Lebanese banks struggle with public debt

Banking official slams government for failure to take serious action

BEIRUT: Lebanese banks may not be able to finance the public debt this year at the same pace as before if customer deposits and capital inflow shrinks, the secretary general of the Association of Banks in Lebanon (ABL) warned Thursday. “Commercial banks have been financing the public debt for a long time. However, this trend may change if the banking sector does not achieve real growth in deposits and assets” said Makram Sader.

According to the Central Bank, the money supply in the first four months of 2005 fell by 3.2 percent compared to 3 percent growth in the same period of 2004.

Central Bank governor Riad Salameh said earlier this month total bank deposits fell by $1.5 billion following former Premier Rafik Hariri’s death, adding total deposits stood at $59 billion before the incident.

“The drop in the money supply was mainly due to the assassination of former Prime Minister Rafik Hariri and the ensuing events in the country,” Sader said.

Successive Lebanese governments have been issuing large quantities of Treasury bills and Eurobonds since 1994 to finance the $35 billion public debt.

A large percentage of these issues were snapped up by Lebanese banks, increasing their exposure to the public debt.

“Nearly 53 percent of the Lebanese banks total investments portfolios are with the Finance Ministry and the Central Bank in the form of T-bills and Eurobonds,” Sader explained.

He added that although the structure of these investments has changed, the exposure to the public debt is still considered high.

The ABL secretary general said the Central Bank may be forced to finance the public debt by subscribing to T-bills, warning such a move will have a negative impact on the economy and cause higher inflation.

He said: “This means that the government is running out of options. The state must start looking for new ways to handle the economic and financial crisis gripping the country.”

Sader added policymakers must hammer out a long-term plan to contain the rise of the public debt.

He said: “The World Bank and the International Monetary Fund will not help Lebanon if the government does not come up with a clear financial, administrative and economic program.”

Sader further said the government failed to capitalize on the success of the Paris II conference, which pledged $4.4 billion in soft loans to reduce debt servicing.

France, Saudi Arabia, the United Arab Emirates and other countries have lent Lebanon $2.5 billion out of the $4.4 billion pledge.

Commercial banks helped Hariri’s government in reducing debt servicing by subscribing to $4 billion of T-bills and Eurobonds at zero percent interest.
  

This massive cash injection from donor states, commercial banks and the Central Bank boosted the gross foreign currency reserves to $12.5 billion in 2003.

But this short-lived boom quickly faded as politicians argued endlessly over the merits of reforms and privatization.

Pressure on the Lebanese lira increased after the assassination of Hariri, prompting the Central Bank once again to come up with last-minute solutions to re-assure the jittery market.

But the Central Bank’s measures, ranging from the swapping of T-bills to issuing dollar denominated certificates of deposits, caused a spike in interest rates.

Commenting on the heated debate in Lebanon over an election law, Sader said the country will not gain anything if the same political class that caused the financial and economic problems returned to power with the same mentality.

Sader believes the government must adopt painful measures if it wants to reduce the public debt.

He said: “The government must tell the public that the road to recovery is long and painful.”

Sader, who co-authored a five-year economic plan that was submitted to former Prime Minister Salim Hoss, feels some politicians are too busy serving their own interests instead of tackling the public debt and pressing economic crisis.

He said: “The government must stop wasting money on some sectors that are causing losses to the state, such as the state-owned Electricite du Liban (EDL) and other institutions.”

The government spends more than $300 million a year to cover the losses of EDL, universally known as one of Lebanon’s worst-run public institutions.

Sader said: “We must be honest with the Lebanese. If supplying electricity for 24 hours a day will cost us a lot of money, then EDL must generate 16 hours of power a day.”

He added both the public and private sectors in Lebanon have been spending much more then they have been earning over the past 10 years.

He said: “Lebanese governments have been resorting to taxes and borrowing to cover all the big spending.”

The ABL official stressed reform does not mean the government must lay off half of its staff in public offices just to break even.

However, he admitted cutting government spending will affect economic growth in the short and medium terms, but said austerity measures were necessary despite the immediate negative impact.