Lebanon: Public finances gone wide off the mark

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Lebanon was once a bastion for political stability in an otherwise unstable region, but this no longer the case. The Lebanese Government has mismanaged public finances for too long, and risks breaking the social contract, which in turn makes investments into Lebanon in the near future a highly volatile investment.

The country continues to suffer from high levels of public debt and fiscal mismanagement. The government has been unable to further grow rising GDP per capita, with extreme youth unemployment and an extreme import leaning balance of trade.

Taking a look at the youth unemployment rate, it currently stands around 17.36 per cent. This is an unusually high rate and has led to feelings of economic despair amongst the youth which has led to the current political protests. The high rate of youth unemployment can also point to a stagnation of sorts in the economic growth and job creation of the Lebanese economy.

The latter can be clearly seen in real GDP growth rates, alongside forecasts for future growth, which are seen at two per cent levels. While this rate may be sustainable for developed nations, it is not a fast-enough rate for middle-income nations to pull themselves out. This is turn could further aggravate the economic issues which might increase further a political turmoil.

Looking more to the public finances what’s more concerning are the extreme levels of government debt that Lebanon has, alongside some speculation as to how it was possible for the Lebanese government to amass such record levels. In fact, the Lebanese gross government debt stands at a ratio of 1.5:1 to GDP. It is forecasted to be at 2:1 to GDP by the 2030s. Such extreme amounts of debt only truly rivalled in the world by Japan, Greece, Venezuela and Sudan.

The said situation is most likely caused by the high import to export ratio Lebanon has. It also has a strong fiscal deficit that has continuously helped expand the debt load.

Furthermore, the forward-looking forecast suggests that Lebanon is facing a demographic decline. It will be forecasted to remain around six million people for the foreseeable future with a further dip off into the far future. This will intensify the issues the country is facing through not being able to increase its tax base, or possibly to find the labour needed to have a competitive advantage in low labour cost manufacturing or services.

This demographic shift can and hopefully will force the government to truly reform its fiscal stance, and debt burden to ensure the strength and growth of the economy going forward.

That being said, this seems to be a difficult task for Lebanon due to its unique power-sharing form of governance, alongside its geographical location making it a primary location for Syrians who are fleeing or dealing with the Syrian civil war soon entering its ninth year.

Potentially, this might turn out positive for Lebanon with Lebanese firms being a possible benefactor of Syrian rebuilding efforts if and when the civil war ends in the near future.

Disclaimer: This article was issued by Maria Fenech, credit analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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