dollar of deficit goes towards paying the interest on the debt. The remainder (55 percent) comprises the administrative and investment expenses. To finance its budget deficit, Lebanon is being forced to pay extremely high rates to borrow money. In turn, this is straining the government's public debt service payments, which are expected to continue to rise as a result of increasing interest rates on treasury bills. Some analysts question whether it is sustainable for the government to continue to increase the country's debt at such a high cost. There is serious concern that interest rates paid on Lebanese Treasury Bills (LTBs) and the rate of the market's growth cannot continue at the current pace.

The sharp increase in public debt is a relatively recent phenomenon. The bulk of the increase can be traced to May 1993, when the Banque Du Liban, Lebanon's Central Bank, began weekly auctions of three-, six-, twelve-, and twenty-four months securities.6 The Council for Development and Reconstruction (CDR), the government's macroeconomic planning arm, has estimated that public cumulative debt will continue to rise and peak at 90 percent of GDP at the turn of the century.7 The government, however, has no plan to shift its borrowing abroad, and plans to continue its reliance on the domestic market until it balances its budget a decade from now.8


For dollar investors, the LTB market has been a very rewarding venture since 1993, because of the 25 percent rate of return in hard currency terms over three months. With these profitable rates, it is not surprising that international investors have been avid buyers of LTBs. The generous yield offered on these securities has enabled the Hariri government to achieve its goal of financing the reconstruction of the country's infrastructure without relying on foreign aid or assistance. At the same time, the LTB market has provided the central authorities with a powerful monetary tool to defend and stabilize a frail Lebanese pound (LP) against the US dollar. By controlling interest rates, the Central Bank has been able to make investments denominated in LPs more appealing to local and foreign investors, and, therefore, shore up the exchange value of the LP vis-a-vis the US dollar. …

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