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Tuesday 19th May 2020
Macro-Finance: What Is It? & How Does It Work?

 

Macro-finance is a funding policy that aims to benefit the economy or sections of it. It’s operations and policies target broad areas of the economy. Typically, governments, corporates, global banks and established private lenders provide the large funding needed to implement this type of financing. Macro-finance entails the implementation of certain policies – usually set by governments – with the intention of strengthening the economy structurally through:

  • developing plans for subsidies
  • engaging in multi-year expansion strategies

 

These policies and strategies should ideally lead to:

Macro-Economic Instability in Lebanon – Reviewing the Causes:

There are countless factors that have jointly led to this instability. Below are the most prominent ones:

  1. Lebanon has one of the highest government debt-to-GDP ratios in the world – 150% with public debt amounting to $86 billion
  2. A growing foreign-currency shortage in Lebanon’s highly import-dependent economy which diminishes the possibility of ensuring currency stability for the Central Bank
  3. The former shortage and increased need for foreign currency for daily business transactions drastically devaluated the currency; the current exchange rate is 4,000 pound to the US dollar while the official rate was LBP1,507.5.

The above factors led to hyperinflation, which, in turn, led the government to implement capital control. This had detrimental effects on the industrial sector, the already struggling agricultural sector, and the under-performing tourism sector.

Unprecedented levels of corruption also pushed Lebanon further down the rabbit hole. In light of lower nominal growth, the lockdowns caused by the coronavirus outbreak, and threats to national security, Lebanon’s debt burden is expected to continue rising with a fiscal deficit exceeding 12% by end of 2020.

Looking Ahead – The Required Actions:

  1. Immediate negotiations to restructure the government debt and reduce the expenses related to its services.
  2. Attraction of international investors based on investment schemes such as (PPP, BOT, BOO, etc.) or financing basis (EPC+F and G to G) which would revive the economy through fresh funds.
  3. Immediate support from international donors, such as IMF and WB
  4. Other actions such as employing anti-corruption policies, corporate governance to attract investments, GREs restructuring, etc.

The Effects of Applying Macro-Financing in Lebanon:

In case appropriate measures were taken to ensure that macro-financing was properly applied in Lebanon, this type of financing can benefit the economy by:

  • Creating new job opportunities
  • Boosting existing industries that were depleted during the war
  • Promoting successful partnerships between the public and the private sector (PPP- BOOT- BOT- etc.)
  • Restructuring the economy as a whole
  • Reform the banking sector

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