Weighed Down by Debt: Al Hariri Observed: "This Budget Is the Beginning of the Way out of the Debt Crunch." He May Well Be Right but There Is a Long Way to Go and Right Fiscal Policy Will Probably Have to Be Maintained for at Least the Next Decade If the Country Is to Extract Itself from Its Debt Burden. (Lebanon)
Ford, Neil, The Middle East
Although physical and economic reconstruction programmes are helping rebuild Lebanon, the loans taken out to fund such schemes are threatening to overwhelm the country. The economy was devastated and much infrastructure destroyed during the 1975-1990 civil war, prompting the government to take out a series of large loans to bolster the economy, often at high rates of interest. The national debt now exceeds $30bn, equivalent to over 180% of GDP. Anything above 100% is considered dangerously high and the situation is now critical.
The government launched its $20bn Horizon 2000 reconstruction programme in 1993, with the reconstruction of Beirut targeted alongside investment in the export economy. Growth was initially high at 8% in 1994 on the back of rising exports of agricultural products, processed food and tobacco, and these sectors continue to underpin GDP of around $3,750 a head. However, his rapid rate of growth had to be maintained if debt was to be brought under control but GDP is currently rising by only 1% a year.
The threat that the spiralling national debt poses to progress prompted multilateral and bilateral lenders to meet in Paris last November to coordinate their efforts. Although a $4bn package was agreed, it was still $1bn less than the Lebanese government had hoped for. The new package was put together just over a year after $500m in loans was agreed at an earlier Parisian conference. Prime Minister Rafiq Al Hariri admitted that Lebanon would have defaulted by the end of 2003 without the new financial strategy.
The lenders include Saudi Arabia with $700m and the Kuwait Investment Bank with $500m, alongside multilateral development agencies like the Arab Development Fund and the European Investment Bank, which both contributed $500m. However, the government's refusal to strictly adopt the IMF medicine of deregulation, liberalisation and privatisation resulted in Britain, Germany, Spain and the US refusing to commit funding, causing a $1bn shortfall in the financial plan.
Al Hariri held talks with IMF executive director Horst Koehler in Washington last November but although the Lebanese leader made a series of pledges on economic reform, these are not believed to have gone far enough to gain support from the four countries. The IMF's pressure on the country to liberalise is somewhat ironic given Lebanon's tradition as a free and open trading economy.
The money will be used both to service and restructure existing debts but doubt has been cast upon the conditions attached to the loans. George Corm, the former Lebanese finance minister said: "The sums lack transparency and neither the conditions, the period and the process of utilising credits is clear." Others within Lebanon have questioned the logic of taking out loans to repay loans but Al Hariri countered: "We will use the money to swap short term debts for long term debts with noticeably lower interest rates". Local currency debt is to be exchanged for hard currency bonds, which are generally cheaper and more predictable.
Until the new plan was drawn up, the government was paying an average of 10% a year in interest charges on the national debt, a sum which is equivalent to 18.5% of GDP or half the entire state budget.
Alongside the new loans, the government is trying to balance the budget through tax increases, spending cuts and the sale of state owned concerns. The privatisation of power companies and the two state owned mobile operators Cellis and Libancell is expected to raise $3bn this year alone. Al Hariri observed: "This budget is the beginning of the way out of the debt crunch." He may well be right but there is a long way to go and tight fiscal policy will probably have to be maintained for at least the next decade if the country is to extract itself from its debt burden. The overall effect of this year's budget has been to cut spending by 10% on last year, with revenues expected to rise by 16%. …