1.         Having spiraled out of control, Lebanon’s public debt needs to be drastically reduced both as a share of GDP and in absolute amount given the stalled economic growth and, worse, contraction. At the current level of indebtedness compared to economic output, the debt cannot be put on a sustainable path without major policy adjustments, in parallel with a massive, if at all bearable, fiscal effort to generate substantial primary surpluses of some 5% of GDP annually over the next twenty years.

2.         A general consensus has now formed that a restructuring program is inevitable to address the huge debt overhang. (Restructuring entails: rescheduling, i.e. postponing instalments; lowering interest payments; and most distressingly, reducing principal amounts due.) In legal terms, failure to make timely repayment of principal or interest is construed as a default. A default on a single debt issue may trigger cross default clauses on other, or all debts outstanding. Default will ineluctably translate into a sovereign rating downgrade to the lowest category, and impede for a long time Lebanon’s ability to access international debt markets other than at forbidding costs, if at all.

3.         Debt restructuring is no benign process. Yet Lebanon’s specific case may call for a tailored approach, taking into account two factors:

  • Only 1/3rd of Lebanon’s US$90 billion equivalent total government debt is denominated in foreign currency, and only 12% of the total debt is owned to foreign creditors, while the bulk of 88% is held by domestic entities – central bank, commercial banks, national social security fund, and bank deposit guarantee agency. This configuration warrants a differential treatment between foreign and domestic currency and holders, as the resolution of the Lebanese pound (LBP) denominated debt, major as it is, ranks second in priority, especially in a depreciating currency environment, and can be addressed separately.
  • The large concentration of deposits in the banking system, where 50% of all deposits, or US$86 billion equivalent are owned by 1% of the accounts. Let’s call it the “prime group”. It is acknowledged, furthermore, that reducing the debt overhang would inevitably affect bank balance sheets through a write-off on shareholders’ equity, as well as deposits (“haircut”).

4.         These two factors combined argue for a two-track approach that would address, in a first step, the US$32 billion foreign currency debt, half of which (US$16 billion) is held by domestic commercial banks. For any resolution measure to be socially fair and acceptable, it should target, first, the more affluent, i.e. the larger accounts. The Lebanese authorities may thus want to redeem immediately US$16 billion of Eurobonds in writing-off, on the liabilities side of the commercial banks’ aggregate balance sheet, an equal amount from the US$86 billion “prime group” deposits. The “appropriation” by the state of US$16 billion in depositors’ money would be in the legal form of a 20%, “one-time national solidarity tax” levied on the “prime group”; the measure could also provide for future compensation of affected depositors, for instance in the form of bank shares. A change in tax policy, even in the context of a debt resolution program, is not construed as a default, fiscal policy being the undisputed domain of sovereign states which can alter their tax code at will. In implementing, up-front, such a bold quasi-fiscal measure as part of a debt restructuring package, the Lebanese authorities would demonstrate their determination to tackle the debt problem, and strengthen their stance in the restructuring negotiations with external debt holders.

5.         One may justifiably argue that the fiscal approach is hurried and inequitable as it starts by penalizing depositors while exonerating, and keeping whole, bank owners whose equity shares, to the contrary, are meant to take the first loss in a debt resolution scheme.  The answer is that, although the proposed fiscal levy on deposits might temporarily spare capital-depleted banks a further erosion of their equity base when measured against their hollowed assets base, it will not, and must not preclude a full restitution by shareholders, especially as the debt restructuring process will also bear on the LBP-denominated debt held by banks.

6.         It is important that the proposed solidarity tax not be designed, nor viewed as a retaliatory act against the wealthy, as this has irreversible long-term costs in driving them out of the domestic economy. To this end, the real wealth effect of the proposed tax on the “prime group” should be measured, and one way to do so is to compare, over a relevant period of time, the returns on bank deposits in Lebanon against those that would have accrued in external markets. The following comparison demonstrates in a way that the “prime group” real economic loss from the one-time levy is largely mitigated by the attractive returns they have reaped on their high interest-paying holdings in Lebanese banks.

7.         Consider the four-year period starting in 2016 when the central bank launched its financial engineering schemes, bidding up interest rates, signaling and building up stress in the domestic financial market. Large depositors and savvy investors who choose to keep their funds in Lebanese banks – and had done so, it is assumed, in light of their intrinsic risk/reward profile – would have, over the period, accrued on their bank deposits a return of 31% (assuming a compounded average interest rate of 7% p.a.). This would mean that the “prime group” present holding of US$86 billion stood at (86 divided by 1.31) or US$66 billion in 2016 – a total gain of US$20 billion. At the other end of the spectrum, risk averse investors would have transferred their holdings to safer (US/European) markets, settling for a return of 1.5% p.a., for a total gain of US$4 billion on the US$66 billion original principal. “Capturing” thus US$16 billion out of the 20 billion earned by the “prime group” over the period would leave the latter with a US$4 billion gain – at par with what prudent investors have reaped and whose aversion to risk was in retrospect fully borne out. Add to this that the “prime group” deposits, like all deposits in the nation’s banking system, are in any case impounded sine die. Seizing thus “notional” gains accrued on “virtual” accounts can be hardly viewed as a punishing, real capture of wealth.

S.El Daher

March 5, 2020

Municipal bond markets provide a vehicle to narrow markets (in Italy and Spain) are slowly developing. local governments resource gap through schemes Amongst other developed countries, Australia has also varying from debt funding based on the full faith and created a truly sub-sovereign debt market. credit of sub-sovereign issuers, to revenue bonds secured by the earnings of such projects as water facilities and Municipal bonds have been the primary vehicle for toll roads. This note reviews the main characteristics of financing local infrastructure in the US. They include the US municipal bond markets-the most advanced by general obligation bonds supported by the taxing power any measure of depth and sophistication. A separate note of local governments as well as project revenue bonds by discusses the conditions underlying the development of states and local jurisdictions such as counties and cities municipal credit markets in developing countries.

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Lebanon’s resources consist of its human capital, unique geography and privileged location – assets that bestow upon Lebanon its comparative advantages at the regional and global levels. For Lebanon to achieve high and sustained economic rates of growth, and create high value added jobs on a scale sufficient to consolidate civil harmony and dent emigration, it must redirect its economy towards sectors and activities based on knowledge and innovation anchored onto its vast pool of talent and expertise. To do so, Lebanon must increase its productivity in the niches where it holds a comparative advantage and can strengthen its competitive position and become an important pole capable of expanding the size of its market, and therefore of its economy, beyond the narrow confines of its national borders, in exporting its “knowledge-based” services – in addition to its traditional goods and services where its position is well established – rather than its human resources as in the past.

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1.Cette note discute les déterminants principaux de la croissance économique au Liban, ainsi que les défis et obstacles majeurs à cette croissance. Le Liban ne peut réaliser des taux de croissance élevés et durables, et créer des emplois en qualité et nombre voulus pour enrayer l’émigration et consolider l’entente civile, que dans le cadre d’une «économie de la connaissance», ancrée dans le «savoir», qui mette à contribution ses réserves vives d’expertise et de talent. Ce sont ses ressources humaines qui confèrent au pays son avantage comparatif aux niveaux régional et global, et lui permettraient, dans certains secteurs, de devenir un pôle régional important capable d’accroitre la taille de son marché, et donc de son économie, par l’exportation de ses biens et services.
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1.Cette note examine le rôle des autorités publiques dans la mise en œuvre de politiques qui contribuent à la promotion de la croissance créatrice d’emploi. La revitalisation de l’action du secteur public est essentielle au vu de: la précarité des finances publiques du fait du fardeau pesant de la dette; l’état obsolète de l’infrastructure, entrave à la productivité et compétitivité des entreprises libanaises; et l’iniquité de la politique fiscale et du régime de protection sociale. L’économie libanaise opère en deçà de son potentiel réel et ne crée pas, en qualité et nombre, les emplois nécessaires à la croissance et à la paix sociale. Le débat économique au cours des deux précédentes décennies a porté essentiellement, sinon exclusivement, sur les problèmes importants et épineux des finances publiques sans que leur gestion n’en fût en rien plus réussie. En particulier, la dette publique toujours ascendante constitue un drain continu sur les ressources de l’état, dont résultent: (i) un fardeau fiscal sans rapport avec la qualité des prestations et services rendus par l’état au citoyen; (ii) une infrastructure obsolète; et (iii) une administration publique aussi pléthorique qu’inefficiente, avec des institutions de réglementation, supervision et contrôle marginalisées, et des forces armées sous-équipées.

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  1. Les carences de l’infrastructure au Liban constituent de l’avis unanime un obstacle majeur au progrès économique et social – des carences qui n’épargnent aucun secteur, des transports à l’énergie, l’eau, l’assainissement, et l’environnement.Des solutions durables doivent être apportées à la mise à niveau de l’infrastructure indispensable à la croissance. Cette note examine le problème des transports.
  2. Le problème des transports au Liban est complexe, et sa solution sera difficile et onéreuse. Les causes de l’asphyxie routière sont nombreuses et requièrent des approches qui vont au delà des mesures classiques d’élargissement de voies, de construction de passages à niveau, d’observation plus stricte du code de la route (s’il en est!), et d’organisation du stationnement. C’est en premier lieu la concentration de 80% de l’activité économique nationale dans le grand Beyrouth qui définit le mode et la topologie des déplacements et de la circulation. Les centres d’activités – administrations, commerces, bureaux et ateliers – aux horaires divers, souvent ne sont pas distincts des quartiers résidentiels. Les travailleurs se meuvent en tous sens et directions aux heures de pointe et au delà, qui des quartiers centraux de la ville vers sa périphérie, qui en sens inverse! Tant que l’essentiel de l’activité économique restera concentré dans la capitale et sa banlieue, les mesures d’aménagement d’usage amèneront une amélioration certes, mais pas de solution radicale au problème des transports. La solution durable dépendra en grande partie de la décentralisation de l’activité économique et de sa localisation de façon plus équilibrée sur l’étendue du territoire national.
  3. Avec une population dense répartie sur 10.000 km²,le Liban-nation, présente les caractéristiques d’une “cité-nation”. En somme une grande agglomération urbaine qui aurait la superficie de Washington (dont elle dépasserait la population de 10%), ou de la Grande Couronne de Paris (dont elle représenterait 40% de la population). Cet “espace urbain” pourrait et devrait être relié par un réseau de transport de surface routier, ferroviaire, et maritime qui permette l’intégration économique effective de toutes les régions du pays. Un tel réseau consisterait des installations suivantes:

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This program puts forth a set of public policy reforms and proposals aimed at fostering civil peace, strengthening national unity, furthering social progress and  purring economic growth. It is predicated on the belief that with the right political, legislative, development and social initiatives, Lebanon can be a secure, democratic, inclusive and prosperous nation operating at full economic potential. In such a frame, it will be able to generate employment on a sufficient scale for  he youth thronging its labor market, including high value-added jobs for educated professionals and spare them the inexorable fate of emigration. Yet no policy will achieve its objectives if not anchored onto mature state institutions, with organized political groups reflecting the people’s will through fair electoral laws and processes allowing peaceful transfer of power, and enlightened national leaders committed to the public good and the rule of law.

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يتميّز لبنان بموارد مهمة، من رأس مال بشري، وجغرافيا فريدة وقدرة عالية على التواصل مع المحيط، وهي صفات تغني لبنان بميزات تفاضلية على المستويين الإقليمي والعالمي غير انه يحتاج إلى تحقيق معدلات نمو اقتصادية مرتفعة ومستدامة

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يطرح هذا البرنامج السياسات العامة لتي تساهم في تحقيق تقدّم المجتمع ووحدته، وترسيخ السلم الاهلي، ودفع النمو الاقتصادي، وينطلق من اليقين انه في ظل التشريعات والمبادرات السياسية والمجتمعية والتنموية

المؤآتية يمكن للبنان ان يكون وطناً آمناً، عادلاً، حاضناً، مزدهراً

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