Skander Ounaies is a professor at the University of Carthage in Tunisia and a former Economic Advisor to the Kuwait Sovereign Fund (KIA).
Lebanon, “Switzerland of the Middle East”, and Tunisia, “cradle of the Arab Spring”, are both facing a serious multipolar, social, economic and political crisis, due to a failing political architecture, and to a productive system that has shown his limits. These beautiful denominations are a thing of the past. Reality has exposed their chronic structural failures. The situation of the two countries offers negative political and economic similarities, carrying serious social conflicts to come, threatening the very existence of the institutions, if no clear and visionary economic policy is applied, coupled with essential political reforms. This article will focus on the economic dimension of the crisis in these two countries.
The explosion of public debt, the decline in growth and the swelling of the public sector, determining economic causes, are coupled with specific internal factors, resulting in the current dramatic situation of the two countries.
Lebanon: explosion of public debt and disintegration of the State
In 1992, the Lebanese state debt stood at $ 3 billion. This debt will reach prohibitive amounts, with 18.6 billion in 1998, 32.5 billion in 2003, to peak at 90 billion dollars in March 2020, or more than 150% of the GDP. The first effect is the deterioration of the country's sovereign rating in January 2020 to level C (country at risk of default), with all the negative consequences for access to international financial markets. This default took place, since in March 2020, for the first time in its history, the Lebanese state declared itself in default, unable to cope with a reimbursement of 36 billion dollars. In addition, most of the public debt was not devoted to investment spending, but to current government spending,the salaries of a bloated public sector representing nearly 30% of the budget.
The year 2011 marked a break in Lebanon's growth process, with the influx of 1.5 million Syrian refugees, for a Lebanese population close to 4 million residents.
Skander Ounaies
In addition, there are two aspects of national economic and financial policy accentuating the crisis. On the one hand, the choice made by Lebanon, since the mid-1990s, to base the financing of its growth on indebtedness to the local banking system, and then to attract, through attractive interest rates, foreign capital and those of the diaspora to finance the debt. However, the latter has hardly served the community at all: no public transport, recurring electricity shortages ... According to several analyzes, it has instead financed the patronage networks of the parties in power.
The abnormally high structure of interest rates and the way in which the public debt is managed are causing it to explode to reach unsustainable amounts. This led to the so-called “Paris II” conference in November 2002, with the support of President Jacques Chirac. Lebanon obtains immediate aid of 2.6 billion dollars in support of its finances, and the initiation of the necessary reforms, such as the overhaul of the mode of financing growth. But the chaotic management of the country's public finances continues.
On the other hand, the importance of the “dollarization” of the country, ie the use of the dollar as an internal means of payment for certain transactions.
The average total dollar deposits approached 70% over the period 2002-2011.
These two elements, public debt and dollarization, ultimately lead to a loss of investor confidence in the refinancing of the debt, and consequently in the Lebanese pound.
Its fixed peg against the dollar (1 dollar = 1507 pounds), determined by the Banque du Liban since 1992, quickly becomes untenable, in fact reinforcing the weight of the black market for currencies in financial transactions.
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The year 2011 marked a break in Lebanon's growth process, with the influx of 1.5 million Syrian refugees, for a Lebanese population close to 4 million residents. All this leads to a drastic drop in the country's growth, which fell from 8% in 2010 to 0.9% in 2011, with a very low average of 1.7% over the period 2012-2018. The 2019 revolution points to an almost general rejection of the Lebanese political class, because of its corruption and its inability to solve the country's economic problems.
With the global health crisis of 2020, the inconsistencies in the country's economic and financial policy are growing. According to the World Bank, the GDP will contract in 2020 by nearly -20%, and it is expected to -10% in 2021. The immediate impact of the 2020 decline is felt on employment: the unemployment rate peaks 40%, particularly among 15-24 year olds; inflation reaches 145%; and the pound depreciates by nearly 84%. As a result, 55% of the population is below the poverty line, with staple food prices doubling (meat and bread), and 77% of the population lacks food (UNICEF). The black currency market alone sums up this negative dynamic, since in October 2021, the dollar was worth 21,000 pounds, against 9,000 pounds a year earlier.
The Mikati government, formed in September, must engage on several economic and political fronts, in order to benefit from the aid (grants and loans) granted by the two meetings in Paris: the “Conférence Cèdre” (2018), which promised a conditioned envelope of $ 11 billion; and the “International Conference in Support of the People of Lebanon” (2021), with immediately $ 357 million in humanitarian aid, and $ 370 million in financial aid, while specifying that “
this aid cannot be a lasting solution to the difficulties facing Lebanon
”.
A future agreement between the IMF and the Lebanese government would involve two major elements, on the one hand access to the international financial market with the guarantee of the IMF, and on the other hand, a strong signal for the takeover by the State Lebanese from its institutions.
Skander Ounaies
At the internal level, the commitment will target essential reforms, such as the gradual lifting of subsidies, with the establishment of a safety net for the most fragile households, and the reform of the banking sector, which must become a major player in the financing of the real economy. Externally, it will have to bring the negotiations with the IMF to a successful conclusion, which will certainly impose a minimum acceptable level of transparency in the management of the country's public finances. A future agreement between the IMF and the Lebanese government would involve two major elements, on the one hand access to the international financial market with the guarantee of the IMF, and on the other hand, a strong signal for the takeover by the State Lebanese institution, knowing that the crisis it is going through is a crisis of disintegration ofState before the communities. The continuation, or not, of Judge Bitar's investigation into the explosion of the port of Beirut, as well as the outcome of the legislative elections of 2022, could mark a turning point in the affirmation of the state in Lebanon.
Tunisia: a fatal economic policy error
The economic policy applied by the government resulting from the legislative elections of October 2011 was based, from the beginning of 2012, on a completely false diagnosis of the country's economic situation, and this despite multiple warnings of the worsening of the economy. public debt and trade deficit. Indeed, the first measures taken to revive purchasing power (increase in wages) indicated the choice of a stimulus through consumption, and therefore a diagnosis based on a demand shock. However, the reverse was true: the Tunisian economy was suffering a supply shock, since companies were affected in their activities by social movements. It was therefore necessary to act in the direction of production aid (cost subsidy,temporary suspension of bank debt payments, as well as social contributions) in order to maintain the internal and above all external competitiveness of these firms, and thus help maintain employment as much as possible.
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The consequence of this serious error was a significant widening of the trade deficit which went, according to the World Bank, from -9.44% of GDP in 2012, to -9.52% in 2013, to reach a peak in 2014 with - 10.98% of GDP. Thus, wage increases have been oriented mainly towards imported products, and towards the informal sector (parallel trade), which reaches 30% of GDP. Two other elements then aggravate this situation. On the one hand, the process of "compensation" for the victims of the old regime, estimated by the Ministry of Finance at 1 billion euros, taken directly in 2012 from the state budget. On the other hand, the hiring in the public service of 200,000 people (including 92,000 in 2012), without any training, and for the most part without competition, but members of the parties in power.
By way of comparison, Morocco with an estimated population of nearly 37 million inhabitants in 2020, has nearly one million civil servants, and Tunisia, with nearly 12 million inhabitants, has 700,000. The result is an explosion in public debt from 2013, which rose from 40% of GDP in 2010, to more than 47% in 2013, to currently reach 100% of GDP. The 2012 economic policy error had negative repercussions on the productive activity of firms, with a continuous decline in productive investment, a source of wealth creation, which records, according to the National Statistics Institute (INS ), a decrease of -12.5% over the period 2010-2019. The immediate impact of this fall will be visible on growth: according to the IMF, Tunisia is getting poorer, with a GDP oforder of 45 billion current dollars in 2008, which drops to 35 billion in 2020. The health crisis lays bare the chronic structural distortions of the country, and accentuates the decline in GDP, which becomes negative -8.8%, with a forecast low for the year 2021, constantly revised downwards, around 2%.
In Tunisia, the unemployment rate is close to 17% of the active population for 2020, with a sharp increase in the 15-24 year old category, where it reaches 40.8%, resulting in a very worrying poverty rate, estimated by the World Bank at 20% by the end of 2020.
Skander Ounaies
The result is an unemployment rate close to 17% of the active population for 2020, with a sharp increase in the 15-24 year old category, where it reaches 40.8%, hence a very worrying poverty rate, estimated by the World Bank at 20% by the end of 2020. This negative economic dynamic, coupled with a paralyzing political system, is sanctioned continuously by the rating agencies, since in ten years (2011-2021), Tunisia has been degraded 9 times, to find itself, recently, in the category of countries "at risk of default on sovereign debt", like Lebanon, with level C.
Tunisia faces three major questions:
How to resolve the political crisis which paralyzes the institutions of the country, by exerting a major uncertainty on the economic prospects of the country?
How to complete the 2021 budget which requires around 15 billion dinars, (or nearly 4.6 billion euros), with an economy almost at a standstill?
How to deal with an untenable situation of "wall of debt", both public and external, each equivalent to 100% of GDP, with the major constraint of recent sovereign degradation?
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The resolution of each situation implies taking into account the opinion of the country's foreign partners.
For the political part, the European Parliament has just voted on October 21 a resolution which insists on "
the return to normality in Tunisia.
". For the economic part, at least for the country's indebtedness, discussions with the IMF should lead to a plan of compulsory reforms, close to those requested for Lebanon, such as the gradual lifting of subsidies, the privatization of certain public enterprises too. heavily indebted, with a view to obtaining financial assistance and a possible guarantee as to an exit on the international financial market, currently almost impossible, with a spread (level of risk) equal to 15%, while in comparison, Morocco is at a level below 2%.
Finally, it seems to us that a real tax reform, with broadening of the base (there are currently 400,000 flat-rate households) still postponed, is necessary, both to increase the financial resources of the State, and to affirm its ability to apply tax fairness for all, a sign of a State guaranteeing the business climate.