Lebanon plans $5 billion debt swap to cut servicing costs

Riad Salameh, central bank governer
Riad Salameh, central bank governer

Lebanon’s government plans to swap $5 billion of new foreign currency bonds for Lebanese pound debt with the central bank, in an operation its finance minister suggested would slash the cost of servicing its huge debt pile by $1.5 billion.

Ali Hassan Khalil, speaking in parliament on Thursday, said 218 billion pounds ($145 million) of the total savings to the treasury of 2.2 trillion pounds would accrue in the first year.

He said the move would also boost the central bank’s assets in foreign currency, which took a hit late last year on Prime Minister Saad al-Hariri’s sudden resignation, which he later retracted.

Parliament approved on Thursday the 2018 state budget, which projected a previously stated deficit of $4.8 billion, slightly reduced from 2017.

Economists said the swap, whose mechanism Khalil did not explain in detail, aimed to ease the burden of managing state debt estimated in 2017 at over 150 percent of GDP, one of the highest such ratios in the world.

“The fact they have to go down this route goes to show that policymakers are really struggling … to deal with the dire public finances,” said Jason Tuvey, Middle East Economist at Capital Economics.

Lebanon is due to hold a parliamentary election on May 6.

Khalil said that while the planned operation was not ideal and might affect markets, the state needed to secure $7.3 billion to cover maturing foreign currency payments due in 2018.

Part of this would come from revenues or through swapping bonds that had matured in recent years or were due to this year.

“There remains about $5 billion that the state still needs to issue as treasury bonds. We took the initiative to look for a framework to benefit from this in a way that strengthens the central bank assets,” he said.

“…We issue treasury bonds in foreign currency from which the central bank benefits, in exchange for treasury bonds for the needs of (the) Lebanese state.”


Capital Economics’ Tuvey questioned the sustainability of the type of operation detailed by Khalil, over which “concerns may also build about the Lebanese pound, and whether that would need to be devalued”.

“I don’t think devaluation is an immediate concern, but clearly there are significant risks, particularly if we saw a re-escalation of the geopolitical tensions that we saw late last year, and saw another sustained withdrawal of non-resident deposits from the banking system,” he said.

Central bank governor Riad Salameh was not considering a devaluation, English-language newspaper Daily Star quoted him as saying in an interview published on Thursday.

The Lebanese pound has been pegged against the dollar at the same level for 20 years.

Salameh said this month dollar reserves at the central bank had climbed in early 2018, recovering from the decline during the Hariri resignation crisis.

Nassib Ghobril, chief economist at Byblos Bank said that, should the swap go ahead, the issuance would be for special, non-market Eurobonds. “The primary objective is to reduce debt servicing costs,” he said.

The International Monetary Fund, in the concluding statement of a staff visit in February, called on Lebanon to immediately anchor its fiscal policy in a consolidation plan to stabilize debt and put it on a downward path.

Fiscal reform is a key demand of international donors due to convene an April 6 Paris conference where Lebanon hopes to secure billions of dollars of soft loans for a capital investment plan.

The finance minister has told Reuters the budgeted deficit for 2018 was equivalent to 8.4 percent of GDP. The budget foresees 23.85 trillion Lebanese pounds of spending and 18.69 trillion of revenues, Khalil also said earlier this month.