Lebanon: Government announces reforms to appease protesters, but they are unlikely to solve fiscal or economic woes

On 21 October the Lebanese government presented a package of reform measures and cabinet approved the 2020 budget. The moves were designed to quell widespread protests—which began several days earlier over proposed tax rises but have since morphed into a more generalized outpouring of discontent regarding corruption and stagnating living standards—which have engulfed the country and paralyzed economic activity. While these measures could narrow the budget deficit in the short term, they are unlikely to be a lasting fix for the precarious fiscal position or reboot a spluttering economy. Moreover, concerns over the sustainability of the currency peg are likely to persist.

Among other measures, the government announced it will halve the salaries of top public officials, scrap some public agencies, overhaul the crumbling electricity sector and privatize the telecommunications sector. Cabinet also approved a 2020 budget with a fiscal deficit target of just 0.6%, which would be a significant improvement from the near 10% shortfall panelists are penciling in for 2019. To achieve this, the government is hoping to extract USD 3.4 billion from the financial sector through a tax on banks and the central bank cutting debt interest payments.

On the positive side, the fiscal proposals should help reduce the budget shortfall in 2020. Moreover, electricity reform could lessen chronic power outages which hamper the economy, while the telecoms privatization would provide a windfall to public coffers. The reforms could also help unlock USD 11 billion in donor funds pledged at the 2018 Paris conference.

However, it remains to be seen whether the measures will be implemented in full, and they will likely be insufficient to put the public finances on a sustainable footing; the USD 3.4 billion from the banking sector would be a stop-gap measure for instance, and no substitute for reforms that would permanently boost revenues and contain spending. As such, FocusEconomics panelists forecast a fiscal deficit in 2020 far larger than the government’s 0.6% target.

As analysts at Emirates NBD comment: “For 2019, reported aims of revenues of LBP 19tn and spending of LBP 23tn would result in a fiscal shortfall equivalent to 6.4% of GDP. However, our expectations of LBP 17tn and LBP 24tn respectively would see the deficit more in the region of 8.7% […] In light of this, and the government’s post-protest plans to boost spending on the poor while curbing new taxes, the 2020 target looks rather farfetched – we forecast a deficit of 7.7%.”

Moreover, putting additional strain on the financial sector—which already accounts for the majority of tax revenue—could even be counterproductive as it would hurt banks’ profitability, an issue recently highlighted by Moody’s. The credit ratings agency also warned that the cash extraction from the financial sector could increase concerns over the currency peg, which has already come under pressures in recent weeks amid a dollar shortage. While the Central Bank does have ample international reserves, these could quickly become depleted if confidence in the currency collapses altogether. That said, our panelists still see the peg remaining in place over the forecast horizon, which ends in 2024

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Oliver Reynolds, Economist

Date: October 28, 2019

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