Gareth Smyth – Lebanon’s resilience is famous. Since the civil war ended in 1990, Lebanon has survived Israeli onslaughts in 1996 and 2006, as well as the 2005 assassination of former Prime Minister Rafik Hariri. Since 2011, Lebanon’s population has absorbed more than 1 million Syrian refugees. Some attribute such resilience to a political system based on compromises between sects, even when politicians are allied to rival regional powers. Others say Lebanon has survived due to its banking system. In a country with intermittent electricity and rampant nepotism, Lebanon’s banking sector excels. The regulatory framework imposed by the Central Bank, led since 1993 by Riad Salameh, showed its resilience in 2009. The world financial crisis barely rattled Lebanon’s banks. At the end of 2017, the banks’ assets in the domestic market were $220 billion. The six banks listed on the Beirut Stock Exchange have assets, including foreign operations, of $125 billion. The banks’ overall assets represent approximately four times Lebanon’s gross domestic product.
The banks’ importance is twofold. First, their earnings and receipt of remittances from Lebanese abroad mitigate a balance-of-trade deficit of $20.3 billion in 2017. Along with tourism receipts and foreign direct investment (FDI), this has resulted in a balance of payments deficit of just $156 million. This represents a deterioration on 2016’s $1.2 billion surplus but it is better news than it might have been. Second, the banks have financed government borrowing that took public debt to $78.15 billion in September 2017, up 4.6% year-on-year and 149% of GDP. Borrowing has financed a bloated public sector: From 2000-16, the International Monetary Fund said, 34.7% of public spending went to salaries. In the past three years, the government has appointed 26,000 extra staff. Bankers want reform. Some detect positive signs. A recent government circular called for a 20% reduction in non-salary spending. Ahead of April’s elections, there is newfound government efficiency in planning cabinet ratification of the 2018 budget. “Lebanon needs drastic structural adjustment, such as fighting fiscal evasion, which is $4.2 billion a year in a country with a $5 billion deficit,” said Marwan Barakat, chief economist at Banque Audi. “The deficit has to be reduced to ensure a soft landing.” The politicians assume the banks will forever rescue them, bankers say, thereby threatening not just the country’s banks but its entire economy. “The banking sector faces challenges,” said Nassib Ghobril, chief economist at Byblos Bank. “The first is the decline in lending opportunities in the private sector, due to the expanding public sector. Second, there are the continuing borrowing needs of the government. While the banking system — the Central Bank and the commercial banks — finances the deficit, we see no political will to reduce the fiscal deficit and implement reforms.”
