Lebanon’s Fiscal Crisis and Economic Reconstruction after War: the case of a bridge too far?

Since the onset of the Civil War in 1975 Lebanon has experienced burgeoning fiscal deficits and an unsustainable public debt overhang. Much of this arose from the loss of revenues during the period of the Civil War 1975-90 and attempts to maintain basic public expenditure, while from 1990-2006 it reflected post Taif rebuilding and reconstruction of key infrastructure with limited revenue capacity. Considerable progress from the 1990s has been achieved in rebuilding the shattered economy from both public and private international and domestic sources, but its legacy is a huge public debt and a servicing requirement that currently absorbs alone almost 30 per cent of total government revenue and is the highest in the world on a per capita basis. While the need to reduce this debt to a sustainable level would be daunting enough in itself, Lebanon’s fiscal predicament was further compounded by the outbreak of war with Israel during July-August 2006. The consequence of this 34 day conflagration was the devastation of residential property, vital infrastructure, agricultural production, industrial production, exports, environmental damage, the collapse of tourism and a further erosion of the influence and power of the central government. Estimates of the direct and indirect costs for Lebanon of this relatively brief but devastating war conservatively vary from US$10-15 billion. The implications of such reconstruction and rebuilding costs for the budget and public debt are potentially calamitous for Lebanon. A key question is whether Lebanon can tackle this enormous task in insolation. This paper explores the background to the fiscal crisis, identifies from available literature the extent, nature and cost of the war damage, analyses the options available to the authorities in rebuilding the economy and highlights key policy issues and measures that will be required if a sustainable economic recovery is to be achieved. Despite its demonstrated and remarkable resilience to past trauma the paper concludes that the fiscal crisis makes it impossible for Lebanon to tackle the reconstruction and rebuilding task on its own and particularly in the wake of the events of summer 2006. The country will require substantial and ongoing financial support from international lenders and donors. The success of these efforts in the case of Lebanon is of particular interest as it could well be a microcosm of possible future outcomes for the region more generally.