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Pouring oil on Lebanon’s fire

The Paris conference to provide ‘aid’ to Lebanon sent a clear message: if you are on the verge of civil war, make sure you privatise and pay your foreign debt.

March 1, 2007
5 min read

With Lebanon slipping towards what looks increasingly like a civil war, its rulers met in Paris on 25 January 2007 to negotiate more loans to pay off part of the country’s enormous debt – and sell off its electricity, water, telephone and air transport sectors.

At the Paris III conference, hosted by Jacques Chirac to collect aid for Lebanon and support its governing coalition, prime minister Fuad Siniora secured more than $7.6 billion towards government expenditure, social programmes and the reconstruction of infrastructure destroyed by last summer’s Israeli attacks. Saudi Arabia, the US, the Arab Monetary Fund and the EU were among the leading donors.

A poisoned chalice

But there is no such thing as a free lunch, and the bill for this new ‘aid’ package might end up being paid by the Lebanese population, as a closer look at Lebanon’s finances reveals.

Lebanon was virtually debt-free until the end of the civil war in 1990. By 1998, however, after six years of Sunni rule under the Hariri government and ambitious borrow-and-build schemes that made the World Bank proud (and allegedly filled the pockets of the Hariri family), Lebanon found itself owing $17 billion. It was using 89 per cent of government revenues to service the interest.

Today, that figure has reached $41 billion and accounts for 188 per cent of GDP – the world’s second highest proportion of debtto- GDP (after Malawi). The current prime minister can hardly be absolved of this: he served as Lebanon’s finance minister from 1992 to 1998, and again from 2000 to 2004.

Under these circumstances, it is hard to see how more borrowing (most of the ‘donations’ are actually loans) can be a solution to anything. Studies have shown that Lebanon’s primary deficit, the difference between public expenditure and public revenue, is very low. This points to the fact that the debt service payments are the major cause of the country’s further indebtedness.

As usual, the ‘aid’ money not only comes with high interest rates but with a demand for ‘structural reform’. The IMF and other donors claim that public expenditure and constraints upon the market are the problem. So, on 2 January, a few weeks before the donor conference, the Lebanese government presented an ‘ambitious’ five-year plan ‘‘to impress the Paris III donors’’. The plan promises social and financial reforms, the privatisation of the telephone and electricity sectors, water and sewage systems, air transport and a 2 per cent VAT hike.

Creative accounting

According to the IMF, the revenues from privatisation ‘could bring down the debt ratio to under 150 per cent in 2011’. But the Fund acknowledges that this would still be a ‘dangerously high’ ratio, meaning that the current reforms will ‘not be enough to steer the country on a safe path toward debt sustainability’ – in other words, more ‘reforms’ will be necessary in future.

The IMF and international donors are urging Lebanon to borrow more money and sell its public services in order to pay off part of the country’s debt, but at the same time acknowledge that the current plans would not offer any significant economic improvement.

So, as the Lebanese trade unions have pointed out, the majority of the population will be worse off after the increase in indirect taxation and inevitable lay-offs in the privatised industries, and the state will lose the stable revenue provided by some of its best publicly-owned companies.

The government plan approved by the IMF is based on a series of flawed and irresponsible assumptions. These include the expectation of a return to economic growth of 4-5 per cent in 2007 on the back of a predicted tourist sector boom.

This is little more than wishful thinking and shows a dangerous lack of realism. The Paris conference was held only days after a general strike that saw the first military curfew since 1996, and violent clashes in the streets of Lebanon that resulted in several people dead.

Paving the way to civil war

It is unclear how a government as delegitimised as Siniora’s will be able to implement any of the promised reforms or social programmes. So far, the 29-page ‘reform’ proposal has only served to encourage more workers and trade unionists to join the opposition movement.

In early January 2007, Lebanon’s 200,000-strong Federation of Labour Unions (CGTL) called on its members and the general population to take to the streets.

In doing so, it declared that that ‘all successive governments since 1992 have contributed to the economic deterioration’ and that ‘those who were responsible for the economic plight in the country do not deserve to solve the problems of the Lebanese’.

On 23 January, just two days before the Paris Conference, the CGTL called a general strike that was backed by the rest of the opposition groups, whose supporters have been camping out in front of Siniora’s government offices in central Beirut since the beginning of December.

In this context, it looks like the IMF and donors’ recipes do nothing but pour oil on the fire of an already explosive Lebanon.

With friends like these, the Siniora government’s days are numbered.

Let’s just hope it does not take the whole country with it.

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