Transcript Lebanese Banking Sector Resilience, Growth, Promise

Lebanon’s Economic Project:
Lessons from the Past and
Challenges for the Future
A Book by Dr. Mazen Soueid
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Lebanon’s Economic Project
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Why?
For whom?
How?
What about?
Why?
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Bridge a Gap
Bring back economic discussion to where it belongs.
Definition of Economics
Address Myths about Hariri Economic Vision
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Why Hariri?
Why Now?
For Whom?
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General audience
Non-experts
Simple Arabic language
“Democratizing Economics”
Krugman/Friedman Style
How?
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Paper on Paris Reform track
Back to 1992
Back to 1943
What about?
Part I: 1943-1992
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The four foundations of the Lebanese laissez-faire
1. Private sector/ Property rights
2. The stable exchange rate
3. Balanced budget
4. Free movement of goods and capital ( no restriction on current
and capital account transactions
A model that worked (despite its many shortages)
and produced outstanding results
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The Lebanese Economic Model was Based
on 4 Pillars
1.
2.
3.
4.
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Private sector initiative/property rights
No restriction on current and capital account
transactions (free repatriation of capital)
Stable exchange rate vis-à-vis the US dollar.
Balanced budget
Model generated high growth rate and placed Lebanon in
favorable position regarding other emerging markets
GDP per Capita in 1974 (Base year 2005):
Lebanon and other Emerging Countries
4500
4000
3883.46
3500
2910.8
3000
2409.41
2500
2262.6
2157.47
2118.46
2000
1668.84
1500
1321.25
1190.83
1000
787.12
444.01
500
0
Lebanon
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Singapore
Source: Penn World Table
South
Af rica
Mexico
Brazil
Poland
Cyprus
Malaysia
Korea
Thailand
Indonesia
Singapore Chose to become “The Lebanon
of the East” in the early 70s
GDP per Capita in Lebanon and Singapore (1970-2007)
in 2008 USD
55000
48489.62
50000
45000
40000
35000
Lebanon
30000
Singapore
25000
20000
15753.5
15000
8228.17
10000
5000
2871.75
3883.46
1545.29
2910.8
4051.61
0
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1970
Source: Penn World Table
1974
1990
2007
Challenges: Pre Civil-War
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Needless to say, there were several challenges that the
Lebanese economic model (laisser faire) could no overcome
1. The imbalance in regional economic development
(centered in Beirut and Mount Lebanon)
2. The widening of the gap between poor and rich
(income distribution)
IRFED Study Reveals: 41% poor, 9% very poor
The important reforms introduced by President Fuad
Shehab (1958-1964) to address these challenges were
later hindered by tension leading to the civil war.
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Why is it Important to Go Back?
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Hariri’s policies adopted in 1992 onward were an attempt
to converge to the spirit of the Lebanese economic model
with an objective to develop it further in the social
perspective.
Several “endogenous” factors implied impossibility to reassert
the liberal aspect of the economy (the first three pillars) without
sacrificing “ temporarily” the 4th: Balanced Budget
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The War shook and destroyed three of the four pillars
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Severe exchange rate depreciation
Fiscal deficit-debt: 50% of GDP by end of 1992
Private Sector impaired by destruction and
damages to both infrastructure and supra structure
1990-1992: further deterioration
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Part II: Reconstruction vs. Challenge
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What were the choices?
→ Pro-growth or
→ fiscal tightening
The Objectives were Numerous
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Eject the economy from the vicious circle of
inflationary financing, dollarization and exchange
rate depreciation
Launch the private sector initiative to stimulate
investment, growth and employment opportunities
Increase the real income of the Lebanese population
and reduce poverty through social spending on
education, health and safety nets
All these objectives were inter-related
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Exchange rate stability essential for private sector investment
Higher private sector activity essential to generate revenues
Revenues were essential for social spending
Otherwise more exchange rate instability (1990-1992)
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But given that situation of the country, of the treasury, and the
population it was impossible to go back at once to all pillars,
and priority was thus given to the two essential pillars:
– Stability of the Exchange Rate
– The Role of the Private Sector which was needed to put
the economy on the path of reconstruction and growth
Inability to Balance the Budget
This suggested the impossibility of returning to the 4th pillar:
“ Balancing the budget”
Due to various reasons:
– The impossibility to increase tax rates given the protracted
effects of the war on the middle class
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The need to increase capital expenditures to repair the
damage after the war, catch up with growing need and
meet with future needs
– The need to rebuild the Lebanese administration, hire new
staff in the educational health and judicial sectors
–
The need to increase the size of the army and internal
security forces to meet the requirement of peace (15% of
total spending was on defense between 1993-1998)
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Inability to Balance cont…
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Need to achieve through a series of rises on wages
and salaries an increase in real income that
reduces the gap that has been growing between
purchasing power and cost of living
Need to achieve a slow but sure reduction in
interest rate, which encourages capital inflows that
are needed to finance the large investment needs
and generate a balance of payments surplus that
could see a build up of reserves at the BDL
Higher social spending, which was increased on
average by 4% of GDP
Division of Expenditure by Components 1993-1998
Total Expenditures= LBP 38,436
billion
Wage s and Salarie s
11,953
(31%)
Trans fe rs to EDL 1,602
(4%)
De bt Se rvice
13,634
(36%)
Inve s tm e nt s pe nding
6,610 (17%)
Council of the South and
dis place d fund 1608
(4%)
Curre nt Expe nditure s
othe r than w age s and
s alarie s
3,029 (8%)
This shows the low margin of freedom imposed on fiscal policy
Margin no more than 25%!
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Debt as of the end of 1998
Debt totaled, as of the end of 1998, $18.5 billion, and was
accounted for by
Total Debt= $18.5 billion
Non budge tary
Inve s tm e nt Spe nding
3.2
(17%)
Old De bt and its s e rvice
7.6
(42%)
Prim ary De ficit
3.6
(19%)
Ne w De bt Se rvice
4.1,
(22%)
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Interest rates, overall on a declining trend, still
very responsive to political and security shocks
Interest Rates on Treasury Bills
1992 - 1998
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1992 Elections
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Haraw i extension
Israeli 1993 War
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3
6
25
12
24
20
15
10
Jan- May- Sep92
92
92
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Jan- May- Sep93
93
93
Jan- May- Sep- Jan- May- Sep94
94
94
95
95
95
Jan- May- Sep96
96
96
Jan- May- Sep97
97
97
Jan- May- Sep98
98
98
Two Important Events
Extension of Hariri’s term
2. 1996 “Grapes of Wrath” Israeli war
Because of the second one:
1.
1.
2.
3.
4.
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Growth declined from 6.5% in 1995 to 4% in 1996
Revenues less by LBP 492 billion than expected
Expenditures were more by LBP 776 billion than expected
Primary deficit LBP 1039 billion instead of an expected surplus
of LBP 229 billion
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This reflects the fact that by the end of 1998, the Hariri
reconstruction program was responsible for 17% of the debt:
the rest was old debt + cost of financing primary deficit
Primary deficit: ↑ spending on security, social spending, lack
of progress in reform, security and political stability
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Contractionary fiscal policy based on the following premise:
– Economic policy adopted over “Period I” led to higher
interest rate which led to a crowding out of the private
sector and lower growth rate.
Several layers of Faults in this Approach
Growth rates achieved:
 1993-1995: growth reached over 7%
 1996-1997: growth declined to 4%
 1998: 3.6% growth declined to 3.6%
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The decline in 1998 was not separated from domestic
and political problems and security shocks as well as
external development (the challenges facing the peace
process)
There is no evidence of significant crowding out
Banks Assets / GDP (%)
1992-2009
350%
300%
250%
200%
150%
100%
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1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Composition of Assets suggests that lending to public
sector was at the expense of foreign assets and not at the
expense of lending to private sector
Composition of Assets
1992-1998
45
40
Loans to private sector / Total Assets
(%)
35
30
Loans to public sector / Total
Assets (%)
25
20
Foreign Assets / Total
Assets (%)
15
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10
1992
1993
1994
1995
1996
1997
1998
There was no strong evidence of crowding out
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Loans to the private sector increased by $12.14 billion
between 1992 and 2000 (460%)
They increased by $21.65 billion between 1992-2009 (820%)
The fallacy in the analysis led to poor results at the economic level and to
disastrous results at the deficit/debt dynamic level
→ GDP growth declined to -0.5% in 1999 and to 1.3% in 2000
→ Deficit increased from 13% in 1998 to 23% of GDP in 2000
→ Debt/GDP increased from 107% in 1998 to 146% in 2000
(The government had promised to bring it down to 96% by 2003!)
→ Debt Service increased from 70% of revenues to 90% of revenues
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Part III: 2001-2009
No wonder then, when Hariri came back to power in late
2000, he reversed the course of the previous government
and adopted pro-growth policies
→ Tariff Reform
→ Open Skies
→ Investment Law (IDAL)
→Privatization Plans
→Civil Service Reform
Some were passed others were blocked
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Paris I,II & III
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Paris I, II & III Conference Importance-covered in the
Foreign Economic Policy Session- can been seen in the
results recorded in terms of debt structure and costs
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Financing at subsidized rates totaled around $20billion
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In order to do the reforms that we need to do regardless!
Supported by tighter fiscal policy
Public Finance Ratios
2001-2009
35%
Re ve nue s / GDP (%)
25%
20.2%
22.0%
22.9%
22.5%
21.6%
23.2%
23.4%
24.4%
17.5%
15%
5%
-5%
-15%
-25%
-35%
-33.4%
-32.1%
-35.1%
-45%
2001
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2002
-31.0%
-35.0%
2003
-35.1%
Expe nditure s / GDP
(%)
2004
2005
2006
-33.3%
2007
-33.1%
2008
-33.0%
2009
That is finally generating a solid primary surplus
Public Finance Ratios
2001-2009
40%
Expe nditure s / GDP
(%)
35%
30%
Re ve nue s / GDP (%)
25%
20%
15%
De ficit / GDP (%)
10%
5%
Prim ary Balance / GDP (%)
0%
2001
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-5%
2002
2003
2004
2005
2006
2007
2008
2009
Progress achieved over the past 20 years
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The progress achieved in the past 20 years of reconstruction,
stabilization and reform could be best seen in terms of figures
and numbers:
From Reconstruction to Reform
Nominal GDP (billion USD)
GDP per Capita (USD)
Inflation rate
Exchange Rate (end of period)
Revenues / GDP
Expenditures / GDP
Fiscal Deficit / GDP
Primary Balance / GDP
Interest Payments / Revenues
Debt / GDP
Net Debt / GDP
Exports of Goods (million USD)
Balance of Payments (million USD)
FDI (million USD)
Foreign Currency Reserves at BDL (billion USD)
Bank Assets (billion USD)
Bank Assets / GDP
Bank Deposits (billion USD)
Bank Loans (billion USD)
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*as of end-year 1993
1992
2000
2009
5.17
1,700
110%
1838
12.9%
25.1%
12.2%
-6.4%
51.7%
48.9%
48.9%
451*
1169.5*
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1.45
7.962
154.1%
6.62
2.614
17.26
4,846
-0.4%
1507.5
18.3%
40.8%
22.5%
-6.4%
88.2%
146.0%
135.9%
715
-289
964
5.7
45.034
260.9%
37.63
14.755
34.50
8,945
3.4%
1507.5
24.4%
33.0%
8.6%
3.1%
45.5%
148.1%
127.9%
3,484
7,899
4,804
28.30
115.250
334.1%
95.80
24.259
Gross Public Debt / GDP (%)
1992-2009
180%
160%
140%
120%
100%
80%
60%
40%
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1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Part IV: How to adapt Lebanon to the Challenges
that lay ahead
Define 3 big Transformations:
 Graduations of the emerging countries into mature
markets “BRIC”
→ pressure on commodity market → diversification vs. comparative advantage
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Global financial crisis: redefine the role of the state:
liberalization vs. deregulation
Fiscal crisis in Europe: The issue of productivity and
reforms