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Lebanese crisis may foretell Nigeria’s fiscal fate 

...if needed reforms don’t happen

If there is one thing Nigeria can learn from the small matter of Lebanon’s economic crisis, it is that paying over the top to attract foreign portfolio investors could quickly backfire and prove damaging for the economy.

Economists have said 2020 is likely to register Lebanon’s first economic contraction in 20 years, with some saying the economy will contract by 2 percent.

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Others have predicted a long depression unseen since independence from France in 1943, or during the 1975-90 civil war.

Lebanese companies have laid off workers and business has grounded to a halt. A hard currency crunch has prompted banks to restrict access to dollars and the Lebanese pound trades a third weaker on the parallel market, driving up prices.

Lebanon’s capital controls have made the currency too strong to allow for cheap imports and that has resulted in a current account deficit.

Credit-rating agencies have downgraded the country’s sovereign rating and the ratings of its commercial banks on fears of default on public debt that has spun out of control. The economic crisis has triggered wide protests against the ruling class.

Lebanon now has to find a solution for a $50 billion economy that carries $80 billion of debt, the servicing of which consumes nearly 50 percent of annual budget, thanks to less than $15 billion in annual revenues.

“A lot of mistakes made in Lebanon are being made in Nigeria and the similarities are obvious,” an economist told BusinessDay.

Nigeria’s $400 billion GDP suggests it can cope with a debt of less than $50 billion.

But a paltry $10 billion in annual revenues, which the government is trying to increase by raising taxes, with debt serving costs gulping some 60 percent of government revenue, puts a strain on public finances.

Also, while most countries generate external reserves from exports and Foreign Direct Investment (FDI), Lebanon’s are dominated by the issuance of foreign-denominated government debt that attract very high interest rates in a bid to attract dollars.

In the last few years, the worsening geopolitics in the region has cut dollar inflows and that has seen Lebanon offer higher interest rates on the dollar debt to help attract other foreign investors to fill the gap.

But to pay the increasing interest bill, the Central Bank in Lebanon has eaten into reserves that have fallen to $20 billion from $35 billion in two years.

The 13 percent dollar return on Lebanese bonds is only affordable if the Central Bank can attract fresh dollar inflows, economists say. The high debt servicing cost has crippled public finances and limited the ability of government to invest in the productive sectors of the economy with growth hovering around 1-2 percent.

A similar scenario is at play in Nigeria where costly foreign exchange and petrol subsidies have eaten deep into public funds and leaves the government with little or no cash to invest in badly needed infrastructure.

That has showed in weak economic growth, which has remained below 2.5 percent since 2015, lower than population growth.

The Central Bank of Nigeria (CBN) has prioritised foreign portfolio inflows over Foreign Direct Investment and local investment, paying as much as 14 percent to foreigners holding its short term Open Market Operations (OMO) Bills.

Local investors from pension funds to money managers who were banned from participating in the high yielding OMO market last year complain of financial repression by the CBN. The move by the CBN means local investors are left with an option of piling cash into T-Bills, which at an average of 5 percent, yield below inflation (12%) and offer negative real returns.

Nigeria’s $38 billion external reserves as at January may be made up of close to $20 billion of hot money, which economists say helps explain why the Central Bank is fixated on dollar inflows from portfolio investors to keep things ticking, especially in the FX market.

The naira has been stable against the dollar for two years in Nigeria, but that has come at a steep cost to the Central Bank, which spent some $36.6 billion defending the naira in 2018 alone, according to a recent report on its website.

“The lesson for Nigeria in all these is that relying on hot money to prop up your books can backfire and have big consequences,” notes Egie Akpata, a director at Union Capital Markets.

“I’m not sure how Lebanon can have its standard of living with such low internal GDP,” Akpata says.

Lebanon may now need a $20-$25 billion bailout including International Monetary Fund (IMF) support to emerge from its financial crisis, according to former Minister of Economy Nasser Saidi.

Lebanon’s crisis has shattered confidence in its banking system and stoked concerns among investors that a default could loom for one of the world’s most indebted countries, which has a $1.2 billion eurobond due in March.



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