Lingering economic woes cast huge uncertainties over Lebanon’s future
TUNIS - A draft policy statement in February predicted a “difficult and painful” time for Lebanon because, after nine months of wrangling over forming a new government, it outlined measures that would halt the country’s slide further into debt.
That proposal was still a work in progress at the end of May. After 12 sessions, Lebanon’s cabinet adjourned until May 27, the day a multimillion-dollar Eurobond matures, as works on a fiscal reform plan to reassure foreign donors while providing the ground for growth is hoped to be agreed upon.
The task ahead is daunting. Retired soldiers picketed the central bank over rumoured reductions to their pensions, the same institution whose staff members recently suspended a strike over fears of cuts in benefits.
That the Lebanese economy is failing is unlikely a surprise. In 2011, the Financial Times warned that, despite that year’s 8% growth in GDP, Lebanon’s reliance on domestic consumption and hard currency remittances from the diaspora imperilled the country’s financial future.
This year, with much of the region in chaos, hard currency remittances relatively stagnant and foreign reserves dwindling, the Financial Times’ warning is looking prescient.
Like much in Lebanese politics, attributing responsibility for the financial situation is far from straightforward.
“There is a deep disagreement today on who bears the cost of the austerity,” Ayham Kamel, head of Middle East and North Africa research at Eurasia Group, told Bloomberg News. “Is it the financial sector, the government and the public sector or politicians and their related enterprises?”
Despite the long-running nature of the difficulties assailing the Lebanese economy, some are attributing part of the responsibility for the difficulties on the August 2017 pay increase given public sector workers. At the time, the pay rise was estimated to cost the country around $800 million per year.
However, this was an undervaluation because, with retirement benefits and end-of-service indemnities factored in, the cost outstripped government estimates. Also, the tax hike that accompanied the wage rise garnered lower than anticipated revenues.
Lebanese Foreign Minister Gebran Bassil, posting on Twitter in April, stated: “If a reduction is not implemented, no salaries will be left for anyone.”
Irrespective of any wage rise, Lebanon’s books don’t add up. The Ministry of Finance said the country had revenues of $12.5 billion last year but spent more than $16.5 billion. This included $2 billion in subsidies to the state-owned electricity company. In addition, servicing its debt increased an annual 8% to $5.5 billion in 2018.
Lebanese Prime Minister Saad Hariri’s plan is to cut nearly $800 million in spending to reduce a budget deficit that reached 11% of GDP last year. The country’s public debt, estimated to reach more than 160% of GDP in 2019, is projected to rise to nearly 180% of GDP by 2023, the International Monetary Fund said.
Growth is vital in offsetting the effects of such cuts. However, confidence that reforms, needed to spur growth, would be enacted is low. US bank JPMorgan recently revised its 2019 forecast for Lebanon’s economic growth down 1.3% for 2019 and cautioned against “significant downside risks” surrounding any fiscal reforms.
“[D]elays in the execution of much needed reforms could dent confidence against the background of large fiscal and external deficits and high debt,” JPMorgan Securities Chief Economist Giyas Gokkent wrote in a note.
At stake is the $11 billion in international funding for Lebanon secured at the CEDRE Conference in April 2018, all of which is dependent on the government following through with reform.
Some hope exists that the country’s debts will be met in the short term. A source told Reuters the government should be able to meet the May 27 $650 million Eurobond deadline by drawing upon a foreign exchange transaction with the central bank, an unusual method of financing but one the Lebanese government has relied on previously. How the government will meet further bonds due this year is uncertain.
However, problems exist. Both the central and commercial banks, which hold more than 85% of the country’s debt, recently demanded reforms to reduce public spending and address corruption endemic in Lebanon in return for continuing to fund the government.
Beyond short-term measures, the position is far from clear and restoring international confidence in Lebanon’s economy will prove vital. Following the drawn-out budget process and with optimism low, the cost of insuring Lebanon’s debt has climbed to its highest level since January 22, when the country was ostensibly without a government.
That the forthcoming budget will likely be the most austere in Lebanon’s history has been assumed. Which sections of Lebanon’s society will bear the brunt of those cuts is unclear.
“We have our salaries and we have arranged our lives accordingly,” Abbas Awadeh, head of the employees’ syndicate at Lebanon’s central bank, told Al-Monitor. “Any salary cuts will definitely affect my family and my life. That’s what we are defending.”