Greek lessons for Lebanon

Greek lessons for Lebanon

Unrealistic planning underpinned by neoliberal economic policies have left Lebanon a thoroughly unsustainable debt ratio, prompting calls for it to follow in Greece's footsteps.

6 min read
12 Jul, 2015
Let them eat debt [Getty]

Lebanon’s public debt, estimated to stand between 137% and 180% of GDP – depending on whether debts accrued on the country’s state-affiliated central bank and the Council for Development and Reconstruction (CDR) are factored in – was not long ago a major political issue in the country.

It is one of the highest debt ratios in the world, and many politicians and economists rightly worry that it has doomed generations of Lebanese. 

Soon after the brutal Israeli war on Lebanon in 2006, when

     Lebanon ceded its economic sovereignty to its creditors long ago.

the official debt skyrocketed to 175% of GDP to cover the damage inflicted by Israeli forces on the country’s infrastructure, the public debt started to decline. This perhaps explains why it has not been much in the news since. But it started to rise again after the Arab Spring and the serious implications for Lebanon’s economy and security, from the influx of refugees to declining tourism and foreign investment.

Dormant volcano

On the surface, Lebanon is nowhere near default, and it would at first glance appear that its deficit and debt repayments are sustainable. But no one should be fooled by the official numbers, says Mouhamad Wehbe, Lebanese business journalist. According to him, a dormant volcano hides behind them and it will inevitably erupt into a crisis very similar to the current situation in Greece.

Indeed, Lebanon rarely, if ever, falls behind on its obligations. But like many weak and heavily indebted countries, it has practically handed over its economic and fiscal policy to the "Washington Consensus", the neoliberal world order spearheaded by the World Bank and the International Monetary Fund (IMF), and its local extensions. 

And unlike Greece, which has not fully surrendered to the creditors’ terms, Lebanon ceded its economic sovereignty to its creditors long ago.

One can argue that the country's entire economy has been restructured to serve one purpose, to service the huge debt. Most of this is owed to local banking conglomerates which operate within the Bretton Woods framework.

The Faustian deal by which Lebanon repays its debt involves the perpetuation of a rentier economy that favours a few capitalists – the majority of the workforce is forced to become expatriates who send remittances home to go towards debt repayment.

Meanwhile, the taxation introduced on consumption and various transactions affects rich and poor disproportionately. In other words, the social and economic cost of Lebanon’s current approach to debt is not sustainable and will come to a head, sooner or later. 

Gambling on the future

Lebanon’s debt snowballed after Rafiq Hariri came to power in the early 1990s. Hariri, a billionaire who built his fortune in Saudi Arabia and was one of the country's longest-serving prime ministers, pursued a grand debt-fuelled policy of “build it and they will come”, relying on promises of imminent peace with Israel in the wake of the Madrid Conference and Oslo Accords. His vision: to restore Beirut’s lost glory as the “Paris of the Orient”. 

Naturally, a slice of the debt, if not most of it, went into the pockets of private interests and former warlords, deliberately or otherwise, given the high incidence of corruption, wastage and inefficiency. Little went to fund public investments, barely 10% by some estimates.

     In the end, the solution chosen by the country’s dominant economic interests was the Marie Antoinette option: let the poor pay the debt, and let the rentier class benefit from it.

Hariri’s vision, of course, collapsed with the first shot fired at Yitzhak Rabin. His grand projects – mostly oriented towards superfluous services and high-end tourism – became bridges to nowhere. The revenues he bet on to repay the debt and cover the corruption “black hole” never came, as Lebanon returned to the same old cyclical patterns of violent “boom and bust”, particularly in the wake of 9/11. 

There were also irreconcilable differences between Hariri’s vision of Lebanon as a politically “neutral”, neoliberal heaven and Hizbullah’s vision of Lebanon as a key part of the anti-Israel axis linked to the agendas of Damascus and Tehran. Their collision course culminated with Hariri’s assassination, which ushered in a political crisis which continues to the present day.

Let them eat debt

As Hariri’s gamble failed, Lebanon scrambled to deal with the debt. Default can never be an option for a country dominated by economic interests deeply enmeshed within the neoliberal world order. 

The classic policies to deal with debt – manipulation of interest rates, austerity, structural reform, privatization – were either politically impossible or nowhere near close enough to making a dent in the debt mountain. In the end, the solution chosen by the country’s dominant economic interests, mediated by the Washington Consensus, was the Marie Antoinette option: let the poor pay the debt, and let the rentier class benefit from it.

There is no progressive income tax in Lebanon. There are no taxes on capital or profits, either. Instead, the government funds its expenditures – and debt-servicing – in large part through corrosive value added tax, which take its toll chiefly on the less well-off.

Ultimately, it is the Lebanese economic model that is at the heart of the problem. 

If the post-war debt had been used to rebuilding the real economy, instead to fund the corrupt rentier structure on the basis of an irrational gamble on resurrecting the Lebanon of the 1960s, there would have been solid fundamentals, and growth, investments and jobs.

Instead, the country has alarmingly high unemployment, especially among young people. It cannot create enough jobs for the people joining the workforce each year, let alone the millions of Syrian and Palestinian refugees.

There is little to no spending on infrastructure and public projects save for those funded from Arab charity, and both the real economy and the middle class shrink year after year.

The nuclear option  

It is probably too late now and too difficult to restructure the economy while continuing to pay the debt. A powerful trans-sectarian coalition of union activists under the umbrella of the Unions Coordination Committee (UCC), led by charismatic labour leader Hanna Gharib, had offered some hope in this direction last year.

But the UCC lost the battle for pay increases even though wages have been frozen below inflation levels since the late 1990s. Their revolutionary call for a new economic model largely failed.

Now, the crisis in Greece has prompted some to call for default.  

Amer Mohsen, Lebanese columnist and analyst, made a detailed case for the benefits of default in al-Akhbar.

He said that Lebanon is an ideal candidate for such a course, arguing that it would help reduce the tax burden on the poorer segments, use the ensuing budget surplus to offer social services, and boost the real economy and help repatriate the exiled workforce.

Mohsen wrote: “Even if the worst happened and the banks collapsed, recall that half of all their deposits are in the hands of 0.8% of total depositors, while 2.6% is in the hands of 70% of Lebanese depositors. It would be the noblest redistribution of income in Lebanon since the Phoenicians.”  

Like Greece, the future of Lebanon, Tunisia, Egypt and Jordan, and all indebted nations coerced in one way or the other to accept the policies of the Washington Consensus and their local collaborators, often along with political dictates, depends very much on getting rid of the debt burden, one way or the other.