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PART THREE – THE GREEN CHUNK OF THE DONUT

Saving the Lebanese Treasury US108 billion during the next twenty years, through a reduction of 2% of the interest rate

that we should negotiate with the bond holders

In the first two parts of our study we have examined the prospects of saving the Lebanese Treasury a total US $3.7 billion dollars a year, or US$74 billion over the next twenty years.

Under this third initiative, we look forward to save the taxpayers no less than US$108 billion dollars from 2015 until end 2032. As the reader will note, this last proposal aims to benefit the taxpayers forty-six per cent more than the combined contribution of the two previous initiatives. 

A.- The Public Debt from 1993 to 2012 and the causes of its climb

In order to accurately assess the impact of the service of the debt on the Lebanese Treasury one would have to go back twenty years in time, when the Public Debt started to show up in the government’s records. We append for that purpose the chart and the table that illustrate vividly the rise of the Debt from 1993 until 2012. As indicated in these documents, the government undertook to borrow, in 1993, some seven billion US dollars to cover the cost of the post civil-war reconstruction program. The loan was initially burdened with heavy interest charges that were common during that unstable period. It must be recognized that the rate of interest that was unusually high during the first few years was gradually brought down to reach a current present average of 6.5%.

Unfortunately no efforts were made during these two decades to repay, neither the principal, nor the service charges. The Debt rapidly grew, fueled as it was, by the compound nature of the interest.

The Public Debt reached, at the end of 2013, the sum of $65.02 billion US dollars. If there is any small difference between this amount and the one mentioned in the official public records, it may be explained by the fact that some liabilities were not recorded by the Authorities at the end of 2013.

All these movements are clearly depicted in the chart and the table below.

B.- The anticipated movements of the Debt between 2013 and 2032 – two scenarios are contemplated

We contend that the 6.50% rate that is still applied today remains unjustifiably high considering the high degree of solvability of the Lebanese State and the Lebanese banks. Consequently, we recommend that the Authorities should approach the local and the foreign bondholders with a view to come to an agreement with them, whereby they will agree to reduce the average service charges by two per cent.

In the second table and chart that cover the period between 2013 and 2032, we have anticipated two hypothetical scenarios. In the first scenario, we assume that no repayment is contemplated during the next twenty years. The debt will likely reach the astronomical sum of US$181 billions by 2032.

In that same graph we depict the movement of that debt, assuming that the bondholders would agree to reduce the service charges down to 4.5% and that the Lebanese government would undertake to start repaying the debt at the rate of ten billion US dollars every year, starting from 2023., which would be the year during which we expect to start receiving our revenue from the development of our oil and gas resources. If all goes well, we should, thus be in a position to fully repay our debt by 2032, if we wish to.

 The benefits of $108 billion that Lebanon can reap from the reduction of 2% on the future service of the debt) would be much larger than the expected benefits from the two other initiatives. However, the economic and the financial experts who are likely to examine these proposals would readily agree with me that, if one wants to reach some effective results, one would have to implement the three initiatives concurrently, and not separately.

 Let us now consider the actors who would be involved in this proposal and the roles that they would be called upon to play in order to bring about the hoped for results.

Considering that 63% of the Debt is detained by local bondholders, according to the latest official reports from the MOF, the challenge that the government will face would be to convince the foreign bondholders to go along with their Lebanese partners and agree upon the two per cent reduction on the service charges.

 The responsibility for convincing Lebanon’s creditors to agree to this reduction in the interest rate will be shouldered by the Ministry of Finance and the Prime Minister. Obviously a great deal of preliminary work and studies must be undertaken if one wants to reach some satisfactory results. I would assume that our creditors would demand to see some detailed in-depth  studies and plans before agreeing to our demands.