Budget Debate Exposes Lebanon’s Lack of an Efficient Economic Strategy

Wednesday, June 5, 2019
Opinion by Jean AbiNader

The American Task Force for Lebanon (ATFL) will soon visit Lebanon to discuss issues affecting US-Lebanon relations. Members of the delegation are accomplished Lebanese-Americans who have a dedicated interest in promoting bilateral ties. It is not uncommon, given their dedication, that deep and meaningful discussions take place with Lebanon’s leadership. In return, the delegation welcomes a dialog about its mission to inform and educate Americans about the value of Lebanon’s survival as a free, independent, and functioning democracy.

While there is a great deal of goodwill, business-as-usual will not enable Lebanon to achieve its political, social, and economic potential without some very challenging reforms. The long-held view that leadership in Lebanon approach the economy as a literal pie-cutting exercise among competing parties has not been diminished by the current draft national budget before Parliament. Since the ministers and others drafting the budget are drawn from the parties, their perspectives reflect the needs of their constituents, and while this is admirable in some respects, it leads to short-term arrangements rather than long-term policies with sustainable solutions.

As a recent senior Lebanese official remarked to me, both Lebanon and the World Bank go through the motions so that each can say that there is progress. The rebuilding of Lebanon’s economy should not be a hollow exercise. All of those involved should be acting out of a commitment to Lebanon’s recovery and reconstruction rather than pacification of those invested in the current system that incorporates corruption and cronyism as its primary features.

Some details from an initial reading of the bill may be helpful. The CEDRE funds pledged at Paris IV were some $11.5 billion of which $800 million is grants, the rest soft and discretionary loans. Prime Minister Hariri, to achieve a system-wide impact of the funding so as to attract domestic and international investors, asked the World Bank and IMF to develop a set of conditions for the release of the funding. This resulted in a set of economic, administrative, public sector, financial, and fiscal reforms that will supposedly trigger the release of funds as reforms are enacted.

While attention has been paid to passing some of the required legislation and public officials have been quite attentive to making statements about hitting certain budget targets, the lack of implementing and monitoring mechanisms is rattling the credibility of these first steps. Among the projects proposed in the national investment plan are a number that are outdated, outmoded, and uncoordinated with other elements of the grand plan. Without an overarching independent regulatory agency or board to oversee and monitor the details of Lebanon’s policy commitments, the budget and its logic remain aspirational, at best. The role of parliament, rather than exercising its constitutional oversight, is part of the problem because of its lack of focus on what’s best for Lebanon nationally.

Fiscal reforms are going in the wrong direction. Rather than increasing taxes, tariffs, and fees selectively, more revenue could be generated through better collection of government levies and reducing exemptions for companies with ties to members of the government either nationally or regionally. Not fully accounting for losses generated by the electricity, water, and telecommunications government-owned companies only postpones awareness of the size of the problems; deficits don’t disappear.

Investors are shying away from Lebanon as it is not clear how much debt servicing costs will increase in the short to medium term, making the government less credible as a borrower domestically and internationally. Without continued purchases of Lebanese bonds at manageable rates, the government will be less able to borrow to fill its funding gaps. This will definitely have an impact of the Lebanese pound and hobble the Central Bank in its herculean efforts to continue stabilizing the currency.

A recent report indicated the degree of excessive employment in the public sector, driven by political largess to maintain constituent base, with jobs being doled out even after a government freeze was announced. Former members of parliament continue to receive full salaries for life as pensions, the same in the Armed Services where the general staff retirees receive more in pension benefits than the service men and women receive in salaries. Corrosive subsidies continue in key sectors such as electricity, agriculture, and water, while loans for certain classes of citizens receive generous support. Government programs from infrastructure construction and engineering to transit and logistics networks and water management and dubious educational schemes are designed more to siphon off funding and provide jobs than generate solutions.

Currently, Lebanon is the third most highly indebted country in the world. It ranks 130 out of 137 countries in the quality of overall infrastructure. Transparency International and multinational institutions are concerned that bad habits will lead to even worse outcomes in the bidding and awarding of contracts. According to the World Economic Forum, Lebanon ranks 130 out of 137 in government spending, 126 in the impact of favoritism on government decision-making, 121 in irregular payments and bribes, and 124 in the transparency of government policy-making. It will be a telling yardstick to see if and how these metrics change in the next three to five years.

These and other concerns will be raised during the trip to Lebanon and a future blog will hopefully detail responses that enable Lebanese-Americans to fully engage their communities and professions in joining in the development of a new and improved Lebanese economy.

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