Sustainability of Budget Deficits and Public Debt in Lebanon: A Stationarity and Co-Integration Analysis

This paper presents a thorough empirical analysis of fiscal developments in Lebanon over the past three decades. After an evaluation of major fiscal and monetary developments, the paper uses the Present Value Constraint framework to analyze whether debt and deficits are sustainable. Unit root and co-integration tests reveal that public debt in Lebanon is not sustainable. It is also shown that Lebanon could be heading towards a debt and exchange rate crisis, which could degenerate into a banking crisis similar to the one observed in Argentina, unless timely fiscal adjustment measures are introduced in the near future.