Lebanon between a pandemic and an explosion … the removal of foreign debt in order to save lives

A position paper issued by the Lebanese Coalition for Education (ANPE) and the Arab Campaign for Education for All – ACEA

“Lebanon between a pandemic and an explosion … the removal of foreign debt in order to save lives”

The Covid-19 crisis presents world leaders with two options: either pay the debt to bondholders or save lives

Since the outbreak of the Covid-19 virus, voices are being raised in the world, calling for exempting the lowest-income and poorest countries in the world from paying external debts until the crisis ends and surviving its great impact on peoples’ lives. The matter also reached a demand for debt cancellation and re-directing these funds supposed to be provided to pay off debts to support saving lives and supporting vital sectors such as health, education and social protection.

These voices found a response by the G20, and a decision was taken to apply a temporary exemption to some of the world’s lowest-income countries by suspending debt payments until the end of this year 2020. This is a step in the right direction and provides an opportunity to redirect financial resources towards dealing with COVID-19.

However, if the world is to survive the great repercussions of the pandemic, and to ensure that the balance of the global economy and the economies of poor countries is restored, then this initiative must be more ambitious. At the very least, the suspension of debt payments should continue not only until the end of 2020 but until after the pandemic is actually over. The initiative should not only include debt suspension but debt cancellation as well. Global creditors must waive both bilateral and official commercial debt for low-income countries.

These steps must be taken urgently, as these resources will save lives and support livelihoods in the short term, restore hope and vitality to low-income economies in the medium term and enable them to continue as drivers of the sustainable prosperity of the world in the long term.

Immediate and determined action on the debt will prevent a humanitarian catastrophe today and support our economy tomorrow. We must divert resources immediately from debt servicing to the response needed to reduce pandemic risks.

Formal bilateral creditors are no longer the main source of external debt financing for many developing countries. Private creditors, including investment banks and sovereign funds, became the main source of financing those debts. Therefore, they must play their role in the efforts exerted to save poor economies from permanent paralysis, motivated by our sense of solidarity and shared responsibility.

Here everyone raises an important question, who can morally bear the consequences of using the available resources to pay off the external debt, instead of using them to save lives and provide the urgent and basic needs of people??

Lebanon between a pandemic and an explosion

On August 4, 2020, Beirut was struck by an unexpected disaster. The port of Beirut, which is one of the most important ports on the shores of the Mediterranean, disappeared due to a huge explosion, which is the second-largest explosion after the Hiroshima and Nagasaki attacks. To this day, this explosion has generated more than 170 dead, more than 6000 injured, tens of missing persons, hundreds of thousands of displaced persons, and economic losses estimated between 10-15 billion US dollars.

Lebanon today faces a great humanitarian shock and catastrophe, which doubled the political, economic and social challenges it was facing before the explosion; part of which was linked to an internal political conflict on the one hand and the impact of the COVID 19 pandemic, on the other hand, a fact which as well led to a significant decline in the ability of the Lebanese government to provide health, educational and social services for the Lebanese people.

The financial crisis in Lebanon: figures and facts

The talk about Lebanon’s external debt comes under the weight of a financial crisis that has plagued Lebanon for years and as one of the most important issues that can be shed light on in order to know the dangers of this debt and its repercussions on the lives of the Lebanese in light of the difficult circumstances that Lebanon is experiencing in all aspects of life.

The Lebanese Central Bank has sounded the alarm since the beginning of 2020, regarding the need to search for a way out to reschedule the foreign debts owed by the Lebanese government last March, estimated at $ 1.2 billion, as the Lebanese government announced its inability to pay the value of the international bonds owed to creditors, and that they will seek to negotiate with creditors to delay the payments and reschedule.

According to the opinion of financial experts and official data1, the difficult financial reality of Lebanon resulted from a set of factors and reasons, the most important of which are:

First: The deficit in public finances

  • Government spending in Lebanon without budgets from 2006 to 2017 amounted to about $ 121 billion.
  • Failure of the government to properly complete the financial accounts from 1993 until 2017.
  • Borrowing (public debt) without permission from the parliament amounted to about $ 24 billion.
  • Spending contrary to the provisions of the Public Accounting Law through consensual agreements, and away from the tendering management in the central inspection.
  • The sustainable public finance deficit (between state imports and expenditures) was about 36%, as a general average.
  • High-interest rates on the public debt, which reached 38%, and as an average these rates ranged between 5 and 21%, while global interest rates ranged between 0.56 and 6.43%.

_________________________________

1All the statistics, data and information mentioned in the position paper are according to the periodic reports issued by 3 Lebanese official bodies, which are: the Bank of Lebanon, the Lebanese Ministry of Finance, and the Association of Banks in Lebanon.

  • Public spending was concentrated on three main items from 1993 until 2019, and it is consumer spending:
  1. Interest on public debt amounted to about $ 86 billion, equivalent to 36% of government spending and 60% of treasury imports.
  2. Salaries and wages amounted to about $ 74 billion, equivalent to 31% of public spending.
  3.  Electricity operating expenses amounting to about 25.6 billion dollars, equivalent to 11% of public spending.
  • The decrease in investment spending, which did not exceed 7% of general government spending.
  • The decline in public revenue: Public revenue is about $ 154 billion, which is low due to:

a) Tax injustice: 76% of it; is direct taxes borne by the poor and middle-income people, and 24% of it; is direct taxes borne by the rich and middle-income groups.

b) Tax evasion.

c) Extensive tax exemptions.

d) The inefficiency of the tax administration whether in the tax verification process or in tax collection.

According to the foregoing, it is evident that the main problem in the state’s fiscal and monetary policy was the high interest incurred by the Lebanese treasury.

Interest rates on public debt were very high and an obstacle to investment. This threatened the continuation of the economic recession, and it became clear that interest rates are not governed by the rules of the market (supply and demand). Rather, they are determined by the Banque du Liban and the Association of Banks in agreement with the Ministry of Finance.

Second: Financial engineering in Lebanon

The Banque du Liban carried out financial engineering for 35 commercial banks. The profits made by banks from these engineering investments amounted to about $ 5.5 billion.

These profits constituted a loss for the central bank and thus a loss for the state treasury and the Lebanese taxpayer without being matched by any return to the state or the central bank.

Third: The tax on public debt interests between exemption and decrease

  1. The state exempted the interests of the public debt from tax from 1993 until January 30, 2003.
  2. After that, the interest was subject to a proportional tax at low rates ranging between 5, 7 and 10%.
  3. Eurobonds were unlawfully exempted from tax for the year 2004 until 2019 when they were totally exempted.
  4. Missed taxes on the state amounted to about 2.4 billion dollars.

Fourth: The relationship between the public budget deficit and the public debt interests

  1. The general budget deficit from 1993 to 2019 amounted to 120,804 million LBP.
  2. Interest for the same period amounted to 128,230 million LBP.
  3. The percentage of the interests in the deficit was 106%.
  4. The public budgets deficit is, in fact, public debt interests.

Fifth: The difference between Lebanese and international interest rates

The difference in the Lebanese public debt interests between the levels of interests’ rates in Lebanon and the world reached about $ 58 billion.

Public debt in Lebanon until the end of 2019
  1. The total public debt amounted to about 138150 billion LBP, which is equivalent to 92 billion dollars. It constitutes about 173% of the GDP and is distributed as follows:
    • Debt in local currency 87279 billion LBP, and its percentage is 63%
    • Debt in foreign currency is 50,871 billion LBP, which is 37%
  1. The major creditors
Banque du Liban41 billion dollars 45%
Commercial banks

 

32 billion dollars 35%
Eurobond holders8 billion dollars 9%
Public institutions and contractors7 billion dollars 8%
Lebanon’s financial losses

Losses according to the Lebanese government program dated 7/4/2020:

Losses were estimated at 83 billion dollars, distributed as follows:

a) Banque du Liban: $ 55 billion (after deducting the bank’s positive and negative capital)

b) Commercial banks: $ 28 billion.

Losses according to the government’s reform plan on 4/30/2020:

  1. Total losses were estimated at 241 thousand billion LBP, which is equivalent to 159 billion dollars.
  1. The losses were distributed as follows:
a.     Restructuring of government debts73 thousand billion LBP
b.    The losses of the Banque du Liban66 thousand billion LBP
c.     Banks’ losses (bad loans)40 thousand billion LBP
d.    Net losses in the budget of the Central Bank and expenses based on adjusting the exchange rate to 3500 Lebanese pounds62 thousand billion LBP

Losses based on the financial accounts of the state, the central bank and commercial banks, and according to the accounting rules in determining losses:

  1. State losses, which are the public debt of $ 92 billion
  2. The Central Bank lost 40 billion dollars.
  3. Commercial banks are in a very good financial position. They have been making profits since 1993 and before and until now, and therefore there are no losses.
  4. Total losses are 132 billion dollars.
  5. The potential losses for the banks depend on the size of the state losses that the government decides to distribute to the creditors, which are, in fact, the state losses mentioned in item (1) above.
The consequences of this reality
Economic ConsequencesManagement ResultsFinancial and Monetary ResultsSocial ResultsBasic Services
1. Economic recession

2. The slowdown in production, and the inability to secure job opportunities for professional and technical competencies.

3. Low economic growth rate and low national income.

4. Intensification of monopoly and exploitation.

5. The focus of the economy is on the rentier economy (interests)

6. Investing in the trade sector in most bank loans, which weakened all other sectors, in particular, agriculture and industry sectors

1. Corruption of administration and mismanagement of public affairs

2. The predominance of quotas, favouritism, and sectarianism in assuming public office position.

3. Ignoring the principles of efficiency, merit, integrity and competence in handling public affairs

4. The growing number of institutions, organizations and councils in the public sector without economic benefit and at a high cost

5. Flabbiness and weakness of administrative and financial inspection bodies

6. Sectarian political control over the Lebanese judiciary

7. Illegal and illegitimate employment in the public sector.

8. The stalled reform policies and the decline of popular and governmental supervision.

1. Increasing the size of consumer spending

2. Decreasing the size of capital spending (investment)

3. The growing deficit in public finances (public budgets)

4. Expenditure without budgets and the increase in spending outside budgets

5. High rates of public debt interests

6. Exacerbation of public debt in relation to domestic production

7. Decreased ability to borrow

8. The collapse of public finances.

9. The state stops paying its debts (bankruptcy)

10. The collapse of the national currency exchange rate in relation to the dollar and foreign currencies

11. Increasing financial losses for the state and its central bank.

1. Imbalance of the social structure

2. The increase in differences between social classes and geographical regions

3. The concentration of wealth in the hands of a small number of Lebanese as a result of the alliance of businessmen with sectarian, ideological and political leaders

4. The collapse of the purchasing power of all Lebanese, especially those with limited income, due to the collapse of the exchange rate of the lira and inflation (increase in prices)

5. The transformation of the middle class into a poor class

6. The increase in poverty and unemployment rates

7. The growth of emigration abroad, especially those with professional and university competencies and brains.

1. 1- The escalation of the electricity crisis (rationing reaches 21/24 hours)

2. The exacerbation of the water crisis

3. The worsening of the transportation crisis and the lack of public transportation

4. The flabbiness of all infrastructures: bridges – roads – highways, ports – airports … etc.

5. The decline in the level of formal education in all its stages.

6. The increase in health costs for the citizen

7. More than half of the Lebanese are not covered by health care

Exit from the black tunnel

The Lebanese Coalition for Education and the Arab Campaign for Education for All-ACEA believe that the tragedy of the Beirut port explosion will exacerbate the financial crisis in Lebanon, especially the foreign exchange crisis and the sending of the Lebanese money abroad more and more, and this is what was happening even before this disaster.

Helping Lebanon today to get out of its crisis must be a concern at the Lebanese national level, and as well an Arab concern that must be reflected with more solidarity and support to confirm the ability of Arab civil societies to work together and unite in light of the decline of Arab political regimes and their inability to achieve the desired solidarity and unity.

The Lebanese Coalition for Education and the Arab Campaign for Education for All – ACEA and its partners in the Arab educational coalitions are trying to contribute to supporting a unified Arab solidarity movement towards supporting Lebanon in its ordeal on the one hand, and also on the other hand to provoke a scientific and logical debate on the issue of the impact of foreign debts on the ability of poor countries to pay Its duties towards services related to the social and economic rights of people, including the groups most vulnerable to discrimination and exclusion, and on top of these rights is the right to education.

The Lebanese Coalition for Education and the Arab Campaign for Education for All – ACEA, and in the context of all the above, see that getting out of this tunnel needs the following steps:

First: the formation of a national front-line formula (socio-economic rescue front) and the adoption of a socio-economic rescue program forms the common solid foundation for the national front.

Second: Promoting an inter-dialogue between the front parties on the one hand and between the front, groups and the unorganized individuals on the other hand, about developing a joint work program, the basis of which is a proportional electoral law and outside the sectarian constraint and the application of the provisions of the constitution, especially article 22 thereof.

Third: Preparing for the launch of a national-regional advocacy campaign aimed at pressuring Lebanese and international governments and financial institutions to write off Lebanon’s foreign debts and directing them towards saving Lebanon, especially in the field of maintaining the continuity of the basic services for the Lebanese citizen, represented in education, health, job creation, and others. The campaign should also focus on raising citizens’ awareness of the current financial crisis and how to get out of it.

Fourth: Rallying support from all parties at the national, regional and international levels for the success of the advocacy campaign and support its efforts in delivering the voice to international decision-makers and governments in order to stop the policy of flooding the poor countries with debts, and the need to give social and economic rights, on top of which is education, priority in making and drawing up global and national policies and decisions.



Leave a Reply