5/8/2013

Middle East Strategic Perspectives

Dear Sirs,

Your new post: “Oil & Gas Updates: weekly round up, May 6, 2013” was very instructive and well presented. I particularly appreciated your concern about the lack of sufficient information regarding the six Board Members of the Petroleum Administration.  It was also interesting to learn that an IMF delegation is enquiring about Lebanon’s ability to manage its prospective oil and gas resources, considering the country’s relatively poor performance in managing public funds during the past two decades.

These remarks struck me forcefully, as I had just published, the previous day, on my face book page “Inform before you Reform”, a study of the shocking snowballing growth of Lebanon’s public debt.

The study was accompanied by the following chart depicting the progression of the size of the Debt during the past two decades and its estimated growth until 2022.

Through accumulated unpaid compound interest charges, the Lebanese public debt that originated with the seven billion dollars cost of the post-civil war reconstruction projects, grew up exponentially during the first decade to reach, some twenty seven billion Dollars by the end of 2002.

Over the next ten years, and for the same reasons, the Debt more than doubled in size, attaining some sixty billion dollars by the end of 2012, as acknowledged by the Ministry of Finance.

It is my considered opinion that, unless some drastic reform measures are adopted as soon as possible, the Debt will keep growing faster and will treble in size to reach the sum of one hundred and seventy one billion dollars in 2022.

At that time, most of the expected revenue that will start flowing from our oil and gas development will be heavily mortgaged to repay this huge debt.

To avoid such a catastrophe, the following systemic reform measures are recommended:

1. Lebanon’s public debt currently stands at some sixty billion US dollars. Some 57% of this amount is owed to local creditors and the balance to foreign creditors, mostly in the form of Eurobonds. The Lebanese Authorities should earnestly negotiate with Lebanon’s local and foreign creditors to seek a reduction in the rate of interest that is currently charged. An examination of the public accounts and the Debt reports published by the Ministry of Finance reveals that the average rate of interest on the local and the foreign debt hovers around 7.5%. The Lebanese Authorities should negotiate with the country’s local and foreign creditors a reduction of somewhere around 2.5% on that rate to bring it to an internationally acceptable level. Negotiations to this effect should start immediately with the bond holders. The existence of our proven gas and oil reserves should encourage the latter to adopt a more lenient attitude in that respect. Should we succeed in our negotiations, we estimate that our financial deficit during that period will be reduced by US$ 38.2 billions.
2. A comprehensive reform plan should also be studied and adopted as soon as possible with a view to reducing waste within the State’s Administration, putting a stop to the dilapidation of public funds, and increasing the collection of tax revenue in some specific areas without overtaxing the lower classes of the population. Introducing all these reforms gradually will save the Treasury some US$38 billion over the next ten years. We have some detailed and precise recommendations to this effect that we wish to present to the Ministry of Finance, should he consent to meet with us.
3. On the other hand, implementing all these reforms will require some additional investment by the Authorities of twenty billion US dollars. The following estimates are the results of numerous past studies that lie in the archives of the Ministry of State for Administrative Reform (OMSAR).
1. Overhauling the infrastructure of the country that is in dire shape. This undertaking will cover the country’s water and energy, roads and public transport systems, as well as the protection of the environment which is dangerously threatened. Previous studies have revealed that the sum of fifteen billion US dollars will be needed to perform this work over the next ten years.
2. On the other hand, achieving a sustainable growth of the different economic sectors (Agriculture, Industry, Tourism, Telecoms), will require an estimated investment of some two billion US dollars
3. Implementing a just and effective social policy, including a full review of our social security system, to compensate for all the past neglects in this domain. This long awaited program is anticipated to cost around three billion US dollars.

All these reform, once they are effectively implemented, will serve to boost the country’s annual revenue, reduce waste and corruption, and improve the social climate in the country.

In the meantime, these assumptions have served us to chart the estimated progression of our public debt during the forthcoming decade. As a result, we anticipate that, by the time we start benefiting from the proceeds of our oil and gas resources, sometimes around 2022, our public debt would be standing at around 95 billion dollars instead of the horrendous amount of 171 billions that would befall us if no reforms were undertaken. Let us hope that the Authorities will agree to face reality and decide to take the appropriate measure. We believe that, should we adopt the right financial and development strategy, the IMF will be encouraged to assist us further in tackling the problem of our public debt.

George Sabat (ACMA)