 Sami Geadah The ongoing financial crisis in Lebanon was precipitated by unsustainable borrowing by the government. Government debt reached 172% of GDP in 2019, an unusually high level globally, including relative to countries facing debt difficulties. This level of debt would not have been possible without the support of the Banque du Liban (BdL) and the participation of domestic banks. Central bank operations aimed at securing a specific amount of inflows from abroad—including nonresident deposits—to help finance the government deficit and maintain a fixed exchange rate. A root cause of the crisis was a lack of governance in economic and financial policy making. Endemic corruption in the government—including at the Ministry of Finance—meant that revenues were considerably below potential and spending far from efficient. The availability of financing meant that there was little pressure on the government to implement measures to address its budget deficits.
There were also governance issues at the central bank, which deviated from its prime mandate of preserving price and financial stability. BdL financing of the government necessitated significantly higher interest rates to attract funds to Lebanon, and banking system stability—and the safety of deposits—were put at risk because of banks' large exposure to the government and central bank. These risks were identified before the crisis, but little was done to address them. One could argue that there was collusion between the government, the central bank, and bankers, raising issues of state capture by political and invested elites. So what can be done to insulate economic policy making from these vested interests? Many countries have legally binding rules that limit discretion in fiscal policy. The rules apply limits on budgetary aggregates, namely on the expenditures, revenues, budget balance, and/or debt. According to an IMF data set, there were 106 countries with such rules from 1985 to 2021.[1] The rules set boundaries for fiscal policy that cannot be frequently changed, which give confidence in the soundness of government finances. These rules do not wipe out corruption in governments, but they limit the resources that could be potentially misused. They also give long-term credibility to government finances that extend beyond the period of any possible program with the IMF. There is also scope to increase governance at the central bank. There is a need for the BdL to focus on its core mandate of price and financial stability, abstain from quasi-fiscal operations, and to insulate it from political pressure. Central bank independence should be supported by a robust framework for accountability and by increased transparency. On this front, consideration may be given to the recommendations of the IMF Central Bank Transparency Code. [2] A fiscal rule in Lebanon would go a long way in strengthening credibility in macroeconomic policies and limiting the detrimental effects of weak governance. Nevertheless, there would still be a need for stronger governance and transparency in government and central bank operations. These initiatives would be important for restoring confidence in Lebanon’s macroeconomic policies, which are essential for putting Lebanon’s economy on a path of sustained and inclusive growth. [1] https://www.imf.org/external/datamapper/FiscalRules/map/map.htm [2] https://www.imf.org/external/datamapper/CBT/ About the Author Sami Geadah is an Associate Fellow at IFI. Comments are closed.
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