The objective of this article is to give an overall picture of the two of the major problems in Lebanon that leaded to the economic crisis in 2020; Public Debt and Corruption. Corruption can be seen anywhere; it is like cancer in public life. In our country, corruption covers politics, central governments, business industry and so on. In the other hand, a thick and seemingly impenetrable cloud of debt is hanging over Lebanon. In theoretical literature, the link between government debt servicing and economic growth largely supports a negative relationship. Government debt servicing costs are believed to have the effect of creating economic and financial uncertainties, which ultimately hampers gross capital formation through discouraging potential foreign investment.

The Lebanese financial system, mainly constituted of the banking system, is subjected to major constraints impeding its economic growth. The budget and fiscal policies followed in recent decades have generated an unbearable public debt. The Lebanese financial system was incited to invest in government debt thus crowding out the private sector. This includes foregoing industrial and agricultural projects that may on the long term increase potential growth of the economy and improve the wealth of the nation by generating a sustainable revenue stream that can at least cover debt repayments of the nation. The financing of the budget deficit was ensured, since 1992, via the accumulation of an increasing public debt, contracted at very high interest rates. Consequently, the service of this debt becomes prohibitive in an unfavorable macroeconomic context where paradoxical government choices have been applied and were largely illustrated by the fixity of the exchange rate and by a periodical upward pressure on interest rates. The coexistence of a budget deficit in continuous progression with very high interest rate levels carried the public debt to a point of no return (since 1995, the debt service exceeded 80% of the public revenues).

In the contemporary economic language, this phenomenon is called the snowball effect. The ratio of outstanding gross public debt to GDP in Lebanon is among the highest in the world. In 2006, Lebanon’s debt-to-GDP peaked at 183%. By 2007-2012, the ratio gradually retreated to stand at 131% in 2012. However, from 2013 onward, debt-to-GDP in Lebanon was on an upward trend, reaching 153% in 2018. In fact, Lebanon’s local currency debt is mostly held by the Lebanese banking sector and is constituted of a portfolio of Eurobonds of short-term, medium-term, and long-term maturities. This dependence on foreign investors through Eurobonds is the major problem pushing the Lebanese authorities to call the IMF and World Bank in 2020.

Source: Ministry of Finance, BLOMInvest Bank

On the other hand, corruption has always existed in Lebanon, its effects were magnified starting 1990 after the end of the fifteen-years civil war. In its 2018 report, the NGO Transparency International had classified Lebanon in 138th position out of a total of 180, with a corruption perception index of 28 points thus qualifying it as “country to watch”. Corruption in Lebanon governs all sectors of society and all branches of government. It exists in all its forms including bribery, nepotism, favoritism, patronage, embezzlement, kick-backs and vote-buying. The causes behind corruption in Lebanon are various and include the lack of awareness on corruption, the absence of dysfunctional key anti-corruption institutions and the post war structure in Lebanon, which has led to a power-sharing formula among political and confessional groups resulting in competition for state resources.

The impacts of corruption are tremendous and can be classified as political costs rendering fragile the relationship between citizens and the state, financial costs especially in terms of investment and lack of corporate governance, as well as socio-economic costs. The fight against corruption would therefore theoretically go through the improvement of systems through the reduction of monopolies held by political leaders for the supply of certain public goods and services or their careful regulation, the delimitation of their discretionary power and the increased transparency and the likelihood of being arrested and punished. Concretely, this implies reforming the role of the state, that is to say acting at the level of some of its functions which promote the development of corruption. Excessive regulations create fertile ground for rent extraction, while an economy where the role of the state is minimal is less exposed to this kind of risk.

There are different areas in which corruption can arise from over-regulation. A first example is that of taxation. When laws are difficult to understand where there are tax incentives, corruption is likely to take place. Another example is the level of certain goods and services offered by the government at subsidized prices (such as water, education or electricity), which can create an opportunity for corruption. One solution would be to raise the price of these goods or services to market prices, if possible, to reduce or even eliminate corruption. Once again, such a measure would change the role of the state in a way unwanted by many governments.

Finally, the industrial policies adopted by certain countries can be the source of corrupt behavior. Studies have shown that industrial policies can promote corruption as much as investment, and that the negative effect it causes in some cases offsets the increase in investment. All of these examples lead to one conclusion: the need to reform the role of the state to reduce corruption. Note, however, that it is not a question of abolishing all kinds of regulations; on the contrary, some of them and even certain discretionary powers can serve functions useful to society.

Economic fundamental principles suggests that the fight against corruption should be undertaken as long as the benefits of reducing corruption, in terms of growth recovery and efficiency gains, exceed the costs of the same operation. Indeed, anti-corruption policies generate expenses which are considered to be indirectly productive and which could have been spent on projects with higher added value and favorable for growth. Likewise, this fight could reduce the income of agents who took advantage of this income in the form of bribes or tax fraud, which would significantly reduce their consumption and also their ability to invest.

In order to start solving the economic crisis, the Lebanese authorities should start the reforms to reduce corruption and improve the efficiency and productivity in the public sector. It is also expected to start the restructuring of the banking system and public services suppliers such as EDL, port of Beirut, telecom sector, customs, etc.   

Nané Sophie Semerdjian
February, 2020