The recent Goldman Sachs report on the Lebanese economy (“Mapping Out the Path to Lebanese Economic Recovery”, Farouk Soussa, 9/22/2021) betrays a lack of knowledge about the Lebanese economy and relies on a template model not applicable to the uniqueness of the Lebanese public financing architecture.
Worse, and very surprising for an institution of Goldman Sachs’ sophistication, the analysis relies on a quantification of subjective losses and not the objective liabilities in the system. The losses cannot be fairly quantified before a government plan for reform is set and concluded with the backing of the IMF program.
“Losses” are not an input to a liability management model or debt sustainability analysis: they are the result. Lebanon’s financial and economic crisis was triggered by the loss of market access by an unsustainable fiscal dynamic, itself the result of successive parliaments and governments unwilling to implement the reforms demanded by the domestic and international financial community.
Despite the irreversibility of the damage done as result of the mishandling of the crisis since the early stages, Lebanon’s recovery and subsequent high potential growth will depend on the skillful (and this time consensual) restructuring of the stock of debt of its consolidated public sector, according to priority schemes to be determined.
First in line are the legal obligations. Our Code of Money and Credit provides, like most countries in the world, a fiscal support rule, whereby the central government is legally mandated (under criminal penalty) to recapitalize the Central Bank which successive governments have been plundering for decades. In spite of being a desperately cash-strapped country, we have a wealthy public sector, and the government can fulfill its fiscal support obligations and ABL is willing to help the government to develop a new comprehensive economic and financial plan that shall help revive the real economy, put in place the public sector’s much needed reforms, and restructure the financial sector liabilities and losses, while preserving the depositors rights.
After its legal obligations are satisfied, the government will need to address its contractual obligations over which it will have the flexibility (and creditor cooperation) that are absent in the case of the former.
ABL is prepared to be part of the government reform and negotiate with good faith debt the restructuring, and make the necessary and affordable concessions in terms of principal haircut, coupon, maturity, to allow for the debt stock as a percentage of GDP to follow a monotonously decreasing path reflective of medium-term debt sustainability. It should be noted, in this respect, that the denominator (economic output) is just as important as the numerator (debt stock) in achieving the desired result. To that effect, ABL is prepared to contribute high-impact reform proposals which, combined with renewed lending to our private sector should ignite and maintain elevated economic growth in the medium term and attract investment beyond that pledged by the CEDRE conference.
Surely, given the magnitude of the crisis and its mismanagement to date, some of Lebanon’s banks may not be able to survive this once-in-a-century event, others may need to merge with competitors to achieve cost rationalizations consistent with a reduced asset portfolio but, contrary to the misguided Goldman Sachs conclusion, the vast majority of the Lebanese banking sector is solvent and stands ready to finance the economic recovery.
Salim Sfeir is President of Association of Banks in Lebanon and Chairman of Bank of Beirut.