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Treasury struggles to fund state

Minister Ali Hasan Khalil, right, meets Central Bank Governor Riad Salameh in Beirut, Tuesday, May 20, 2014. (The Daily Star/Dalati Nohra, HO)

BEIRUT: Lebanon’s Finance Ministry has been struggling to raise enough money to pay the state’s bills.

From January through July, the ministry brought in just LL9.4 trillion ($6.2 billion) through its weekly auctions of Lebanese pound-denominated debt - falling well short of previous years.

Debt auctions - essentially writing IOUs for cold, hard cash - are a primary means of funding the state, supplementing taxes, telecoms fees and other revenues.

This year’s LL9.4 trillion is a sudden drop from the LL16.3 trillion brought in over the same period in 2018. It is the lowest amount in at least five years, despite mounting costs and stagnant revenues.

This week, a local daily reported that the state owed $3.9 billion in arrears - $1.2 billion of which accrued just this year. That money, owed to the National Social Security Fund, hospitals and contractors, comes on top of at least another $1.15 billion due to Banque du Liban after the country’s central bank covered the state’s repayment of dollar-denominated debt in April and May.

The meager amount of money brought in from auctions this year is due to yields that are far lower than what BDL offers, multiple sources told The Daily Star.

Investors earn an average of just 6.3 percent on pound-denominated debt, according to the Finance Ministry’s first quarter report, its latest.

Shorter-term notes yield less money - 5.3 percent on three-month bills - while longer-term ones yield more: up to 10.5 percent on 15-year bonds.

BDL has reportedly been offering much higher returns on pounds - up to 13.5 percent or higher in some cases - raising the market rate for interest on pounds.

Despite using the term “auction” for its weekly sale of debt, the Finance Ministry does not actually allow bidders to make different offers: The yields are set, take them or leave them.

Banks have revolted. Once the primary buyer of pound-denominated debt, the country’s commercial banks have all but put away their wallets. In the first quarter of 2019, they took just 1.3 percent of the bills and bonds the Finance Ministry sold. “The banks are not subscribing,” said Marwan Mikhael, the head of economic and equity research at BlomInvest Bank. “The ministry needs to raise rates to at least 12.5, 13 percent, depending on the maturity.”

“Today, it makes more sense for banks to go to the central bank,” said Nassib Ghobril, the head of economic research at Byblos Bank.

“If the Finance Ministry offers a higher rate, banks will reconsider” where they put their pounds, Ghobril said.

A slight rate rise in December 2018 led to two sold-out auctions, on Dec. 13 and 20, according to a source familiar with the matter who spoke on condition of anonymity due to the sensitivity of the issue. But auctions quickly reverted to the new status quo.

“It wasn’t enough,” Mikhael said.

Raising yields - essentially promising to pay investors more in the future - would mean exacerbating an already suffocating fiscal deficit. Last year, the state’s deficit was LL9.4 trillion, or 11.1 percent of GDP. Debt auctions cover new deficits plus bills coming due on previous debt.

The failure to offer market rates appears to be a deliberate decision.

“There may be a decision by the Finance Ministry to delay some payments, which also means they are postponing their need to issue Lebanese-pound paper,” said Raed Khoury, the economy minister in the previous government. “But there is no decision by the government for that.”

The Finance Ministry did not respond to requests for comment.

“Once the Treasury really needs more money, they will need to increase interest rates,” said Khoury, who is also a banker. “No one will pay at lower interest rates.”

The underlying cause for needing higher rates is BDL, which is scrambling to keep Lebanon’s financial system from collapse.

For three years, the central bank has been conducting “financial engineering” designed primarily to defend the bank’s reserves of foreign currency and, ultimately, the pound’s peg to the dollar.

BDL has used high returns on pounds as one of the incentives to draw in dollars.

In addition to drawing funds away from the state, the central bank’s policies have had a secondary effect: draining the amount of pounds banks can use.

Khoury, Ghobril and Mikhael all noted that BDL has sucked pound liquidity out of the market.

“The banks don’t have enough liquidity in pounds,” Mikhael said.

Another banking source who spoke on condition of anonimity said that BDL’s design did not involve absorbing pounds, but rather providing the incentive to attract dollars through bank deposits with the central bank, and that it had been successful in this effort.

But if liquidity in pounds is lacking, one potential implication is that even if the Finance Ministry ups yields, it still may not be able to cover state expenses - unless policy is coordinated with BDL.

As pounds stopped flowing from the banks to the Finance Ministry, BDL initially plugged the gap in state finances, according to the first anonymous source.

But in late 2018 the central bank decided to only cover part of that gap: only enough for the state to continue paying salaries, Electricite du Liban and debt payments.

Since then, the Finance Ministry has struggled to pay its bills. On March 22, the ministry ordered all public institutions to stop all spending other than personnel costs.

Along with halting many other payments, the ministry has managed to bring the cash deficit for the first five months of 2019 down to LL3.6 trillion, nearly 20 percent less than the cash deficit for the same period of 2018.

The effect appears to be de facto austerity, brought on not by politicians or a new budget, but by policymakers at the Finance Ministry and BDL.

However, unlike typical austerity programs, there appears to be no plan to fix the underlying problems.

And unlike real austerity, the government is only putting off the pain of payments in exchange for another pain inflicted by not paying the bills.

 
A version of this article appeared in the print edition of The Daily Star on August 09, 2019, on page 4.

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