Paris conference a not so ripe opportunity for Lebanon
Lebanon heads to the Cedre conference in Paris with a declared objective of raising financing for a $16 billion public investment portfolio. The money would be spent on infrastructure projects in electricity, water, wastewater, transport, telecommunications, solid waste, industrial zones, tourism and, interestingly, culture.
The conference, organised by the French presidency, will mostly include European donors and international financial institutions. Lebanese Prime Minister Saad Hariri’s latest reconciliatory visit to Saudi Arabia and with several other Arab donors confirming their attendance raised hopes for the conference’s success. Nevertheless, this seems like an uphill battle for the Lebanese government, given unfavourable international circumstances.
Long gone are the days when French President Jacques Chirac could look straight in the eyes of heads of delegations and mandate an additional billion dollars of support to Lebanon, as he did during the Paris II conference in 2002.
Today, harsh economic conditions restrict the capacity of European countries to mobilise public and private financing. Low international oil prices coupled with a cautious attitude vis-a-vis Lebanon’s foreign policy, especially its self-declared dissociation, cast serious doubt on the level of participation from Arab countries and Arab funds.
The conference comes amid competing agendas, including rebuilding efforts in Iraq, humanitarian operations in Yemen and potentially a reconstruction plan for Syria. Given scarce resources, the donor community, the World Bank, UN agencies and others will have to undertake a major trade-off on where to invest.
Consequently, experts estimate that this Cedre conference will raise pledges of $4 billion-$6 billion, a much more realistic figure than the target of $16 billion.
Such financing will not come in the form of grants, as it did in previous conferences, but in concessional financing: Lebanon will have to borrow these funds, albeit at lower interest rates with longer maturities. With public debt at the dangerous level of 151% of gross domestic product, the third highest in the world, a failure to undertake structural reforms that boosts growth and swaps current expensive debt with such cheaper funds could have devastating effects.
Given these circumstances and Lebanon’s poor performance at previous conferences, financing obtained at Cedre is expected to be conditional on economic reforms that will be closely scrutinised by the international community.
What type of reforms are expected and are they feasible?
Proposed reforms have always been on the table and repeated within endless International Monetary Fund and World Bank reports and presented as part of previous donors’ conferences for Lebanon from Paris I in 2001 to Paris III in 2007.
The focus is on implementing a fiscal consolidation plan that puts the public debt ratio on a declining trend. To do so, the Lebanese government must reform the electricity sector by investing in generation and transmission capacities to secure 24-hour services, increase collection rates of unpaid bills and raise tariffs to break-even levels. By doing so, Lebanon would eliminate the need for a $3 billion — equivalent to 6% of GDP — yearly subsidy to the sector.
The second set of reforms are those related to social benefits for civil servants and the military. The Lebanese government will need to lower costs and increase efficiencies. This will mean cutting social spending.
Third, Lebanon will have to improve tax administration measures, including fighting corruption and raising revenue, with a value added tax being the easy option.
The international community is calling for more active participation from the private sector in the financing and execution of investment projects, something the Lebanese government has responded to by passing a law on public-private partnerships. Here, too, analysts question the willingness of international investors to invest in Lebanon.
With interest rates rising in the United States and soon to follow in Europe, emerging markets, in general, are no longer as lucrative for international capital flows. As such, many investors will refrain from
accepting the political and economic risks associated with Lebanon and would likely be content with yields on investments elsewhere.
Those who do decide to invest are expected to demand very high returns or guarantees, which could lower the overall economic returns from such projects and potentially expose the Lebanese government to unattended fiscal risks.
Historically, reforms have been hard to implement in Lebanon and the country’s poor record does not suggest that the outcome will be different this time. Complex governance and political systems, including sectarian divisions, have blocked reforms in the past. Pushing for structural reforms, especially when cuts to social benefits are in play, will be difficult to implement when popular resentment towards Lebanon’s political establishment is on the rise.
As such, it is highly unexpected that the government will introduce deep spending cuts. A big challenge will be to level the playing field among various actors to do business. Otherwise, the notion of private sector involvement will become one huge monopoly involving Lebanon’s current political actors, something the country is too familiar with.