Lebanon should learn the lessons of the past to protect the future
Lebanese demonstrators raise national flags in front of a makeshit barricade set up on a main road in the area of Jal el-Dib, north of the capital Beirut on October 21, 2019.In a solemn press conference over the weekend, the relatively new Lebanese Prime Minister Hassan Diab delivered a speech that will go down in history.
Conceding that the country was paying for mistakes made in the past, Diab announced to the world that Lebanon would not be rendering whole the bond payment due on Monday and that the country would kickstart a process of debt restructuring with its creditors to re-profile the roughly $32 billion in outstanding eurobonds: The first ever default for the tiny Middle Eastern country off the coast of the Mediterranean.
People not following the story might assume that Lebanon, with one of the highest debt to GDP ratios in the world, had become the first country to fall victim to a slowdown in global growth, one that only looks like it's going to get exacerbated with the onset of the new coronavirus. That is not the case. The situation Lebanon found itself in economically is one that has been almost entirely homegrown, due to unsustainable imbalances and twin deficits: The country has been running a negative balance of payment for the better part of the last 10 years while simultaneously running ballooning budget deficits : Debt servicing alone accounts for about half of the spending while an inefficient and costly electricity sector consumes another third. .
Furthermore, the central bank has been leaning heavily on the local banking system. Customers' dollar deposits have been primarily placed at the central bank, reimbursed with above market interest rates in return. The interest alone has made many wealthy depositors a lot of money.
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