Lebanon agrees on draft budget but challenges remain

The draft proposals touch on politically risky moves, including a 3-year state hiring freeze, capping public sector bonuses and a tax on state pensions.
Sunday 02/06/2019
Problems linger. Lebanon’s Finance Minister Ali Hassan Khalil walks to attend a cabinet meeting in Baabda, May 27. 	(Reuters)
Problems linger. Lebanon’s Finance Minister Ali Hassan Khalil walks to attend a cabinet meeting in Baabda, May 27. (Reuters)

TUNIS - After 19 rounds of meetings, the Lebanese cabinet agreed on a draft budget that has been passed on to parliament for approval.

Hopes of a quick reversal in Lebanon’s financial woes look overly optimistic, however. Parliament Speaker Nabih Berri told the Daily Star newspaper that it might take lawmakers a month to ratify the cabinet’s draft proposals, delaying implementation and increasing costs for the debt-ridden country.

While the budget marks a significant step by the Lebanese government to address its spiralling debt, analysts questioned some assumptions on which the cabinet based its decisions.

The cabinet’s proposals avoided some of the potentially more divisive issues, highlighting the challenges involved in restructuring the Lebanese economy.

There is little that is new about the difficulties assailing the Lebanese economy. For years following the civil war, legislators avoided confronting structural weaknesses of an economy that produces little but imports much. The result has been the third highest public debt ratios, the International Monetary Fund said.

Under the draft budget, the country’s deficit target for 2019 stands at 7.6% of GDP, a reduction from the present figure of 11.4%, Lebanese Finance Minister Ali Hassan Khalil said May 27.

“We can maintain this number and we can improve it,” Khalil said. “We are serious in this and it will be translated through an injection of new investment projects that will revive the economy.”

The draft proposals touch on politically risky moves, including a 3-year state hiring freeze, capping public sector bonuses and a tax on state pensions. However, the cause of much prior dissent, such as the anticipated cut in public sector wages, was sidestepped.

Ministers also approved a series of measures designed to increase revenues, including increasing tax on interest on deposits from 7% to 10%. Increased income taxes for high earners have been proposed, as well as a 2% fee on various imported goods.

Addressing Lebanon’s escalating debt crisis and restoring investor confidence in the country are vital to lawmakers. At stake is the $11 billion in funding pledged by international donors at the CEDRE Conference in April 2018. In return for the funding, Lebanon assured donors that it intended to reduce its deficit and introduce measures to combat the corruption that has dogged the Lebanese economy.

Plans to reform Lebanon’s power sector, a significant drain on the country’s economy, were announced in April. Data from the World Bank indicated that government transfers to the state-run electricity company averaged 3.8% of GDP a year from 2008-17, amounting to about half of Lebanon’s fiscal deficit.

Despite such plans, government targets of reducing the deficit to 7.6% may not be enough to restore investor, as well as donor, confidence, credit rating agency S&P Global said.

“The announcement itself (to cut the deficit to 7.6% from more than 11% last year) may not be sufficient to improve the confidence of non-resident depositors and investors, which has waned in recent months,” S&P’s primary Lebanon analyst Zahabia Saleem Gupta told Reuters.

Given that the proposed cost-cutting measures would only be introduced later in the year, some slippage from government targets was also likely.

“We estimate the 2019 fiscal deficit outturn at about 10% of GDP,” Gupta said. “In the absence of substantial revenue-enhancing and cost-cutting measures, we forecast that Lebanon’s general government debt to GDP ratio will continue rising to above 160% of GDP by 2022, from 143% in 2018.”

Despite measures included in the draft budget, many structural problems that have blighted the Lebanese economy for years, principally corruption, remain at the planning stage. As one unidentified Western diplomat told Reuters: “The key now is in delivering lasting reform and providing a vision for the long-term growth of Lebanon’s economy.”

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