Pierre El Sokhn

Rising Income Inequality in Lebanon

While Lebanon’s civil war came to an end way back in the 1990s, the situation doesn’t seem to have improved – at least on the financial front. Rapidly expanding public debt has led to an ever-increasing socio-economic disparity in the country and this grave issue now threatens the country’s stability.

Only when you look at this disparity from the quantitative perspective do you realize how worrisome the situation in Lebanon is. As per the latest income tax figures, 20% of all deposits in Lebanon were concentrated in merely 1600 accounts – which translates to only 0.1% of the country’s population.

What led to this situation? How did the borrowing spree in 1990 lead to this lopsided socio-economic landscape in Lebanon? The terms of lending are one cause, as these terms imposed a high debt-servicing burden on the state. This left the state with barely any money to spend on equitable redistributive measures. The Lebanese government got caught into a debt vortex, sinking deeper into indebtedness. The second cause would be the heavy reliance on public borrowing on a narrow domestic lending base.

Rising Income Inequality in Lebanon

Added to this, we had three important factors which had a regressive effect on income distribution:

  1. Right after the end of the civil war, public debt shot up by 2120%, while the overall GDP grew almost fourfold.
  2. The post-war borrowing drew exclusively on the domestic market in the form of government bonds. These bonds were issued in the Lebanese pound.
  3. An exorbitantly high rate of interest on this debt denominated in pounds.
    Neither of these factors alone was responsible for the ever-widening socio-economic gap in Lebanon. However, the combined effects are what resulted in this situation today. Through it all, one sector kept thriving – the commercial banking sector. The accumulation of wealth was restricted to a few banks only, which also means that there was barely any wealth left to offer to the other sectors.
Rising Income Inequality in Lebanon
  • Cause of the Disparity – High Yielding Government Bonds
    The bonds issued in the 1990s by the Lebanese government were traded at a substantial discount, with the yields reaching up to 36%. This rate of interest was way higher than what banks were offering. High-interest government bonds gave banks a huge return. This return largely surpassed the bank’s relatively modest obligations to depositors on savings accounts. Banks got sufficient returns from the government bonds and did not feel the need to look for opportunities in the private sector at all. This resulted in the marginalization of the private credit market, which saw no growth.
  • Banks were incentivized to invest higher amounts in the high-yielding government bonds, and their financial statements too reflected the same statistics. The ever-increasing gap between the rates of interest offered to the banks by the government and the rate of interest offered to the depositors by the bank further led to more investment by banks in government bonds. From the span 1993 to 2000, the government bonds constituted an average of 27% of the total assets in the bank’s consolidated balance sheet.
  • This money-minting scheme was not limited to banks – anyone with an ample amount of spare money could afford to indulge in this profit-making scheme. Yet, in the post-war scenario, the available savings of the masses were modest. And at these tough times, depositors preferred investing their money where it could be liquidated faster – and the savings accounts of banks offered them this benefit.
  • The banks, on the other hand, took up the opportunity of consolidating funds from these depositors and investing them into the less-liquid government bonds. This explains why during the 1990s, banks held almost two-thirds of the public debt. The remaining one-third was with Lebanon’s central bank and other financial institutions.
    The bank’s exceptional performance was, however, not mirrored by other sectors in the economy. The total profit of Lebanon’s top fourteen banks accounted for around 4.5% of the total GDP – this figure is way higher than those shown by developed countries such as the UK and the US, each of which stands at 1% and 0.9%, respectively.
  • What Could Have Been Done With the Public Funds?
    The Lebanese government could have optimally used the public debt to facilitate the reduction of inequality. The only way this could happen was if enough emphasis was laid on equitable redistribution – amongst the masses, private players as well as economic sectors that were neglected when banks flourished.
  • What Actually Happened?
    At the beginning of 1998, the annual debt-servicing amount spent by the Lebanese government in pounds exceeded the government’s deficit budget. The aftermath of the excessive borrowing was incomprehensible for the government, as it ended up incurring more debt annually. It did not have enough funds to cover the interest payment obligations. To finance the debt servicing, the government had to bank on other government receipts, namely tax revenues. Entire Lebanon was now footing these charges.
  • Inequitable Sharing of the Burden
    The tax base of Lebanon is broad – and various constituents bear the burden inequitably. The Lebanese taxation system is based on indirect taxes, as these taxes are easier to impose as compared to personal taxes (direct tax). This flat tax rate applies across all categories, irrespective of the sales volume or characteristic of the consumer.
Cartoon scale between businessman and tax for design.
  • An Alternative Approach That Could Have Been Followed
    How could the Lebanese government raise funds for post-war reconstruction and rehabilitation in a different way? Firstly, the rate of interest they offered could be nominal – not some exorbitant number that the government couldn’t afford to repay. Even though the high-interest bonds were extremely favorable to lenders, the basic market fundamentals were completely given a blindside. If the same banks had stepped up and offered loans at much lower rates, the government would have been in control of the whole situation
  • Further, the tax system of Lebanon could have been revamped – especially when the regressive taxation system chronically failed to redress income disparities. The government could have mitigated the regressive effects of every fiscal development well in time, but it chose not to.
  • Summing Up
    The Lebanese cabinet met twenty times before it could finally agree and release a budget for the year 2019. The main aim was to reduce the budget deficit, but the burden of the previous excessive borrowing still haunts Lebanon.
    One of the proposed ideas was that banks offer low or no-interest loans to the government – but this was immediately refused by banking executives as well as representatives of the Central Bank. While this restructuring of debt could have helped the government meet its deficit-to-GDP target, the fact that the ruling class has refused to do so has led to further discontentment amongst the masses.