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August 24, 2016 | English | Bassam Fattouh and Lavan Mahadeva
Managing Oil and Gas Revenues in Lebanon

This paper highlights some key features associated with Lebanon that may directly affect the choices its government makes regarding the best management of revenues from its potential oil and gas wealth. Specifically, it identifies the following features of Lebanon’s economic and institutional environment: A high level of sovereign debt and large interest payments that crowd out priority spending and capital expenditure, a banking system whose stability hinges on the government’s ability to service its debt, a persistent current account deficit whose financing relies on continued flows of deposits and remittances, an over-valued exchange rate, poor infrastructure, and a weak governance structure and public investment system that are in need of serious reform. Given these macroeconomic and institutional features, this paper argues that rather than aiming to establish a large saving and/or liquidity fund, it is more appropriate for Lebanon, at least initially, to use potential revenues to pay off its large public debt, beginning with the most risky liabilities, namely foreign currency external debt. In the very optimistic scenario that debt is significantly reduced and there are ample natural resource revenues left over, it is worth considering direct cash transfers given the lack of an efficient public investment system, the common perception among citizens of public corruption, and the dynamism of the private sector. However, taking into account the current poor state of infrastructure, there is also a strong case for public investment in infrastructure, given the high rate of return that can be achieved from such investments if an adequate public investment system is put in place.