Transcript Lebanese Banking Sector Resilience, Growth, Promise
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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
Why? For whom?
How?
What about?
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Why?
Bridge a Gap
Bring back economic discussion to where it belongs. Definition of Economics Address Myths about Hariri Economic Vision – Why Hariri?
– Why Now?
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For Whom?
General audience Non-experts Simple Arabic language “Democratizing Economics” Krugman/Friedman Style
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How?
Paper on Paris Reform track Back to 1992 Back to 1943
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What about?
Part I: 1943-1992 The four foundations of the Lebanese laissez-faire 1.
Private sector/ Property rights 2.
3.
4.
The stable exchange rate Balanced budget 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.
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 8 GDP per Capita in 1974 (Base year 2005): Lebanon and other Emerging Countries
4500 4000
3883.46
3500 3000 2500 2910.8
2409.41
2000 1500 1000 500 0 Lebanon Singapore Source: Penn World Table South Af rica 2262.6
Mexico 2157.47
Brazil 2118.46
Poland 1668.84
Cyprus 1321.25
1190.83
Malaysia Korea 787.12
444.01
Thailand Indonesia
Singapore Chose to become “The Lebanon of the East” in the early 70s
9 GDP per Capita in Lebanon and Singapore (1970-2007) in 2008 USD
55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0
2871.75
1545.29
1970 Source: Penn World Table
3883.46
2910.8
1974
4051.61
15753.5
1990
8228.17
48489.62
2007 Lebanon Singapore
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Challenges: Pre Civil-War
1.
Needless to say, there were several challenges that the Lebanese economic model (laisser faire) could no overcome The imbalance in regional economic development (centered in Beirut and Mount Lebanon) 2.
The widening of the gap between poor and rich (income distribution)
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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?
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.
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Several “endogenous” factors implied impossibility to reassert the liberal aspect of the economy (the first three pillars) without sacrificing “ temporarily” the 4 th: Balanced Budget
14 The War shook and destroyed three of the four pillars
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
What were the choices?
→ Pro-growth or → fiscal tightening
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The Objectives were Numerous
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
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All these objectives were inter-related
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
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– This suggested the impossibility of returning to the 4 th “ Balancing the budget” pillar: Due to various reasons: – The impossibility to increase tax rates given the protracted effects of the war on the middle class – 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…
– – – 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
21 Division of Expenditure by Components 1993-1998 Total Expenditures= LBP 38,436 billion De bt Se r vice 13,634 (36%) Wage s and Salar ie s 11,953 (31%) Inve s tm e nt s pe nding 6,610 (17%) Tr ans fe r s to EDL 1,602 (4%) Council of the South and dis place d fund 1608 (4%) Cur r e nt Expe nditur e s othe r than w age s and s alar ie 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 tar y Inve s tm e nt Spe nding 3.2
(17%) Pr im ar y De ficit 3.6
(19%) Old De bt and its s e r vice 7.6 (42%) Ne w De bt Se r vice 4.1, (22%)
Interest rates, overall on a declining trend, still very responsive to political and security shocks 23 Interest Rates on Treasury Bills 1992 - 1998
40 35 30 1992 Elections Haraw i extension Israeli 1993 War 25 20 15 10 Jan 92 May 92 Sep 92 Jan 93 May 93 Sep 93 Jan 94 May 94 Sep 94 Jan 95 May 95 Sep 95 Jan 96 May 96 Sep 96 Jan 97 May 97 Sep 97 Jan 98 May 98 Sep 98 3 6 12 24
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Two Important Events
1.
2.
Extension of Hariri’s term 1996 “Grapes of Wrath” Israeli war Because of the second one: 1.
2.
3.
4.
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.
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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% 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%
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100% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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25 20 15 10 45 40 35 30
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
1992 1993 1994 1995
Loans to private s e ctor / Total As s e ts (%) Fore ign As s e ts / Total As s e ts (%)
1996
Loans to public s e ctor / Total As s e ts (%)
1997 1998
30 There was no strong evidence of crowding out
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%)
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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
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 Financing at subsidized rates totaled around $20billion In order to do the reforms that we need to do regardless!
Supported by tighter fiscal policy
34 Public Finance Ratios 2001-2009
35% 25%
Re ve nue s / GDP (%) 20.2% 17.5%
15% 5% -5% -15% -25% -35% -45%
-33.4% -35.1%
2001 2002
22.0% 22.9% -32.1% 22.5% -31.0% -35.0%
2003
Expe nditure s / GDP (%)
2004 2005
21.6% -35.1%
2006
23.2% -33.3%
2007
23.4% -33.1%
2008
24.4% -33.0%
2009
That is finally generating a solid primary surplus 35 Public Finance Ratios 2001-2009
40% 35% 30% 25% 20% 15% 10% 5% 0% -5% 2001 2002 2003 2004
Expe nditure s / GDP (%) Re ve nue s / GDP (%)
2005 2006 2007
De ficit / GDP (%) Prim ary Balance / GDP (%)
2008 2009
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Progress achieved over the past 20 years
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
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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)
*as of end-year 1993
1992
5.17
1,700 110% 1838 12.9% 25.1% 12.2% -6.4% 51.7% 48.9% 48.9% 451* 1169.5* 18 1.45
7.962
154.1% 6.62
2.614
2000
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
2009
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 38
180% 160% 140% 120% 100% 80% 60% 40% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
39 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 Global financial crisis: redefine the role of the state: liberalization vs. deregulation Fiscal crisis in Europe: The issue of productivity and reforms