Adoption of New Budget Welcomed but Deemed Insufficient as a “Reform” Budget
While the government can be congratulated on finally adopting a 2019 budget, the verdict from economists and analysts is unanimous: “nice first-step, now get serious on reforms for the 2020 budget.” Investors remain to be convinced that the economy is worth investing in when reforms related to regulatory transparency, combating corruption, reforming the public sector, advancing social services, cleaning up the environment, and reducing external debt servicing obligations, among others, are still outstanding. Although the Finance Minister and the Prime Minister are planning to have the 2020 budget submitted on schedule this fall as mandated by the constitution, many remain skeptical that the next round of parliamentary compromises will be forthcoming as that will pose challenges for the existing sectarian business-sharing culture.
A Reuters article noted that “Foreign reserves, while still large relative to the size of the economy, have been falling. This has led banks to launch a new bid to attract dollars by offering 14% a year to depositors willing to lock up large sums for three years - funds which the banks redeposit at the central bank for yet higher returns.” This reliance on swapping debt for foreign currency deposits is only sustainable with continued and rising inflows of foreign capital, and yet the situation In Lebanon is just the reverse, capital outflows are increasing. A related deficit is the costs of insuring Lebanon’s debt which has risen to the highest of any government in the world.
Farouk Soussa, Senior Middle East and North Africa economist with Goldman Sachs, said Lebanon’s deteriorating foreign exchange liquidity was “the real near-term pinch.” Others are concerned that reliance on a Gulf-led bailout may not be adequate given the Gulf’s concern with Iran’s ally Hezbollah in Lebanon that further destabilizes the region. AUB Professor Hilal Khashan said that “What really matters is not what [the Saudi and Lebanese officials] say in public. It’s what they do in private. The meeting [with the former Lebanese premiers] ended well, but the Saudis always make pledges of support. These statements have to materialize and I don’t think whatever may have come out of this meeting will be implemented.”
According to tradingeconomics.com, in 2018, Lebanon’s deficit was equal to 11.20% of the government’s total budget and over 150% of the country’s debt in terms of Gross Domestic Product, neither of which will be addressed significantly by the new budget. In fact, the country’s GDP has not risen since the late 1980s, casting further doubt on a strong economic surge.
Asharq Al-Awsat posted an article recounting that a number of financial sources have warned against a slowdown in the process of restoring financial stability in Lebanon.” Lebanon simply has very little time in which to cobble together band aids that have worked in the past but are no longer adequate. This compounds the weaknesses throughout both production and consumer areas of the economy, which are impacting the banking and financial sectors. Some $3.3 billion of balance of payments deficits have been recorded for the first four months of 2019.
According to a recent report by Standard & Poor's, “curbing the deficit is essential to reduce Lebanon’s high debt levels. This positive step, however, may not be sufficient to restore the confidence of investors and non-resident depositors, bearing in mind that the implementation of the procedures will begin in the second half of 2019,” with the adoption of the new budget, if implemented aggressively.
It is small wonder that an article in The New Yorker article was titled, “Why Lebanon’s People Are Turning on Their Politicians,” highlighting that “According to the Beirut-based research consultancy firm Information International, 85% of Lebanese citizens don’t trust their politicians.” Adoption of the budget, with its tax increases on the lower and middle class, may bring about further civil unrest after the summer doldrums.
It listed the common litany of concerns: Lebanon is the third-most indebted country in the world; 40% of its annual government revenue goes toward servicing debt; people fear devaluation of the lira – Lebanon’s currency; and rating agencies remain unconvinced that the new budget will stop the country’s scraping along.
Sami Nader, a financial and political analyst and the director of the Beirut-based Levant Institute for Strategic Affairs, reflected in the article that “Lebanon’s ruling élites appear to be betting that European powers do not want to see the country’s economy collapse because it could result in a new wave of Syrian migrants heading toward them. They think that the world will be on its knees begging us to take whatever we want but in exchange we will keep the refugees,” he said. “It’s not like that. No one is begging us.”
It will be clearer by the end of the year, when the 2020 budget should be presented to the Parliament, if Lebanon’s leaders have the will to restrict their habits of doing business and empower the government to move ahead with reforms that engender confidence and further investment in Lebanon’s future. After all, even if CEDRE monies begin to flow by that time, the projects to be funded will require an additional $60-70 billion of investment from other sources to be realized. But the private sector will be hard to persuade without the implementation of real reforms.