“The incoming Aoun administration in 2016, instead of reducing public expenditures, actually continued to increase them,” Ray Debbane, co-founder and CEO of the Invus Group, NY, said in an interview he held with senior economists.
Debbane added, “They increased the public servants’ salaries and indirectly decimated the financial health of the private school system in Lebanon because the private school teachers’ payscale is by law linked to the public servants’ salaries. And private schools in Lebanon, as we know, educate two thirds of our students.”
“The system finally collapsed at the end of 2019 with Lebanon going into default with one of the largest debts to GDP ratios in the world. No longer able to borrow, the Lebanese government continued to spend this time using printed liras that the Central Bank was printing, create hyperinflation and a devaluation of the Lebanese pound to dollar exchange rate.”
With regard to capital controls, Debbane said “the consensus is that all reforms should be done together and capital controls should be in place to prevent the money from leaving Lebanon and putting further pressure on the exchange rate.”
“However, capital controls would be a major mistake, especially in the case of Lebanon because all of the politically connected money has left Lebanon and putting capital controls today would be like closing the barn doors after the horses have fled,” Debbane warned.
“Capital controls would also deter expatriates like us from taking their money back to Lebanon,” Debbane noted, adding “that’s particularly important because Lebanon depends on expatriates as the main source of hard currency.”
When asked about the economic situation in Lebanon, Steve Hanke, professor of Applied Economics at the Johns Hopkins University said “Bulgaria happens to be the closest thing to Lebanon that we can look at as kind of a case study so it’s very important for people interested in the crisis in Lebanon to get a hand on exactly what happened in Bulgaria because it’s almost identical.”
“Bulgaria defaulted two times on its international debt between 1990 and 1997 … and they even defaulted on their domestic debt,” Hanke said, noting that the situation was the same in Lebanon and everything was chaotic and disorganized.
Asked about the “tremendous” gold reserves Lebanon has in the United States, Hanke said they could be used, noting that they exceed slightly the amount of currency and circulation.
Professor Hanke concluded that there are no preconditions for putting in a currency board, contrary to reports by “some economists who tend to confuse things by saying the budget has to be balanced, the inflation has to be low and everything should be in a state of bliss almost” before a currency board is in place.