Lebanon Trapped in a Vicious Debt Circle

As the Lebanese government continues to spend more than it earns, it is forced to borrow to cover its extra spending. The damage created by the civil war, large transfers to cover losses of the public electricity company Electricite du Liban (EdL), and high interest payments on previous debts have locked the government in a vicious circle of deficit and debt.  

Lebanon amongst the most indebted countries

Lebanon’s public debt has been increasing significantly since the end of the civil war in 1990. From 1990 till today the government spent much more than it earned, registering a record debt. Just like individuals, to cover its extra spending, the government had to borrow large sums of money. During the 1990s, the government borrowed at high interest rates to incentivize lenders with the high profit interest payments. This made the debt balloon from around $3 billion in 1992 to $75 billion by 20161.

Today, Lebanon is considered the third highest indebted country in the world with its debt comprising more than 143% of its GDP – following Japan at 239% and Greece at 181%2. In other words, the debt is bigger than the size of the economy. As a result of the high debt, the government continues to borrow more and more money, accumulating more debt and interest payments.

Figure 1: Lebanon has the 3rd highest public debt as a share of GDP in the world, following Japan and Greece

Three factors that inflate government spending

The following three factors have caused a surge in government spending since the 1990 prompting the government to borrow:

First, the post-civil war reconstruction plan aimed to rebuild the severely destroyed infrastructure. Through enhancing quality of infrastructure, the government hoped to attract investment and trigger enough economic growth to repay the debt. The total spending on reconstruction totalled $7 billion between 1992 and 20033.  In just 4 years, between 1990 and 1994, the deficit rose from 4% to 30% of GDP. As a result, the public debt grew at its fastest rate during the early post-civil war period.

Second, transfers to Electricite du Liban (EdL) have drained the Lebanese public finances. The public electricity company has faced constant losses since the end of the civil war. Its losses, worth $17 billion over the period 1992-2015, have been covered by the government4. The company has been losing a lot of money due to inefficient operations. For example, EdL collects payment for only 60% of generated electricity, as 25% is lost to illegal connections and unpaid bills, and 15% of the electricity is lost in transmission and distribution5.

Figure 2: Lebanon’s public electricity company collects payments for only 60% of generated electricity

Third, Lebanon has paid interest on debt during the last 25 years almost equal to the size of the debt itself. As the government was not able to finance all its spending since the 1990s, it has borrowed money from lenders, at an interest of course. As a result, interest payments on Lebanon’s debt between 1992 and 2016 were registered at $69 billion with a debt of $75 billion6.  In fact, if the government wasn’t paying interest, it would currently run a surplus since the early 2000s – meaning that its revenues would have been enough to finance its spending. Hence, the Lebanese government is trapped in a vicious circle of having to borrow money to repay interest payments on previous debt.  

So little left to spend on necessary expenditure

The high cost of debt has decreased the government’s available revenues. The World Bank estimates the cost of debt to be consuming nearly 50% of the government’s revenues7. With half  the government spending allocated to interest payments, less room is left for other necessary expenditures like public sector wages (21% of total expenditure), social benefits (17%), subsidies (10%), or public infrastructure (4%)8. The vast majority of governments in the world have to spend a lower share of their budget paying their lenders, even if some of them have also accumulated large debts. For example, interest payments constitute 5% of the government’s expenditure in the European Union, 7% in Turkey, 10% in the United States, 13% in Jordan and 30% in Egypt9.

Figure 3: Lebanese government’s expenditure items: Interest payments, subsidies, and public infrastructure.

Despite the slow economic growth, discover how the Lebanese government still manages to continue borrowing in this high risk environment.  


Sources:

1 Credit Libanais. 2016. Dissecting the Lebanese Public Debt: Debt Dynamics & Reform Measures.

2 WEF. 2016. Competitiveness Rankings.  

3 Credit Libanais. 2016. Dissecting the Lebanese Public Debt: Debt Dynamics & Reform Measures.

4 World Bank. 2015. Lebanon Systematic Country Diagnostic.

5 World Bank. 2015. Lebanon Economic Monitor: The Economy of New Drivers and Old Drags, Spring.  

6 IMF. 2017. World Economic Outlook Database.

7 World Bank. 2016. Lebanon Economic Monitor: A Geo-Economy of Risks and Reward.

8 IMF. 2017. GFS database; IMF. 2017. Lebanon Article IV.

9 IMF. 2016. Government Finance Statistics Yearbook; Eurostat. 2017. GFS; IMF. 2017. Lebanon Article IV.


Tags: