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Saidi : State must borrow $9 billion next year former minister warns that money lent will have higher interest rate (Daily Star)

Saidi : State must borrow $9 billion next year former minister warns that money lent will have higher interest rate ‘If you want to borrow more you will have to pay more’

The Lebanese government will have to borrow next year at least $9 billion at interest rates that will be two to three percent higher than this year as the effects of last year’s “Paris II” conference of donor countries erode completely, according to former Economy, Trade and Industry Minister Nasser Saidi.

“Interest rates in foreign currency and Lebanese pound will rise by two to three percent next year for several reasons,” said Saidi, also a former vice-governor of the Central Bank. “The forecast for government financing requirements in 2004 is between $8 to $9 billion for a forecast deficit of 8.8 percent of gross domestic product, under optimistic assumptions of growth and the start of privatization and reforms.”

The government, which forecast a 25 percent deficit of spending this year, has said it will miss its target, one of the reform pledges it made at Paris II in return for $4.4 billion in soft loans from financial donors. For 2004, the government has forecast a budget deficit of 32 percent of spending, 1.2 percent higher than the initial forecast.

The government has already used up to $10 billion to reschedule its more than $30 billion public debt this year after using most of the Paris II cash to lower the maturity and cost of its debt. “The government has missed a golden opportunity to reform public debt management,” said Saidi, voicing doubt that the cost of servicing the debt had been lowered on a permanent and sustainable basis with the Paris II soft loans.

He said the government will find it harder next year to sell Lebanese pound or foreign currency debt, unlike the easy ride the Central Bank had this year in selling nearly $4 billion in Certificates of Deposits (CDs) to banks at rates of 12 percent. “If you want to borrow more you will have to pay more,” said Saidi, forecasting debt servicing costs to rise next year and the fiscal deficit to widen as a result.

Saidi said international interest rates are expected to increase next year due to the recovery in the US and global economy and improved performance in Euro economies. “As that happens, the rates that the Lebanese government will have to pay to tap either the domestic or foreign financial markets will go up by as much, leading to higher than forecast budget deficits during 2004 and beyond,” said Saidi.

The Lebanese pound interest rates are also expected to increase next year due to domestic uncertainty related to presidential and municipal elections. “It is highly unlikely that decisions relating to fiscal reform, privatization or securitization will be taken in an election year,” Saidi said. “On the contrary, the pressure will be for increased spending. As a result, the budget deficit will be higher than projected and higher borrowing requirements will drive up Lebanese pound and foreign currency interest rates.”

Saidi said the government will likely put pressure on the Central Bank to buy Treasury bills next year to help contain the cost of borrowing, which is likely to increase as local banks demand higher interest rates to compensate for the higher risk of government debt. “The first thing the government will try to look for is cheap financing from the Central Bank,” said Saidi. “They will force the Central Bank to buy Treasury bills at below market rates of 4-5 percent interest rates.”

The Central Bank bought government Treasury bills in 2002 before the Paris II conference when most local banks refused to carry government debt as risks of default grew higher.

After the government secured the $4.4 billion in soft loans in Paris II, the Central Bank decided to convert and write down some $3.6 billion of government debt it held in its portfolio.

Saidi said the Central Bank has already used the exceptional gold re-evaluation gains on its 9.2 million ounces of gold to write off government debt. The gold, which was bought in the 1960s and 1970s, was revalued in the Central Bank’s books to account for the higher market value of gold.

“The Central Bank allowed the government to benefit from the re-evaluation gains of about $1.8 billion as part of the Paris II package of financial measures,” said Saidi. “This was a once and for all action, that allowed for a reduction in debt service costs ­ including for 2003 ­ and the posting of better reported fiscal results.”

The government resumed this month issuing Treasury bills on a bi-weekly basis after a nine-month break at interest rates that are lower than the pre-Paris II conference, which led interest rates on Treasury bills to drop to two-year lows.

Following Paris II, the Central Bank sold long term CDs to local banks to help soak up excess liquidity in local currency as customers switched deposits from low-yielding foreign currency to higher-yielding Lebanese pounds.

Saidi said the government would have to sell not just Lebanese pound Treasury bills, but also foreign-currency Eurobonds next year, particularly as the ratio of foreign currency debt has increased since Paris II.

The government at the end of last year replaced costly Lebanese pound debt with cheaper foreign currency debt to lower debt servicing costs with mainly foreign currency soft loans secured at the donor meeting.

He said the mix of domestic and foreign currency debt the government will sell next year would depend on continuing de-dollarization, the movement out of dollars and into Lebanese pounds. “In 2003, because of Paris II and the attraction of high interest rates on Lebanese pound deposits, we had de-dollarization. If you wanted to invest in Lebanese pounds it was easier, especially as the Central Bank issued high yielding CDs,” said Saidi.

“For 2004, I don’t think you will see a continuation of de-dollarization. It will be more difficult to find funding in Lebanese pounds and as interest rates on the dollar rise, it will attract people to move their deposits into dollar.”

He said the government has to create an independent public debt management unit to manage and set public debt policy, decide on maturity and currency composition of debt. “The overriding economic policy issue today is the sustainability of the public debt, an issue that was not addressed in the marathon Cabinet sessions that discussed the 2004 budget draft,” he said.

“At the moment, there is a mixing between monetary and exchange rate policy and the management of the public debt. There is a policy conflict between the requirements of exchange rate policy, namely high interest rates on the Lebanese pound, and those of fiscal policy and public debt management, which require low interest rates,” said Saidi.

Beirut 17-11-2003
Dania Saadi
The Daily Star



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