Why is the lebanese government in a huge debt

However, in the postwar economic landscape, the base of available savings was modest and shallow. After years of uncertainty, individual reserves were depleted and resources spread thin.

Banks, therefore, benefited from consolidating funds from small and liquid deposits and using them to buy less-liquid government debt instruments. Growth in the banking sector was more akin to a windfall of rents, rather than the result of financial risk taking, indispensable intermediation, or acuity in identifying investment opportunities that might have lifted other sectors.

The total profit of the top fourteen banks in Lebanon has hovered around 4. Therefore, the market for government bonds afforded a rapidly expanding opportunity for indolent returns that banks alone were primed to seize. These sustained profits to one economic sector tell a story of rising inequality through a rapid accumulation of rents in the hands of a few banks. But this account of the distributional consequences remains incomplete. Lenders are not the only agents in this game.

Therefore, to comprehensively consider the redistributive effects of the public debt, one has to also scrutinize the borrower. One way the government can use the public debt to help reduce inequality is by spending the money it borrows in a way that favors equitable redistribution. Government outlays take on several forms. One is debt-servicing payments that flow from the treasury back to lenders. But debt servicing is only a part of government expenditures; other outlays have their own distributional impact.

The short answer is that it did not matter. Interest rates on government bonds were so high that, once debt servicing was factored in, the government was left with relatively little money to spend anywhere else. The terms of borrowing in the early s meant that interest payments on pound-denominated debt constituted, on average, 45 percent of total government spending , leaving just over half of total government expenditures to finance all other public spending needs.

When scaled to government receipts, by , interest payments represented close to 68 percent of the budget deficit. In other words, two-thirds of any new debt was being issued only to finance interest payments owed on existing debt. This meant that part of debt servicing now had to be financed through other government receipts, namely tax revenues.

And while the lending base to the Lebanese government was narrow, the tax base, in contrast, excluded no one. If it was not bad enough that interest payments on the debt were accruing to a small group of economic actors, now all Lebanese had to foot the bill.

The redistributive implications of this situation were, and remain, dire. Not only is the tax base in Lebanon unjustly broad, its various constituents bear the burden inequitably. The Lebanese taxation system relies heavily on indirect taxes—mostly consumption taxes—levied on goods and services rather than on personal incomes, capital gains, or wealth. Consumption taxes are arguably easier to administer than personal income taxes. They typically take the form of a flat tax that applies at sale, across the board, regardless of the volume of sales or the characteristics of the consumer.

When goods and services, rather than, say, earnings or assets, are taxed, the amount of tax paid per unit sold is the same for all buyers, rich or poor, making the tax regressive.

While that still leaves the redistributive effects of remaining tax revenue and government spending unaccounted for, these crude metrics already tell us a great deal. It does not matter how progressive the levy is for the remaining 40 percent of tax revenues, or how systematically pro-poor the 55 percent of government outlays left after debt servicing are, the available margin of maneuver after debt servicing remains too narrow and implies that the battle against inequality is lost from the start.

Irrespective of how the reconstruction money was ultimately spent, was there another way that the government could have raised the funds for postwar reconstruction and rehabilitation? In principle, the discount on government bonds accounts for the risk involved in lending to the public sector. Therefore, some may argue, the exorbitant interest rates Lebanese government bonds were offering during the s reflected the underlying risk of default.

In reality, there were several indications that the terms of borrowing, which were overwhelmingly favorable to lenders, did not fairly reflect market fundamentals.

Interest rate spreads were unreasonably high early in the public borrowing period. But, a few years later, the same banks were lending money at much lower rates, with much narrower spreads to a government that had become far less solvent.

The politics are difficult too. Beirut could try and manage without the IMF but it would still need to do what no previous government has been able to do - slash government spending and start a longer-term program of tax hikes to get the finances back in shape. Either way it would still have to renegotiate the rest of its debts with its international creditors. Recent defaulters like Ukraine convinced their lenders to write-off some of their money and agree to push back remaining payments and lower interest rates, though that was with the assistance of the IMF.

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