Econostrum | Economic News in the Mediterranean

"Drowning in a sea of debt" according to its Prime Minister, Lebanon defaults on its payments

Written by Frédéric Dubessy on Monday, March 9th 2020 à 16:57 | Read 193 times

For the first time in its history, and as the country celebrates its 100th anniversary, Lebanon is in default with a debt of $92 billion or 166% of its GDP.

Hassan Diab says he is ready to undertake the reforms promised at the CEDRE conference (Photo: Presidency of the Lebanese Council)
Hassan Diab says he is ready to undertake the reforms promised at the CEDRE conference (Photo: Presidency of the Lebanese Council)
LEBANON. For the first time in its history, and as the country celebrates its 100th anniversary* in 2020, Lebanon (6.2 million inhabitants) is in default. Its new Prime Minister officially announced this bankruptcy late on Saturday, March 7, 2020, while a deadline for the repayment of $1.2 billion of Eurobonds to their holders was looming on Monday, March 9, 2020.

Hassan Diab said that Beirut could not honour this debt. "We are now facing a huge debt maturity. In 2020, it amounts to about $4.6 billion in Eurobonds, including interest (...) Faced with this major challenge, we can only adopt a firm and lucid position, in the interest of our nation and our people. Our foreign exchange reserves have reached a critical and dangerous level, pushing the Lebanese Republic to suspend the payment of the 9 March Eurobonds, in order to ensure the basic needs of the population," he said in an address from the Grand Serail, the seat of the Presidency of the Council. "The decision to suspend the payment is the only way for Lebanon to stop the depletion of reserves and preserve the public interest, in parallel with the launch of a comprehensive reform programme aimed at building a resilient and sustainable economy on a solid and modernised basis," he continued.

Already, in February 2020, Lebanon's Central Administration of Statistics (CAS) pointed to a decline in all the country's macroeconomic figures in 2019 and sounded the alarm on the "financial, economic and social impasse" denounced by Hassan Diab in January 2020.

Request for IMF technical assistance

"How can we pay our foreign creditors when the Lebanese cannot access their funds from their bank accounts? How can we pay our creditors when hospitals are suffering from a shortage of medical supplies? How can we afford not to provide health insurance to our citizens? How can we pay our creditors when many people are on the streets, unable to afford to buy bread? Lebanon is a country that honours its commitments. However, the state is currently unable to pay its future debts," concluded Hassan Diab.

Lebanon will therefore have to restructure its debt and this will require structural reforms, which are bound to be unpopular, while demonstrations have been going on in the streets since October 2019 against the political class deemed corrupt and incompetent.
Hassan Diab has gathered around him technocrats to try to get the country out of the impasse, but the criticism continues.

He now plans to propose a plan to cut public spending by more than $350m (€305.5m) a year. And has asked the International Monetary Fund (IMF) for technical assistance to implement it. But the Shiite Hezbollah movement, which has a majority in parliament with its allies, refuses this intervention, saying it fears "foreign tutelage"

92 billion in debt

According to the Lebanese Prime Minister, half of the State's revenue is used to pay back the interests of creditors. The debt is currently estimated at $92bn, or €80.37bn. A sum equivalent to 166% of the Gross Domestic Product (GDP) - against 155.1% in 2019 - which makes Lebanon the third most indebted country in the world behind Japan and Greece. The IMF forecasts a debt expected to reach 185.2% of GDP in 2024. A situation unprecedented since the end of the Lebanese civil war (1975-1990).

"Is it viable for a country to build itself on a debt economy? Will a nation ever be free if it is heavily in debt? Today, we are paying the price for the mistakes made years ago. Should we pass them on to our children and future generations? "The debt has far exceeded Lebanon's capacity to bear it, and has exceeded the capacity of the Lebanese to service it. The entire Lebanese economy has become a prisoner of these policies and dependent on an ever-increasing debt. Public policies have failed to find a way out of the tunnel of excessive debt that has undermined the productive sectors of the national economy. (...) The Lebanese lived under the illusion that everything was fine while Lebanon was drowning in a sea of debt and interest, including foreign currency," criticizes the Prime Minister.

Cedre reforms back on the agenda

After the first big financial difficulties, following the beginning of the Arab Spring (and the inherent drop in capital inflows), an international aid conference (CEDRE for Conférence économique pour le développement par les réformes et avec les entreprises) had been organised in April 2018 in Paris in favour of Lebanon. The country had received pledges of $11.6bn (€10.12bn) in grants and loans. However, the release of these envelopes was conditional on the implementation of structural reforms that political instability has not allowed to be put in place. The Prime Minister therefore promised to remedy this. "It is no longer possible to continue borrowing to finance corruption. It is high time to re-establish ethical conduct in governance and restore confidence in our state," says Hassan Diab.

While restrictions already exist on dollar withdrawals in banks (current official exchange rate of about 1,507 Lebanese pounds to $1 but close to 2,500 pounds to $1 in exchange offices), he plans, among other things, "a special law to organise bank-client relations, so as to bring more equality and justice.

* Lebanon, under the name of Greater Lebanon, was created in 1920 by France which administered it until its independence was proclaimed on 22 November 1943.

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