A New Financial Deal for LebanonDebt Relief and Well Designed Stimulus Can Pull Lebanon out of Economic Malaise

December 17, 2018

In recent years, the Banque du Liban (BDL), Lebanon’s central bank, has introduced a number of stimulus packages in an attempt to catalyse the Lebanese economy. Through subsidising loans to specific sectors in Lebanese Pounds (LBP), the BDL claimed the low interest rates would spur growth, support small and medium-sized enterprises and create new jobs. However, there is scant evidence that the stimuli have achieved any of their purported objectives.

By pouring subsidised loans into the market, the BDL encouraged banks to inflate the housing sector, which took up the lion’s share of subsidised loans. In effect, the stimuli fended off a much-needed correction in housing prices, priced the majority of Lebanese out of the market, and provided  commercial banks with secure and collateralised profits. In turn, the banks continue to fund Lebanon’s crippling public debt, and offer relatively high interest rates on local currency deposits to support the pound.

This financial triangle of real estate loans, public debt and customer deposits persists because it provides profits to another triangle: politicians (who own banks and real estate firms), bankers (who profit from subsidised loans) and other elites (who make interest off deposits). The result is decrepit public services and rotting infrastructure, neither of which are addressed because the state needs to pay off its debts first. This pocket-to-pocket system has functioned relatively well, until now.

Political turmoil, consistent lack of reform, and economic fundamentals have quashed demand for overpriced real estate, creating a perfect storm which threatens the financial status quo. For the first time in over a decade, pressure is mounting on the USD-LBP currency peg. Currency devaluation is on the horizon, and the folly of placing all your economic eggs in a basket full of empty tower blocks has become all too apparent.

To reverse decades of botched financial policies, Lebanon needs a New Financial Deal: one that trades debt relief for public sector reforms which spur economic growth in job-producing sectors. The deal would see the BDL and commercial banks forgive a significant part of their public debt holdings, which would free up money for public investment in physical and social infrastructure.

In return, the government would commit to a package of public sector reforms which spur sustainable economic growth, open up non-housing loan opportunities for the banking sector, and produce lasting benefits for all—the citizenry, the banks and the state. It is no doubt a tall order. But the alternative is an eventual crash of the real estate sector, the national currency, deep economic depression and, inevitably, social upheaval. All of which would be much worse than a little forgiveness.

Read the full paper here.

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