Lebanon’s Economy – The Half-Empty Glass is not Half-Full

In a recent address to Lebanon’s economic bodies, President Michel Aoun made a strong statement on the need to control expenditures, build revenues, and combat corruption. He stressed the lack of progress in facing Lebanon’s economic predicaments, which too often has relied on band-aids such as increased finances resulting from increased tourism rather than economic reforms to stabilize the economy. The recent confusion about increasing public salaries through increasing the VAT is illustrative of the quandary for a country that has not approved a national budget since 2005.

The inability to make hard economic decisions was reinforced by a report published by Carnegie Middle East Center in which four top economists were interviewed on the topic “Is Lebanon Heading Towards Economic Bankruptcy?” The consensus is that Lebanon is running out of short term options and has to make significant changes in how the country operates to revitalize its market economy and provide needed services, despite the impact of refugees and the foreign interference of its neighbors.

Zafiris Tzannatos, formerly at AUB and a senior advisor to many governments and international organizations, made, as others did, a comparison to the earlier situation in Greece. He noted that real annual GDP growth is projected at less than 2% with “a very tenuous fiscal position. “This includes a high debt-to-GDP ratio, estimated at 150 percent by the World Bank and projected to increase, as well as a fiscal deficit of 10 percent. At the same time remittances have been declining while merchandize imports have been rising, as has the already sizable current account deficit that stands presently at 20 percent.”

The combination of these factors, among the largest in the world, and the “lack of dynamism in a business environment dominated by rentierism and corruption,” are significant hindrances to reform. He concludes that the economic challenges are “daunting” even if the regional and national political factors improve.

Concern with laging economic growth and high indebtedness was echoed by David Butter at Chatham House, who looked to what might help turn around the current situation. “Syrian reconstruction and an offshore oil and gas bonanza could turn things round, but not for some time, if at all. The revival of tourism has been positive, but could be undermined by new security crises.”

He notes that international creditors “are unlikely to be impressed by the government’s failure to get a grip on fiscal policy. The recent deal for higher state salaries in return for modest hikes in the value-added tax and some other taxes has been stymied by political squabbles, and the budget deficit is getting close to 10 percent of GDP.”

Sami Nader, at Université Saint Joseph in Beirut said that Lebanon “faces an increasing budget deficit, equivalent to 11 percent of GDP, which is leading to an alarming level of public debt, coupled with a high level of corruption and the absence of growth. In fact for the sixth year in a row, since the outbreak of the uprisings in the Arab world, particularly in Syria, Lebanon’s debt is growing five times faster than its economy—the economy is growing at an average growth rate of 1.2 percent.”

While he praises the Central Bank for its capacity to work around the diminishing strength of the sector, he says that “Such policy is unsustainable and will not make up for the absence of economic planning and structural reforms. Unless drastic changes are initiated to reabsorb the budget deficit, such as privatizing the national electricity utility, Electricité du Liban, responsible for a significant share of the deficit, and kick-starting rapid growth, Lebanon is indeed edging towards collapse.”

Sami Atallah, who directs the Lebanese Center for Policy Studies pointed to “its chronic fiscal deficit, compounded with a trade deficit…exposing the country’s financing needs.” He mentions the negative role that the political system plays. “The political elite does not seem willing to actually reform the system that is serving its interests through excessive spending and debt financing…While some may then praise the resilience of the economic system, it will remain fragile and vulnerable, with a poor record in creating jobs and enhancing the productivity of the private sector. While Lebanon may avoid a crash as a result of these temporary measures, one thing is for sure: The country’s policymakers are morally and intellectually bankrupt when it comes to developing an economic system that delivers equitable growth for its citizens.”

While short-term solutions are becoming less effective and viable, there is a consensus among these experts that the Lebanese government must face the needs for better governance, less corruption, and jump starting the private sector if the country is to move toward economic stability and growth.

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