Lebanon 2019 budget is start of a long economic recovery process, Saad Hariri says

Prime Minister says tourists will return this summer, because the state has reconciled with its neighbours in the Arabian Gulf and all Arab countries

epa07349871 Lebanese Prime Minister Saad Hariri speaks during a press conference with Italian Prime Minister Giuseppe Conte (not pictured) at the Lebanese Government Palace in Beirut, Lebanon, 07 February 2019. Conte arrived in Lebanon for an official visit to meet with Lebanese officials and the Italian peacekeepers in Southern Lebanon.  EPA/NABIL MOUNZER

Lebanon's 2019 draft budget, which parliament still needs to endorse, is the beginning of a five-year economic recovery process that aims to cut the fiscal deficit to 7.5 per cent this year and revive tourism, the prime minister said.

"This budget is the beginning of a long road that we decided to take in order to lead the Lebanese economy to safety," Saad Hariri, said on Saturday. "The 2020 budget will not take that much [time to prepare] because now we know what we want to do [until 2023]."

After a prolonged debate that required 19 cabinet meetings, the Lebanese government finally endorsed this year's budget with the goal of reducing the ballooning fiscal gap and averting a financial crisis. Mr Hariri's cabinet is trying to reduce the budget deficit from the current 11.5 per cent of gross domestic product through spending cuts and increasing taxes.

The push to get the draft budget approved by the cabinet was repeatedly delayed over the past few weeks. One more meeting will be held at the presidential palace on Monday, according to reports, before the draft is referred to parliament for approval, which is critical as policymakers in the past have rejected budget proposals. Lebanon was without a budget from 2005 to 2017.

With its debt-to-GDP ratio at 150 per cent, Lebanon is among the world's most indebted countries in the world, behind Japan, Venezuela and Sudan. Beirut needs to manage its finances and implement necessary structural reforms to be able to access about $11 billion (Dh40.4bn) in loans and grants pledged by international donors at the Cedre conference in Paris last year. The aid will mainly help fund infrastructure projects.

Donor pledges are linked to economic reforms including implementing austerity measures, improving revenue collection mechanisms, reducing debt and lowering the fiscal deficit by 1 percentage point annually over five years among other measures.

“The percentage of deficit reduction [in 2019 draft budget] is a message in all directions: first and foremost to the Lebanese people, to the economic sector, the financial markets and our friends in the international community,” Mr Hariri said. “The message is that the Lebanese government is determined to address the weakness, imbalance and squander in the public sector and that it insists on the highest degree of transparency in implementing the Cedre programme.”

The risk appetite of investors and markets has reflected the political turmoil of the country. Lebanon's five-year credit-default swaps – derivative contracts that protect investors against default on borrowings – climbed almost 200 basis points since February, according to Bloomberg. Meanwhile, the yield on Lebanon's dollar bonds due in 2028 was at its highest since January last week.

Mr Hariri said Lebanon is faced with two choices of either surrendering to harsh conditions by lenders such as the International Monetary Fund, who will "impose impossible conditions on us", or carry out internal reforms before the economy reaches a “danger zone”.

Lebanon has chosen to do the latter and this phase will not be long.

“One or two years after implementing Cedre, things will move,” he said. “After implementing the budget, you will notice that things have changed, and we will see many tourists this summer, because we managed to reconcile with our brothers in the [Arabian] Gulf and all Arab countries.”

In March, Mr Hariri said he wants tourism to account for as much as 50 per cent of GDP from the current 20 per cent. The economy, which has been growing at about 1 per cent for the past seven years, is projected to expand 1.3 per cent this year, according to the IMF.

The draft budget, however, does not have an overwhelming public support and may face hurdles in parliament. The government's plan to raise taxes and cut public wages have caused discontent in the country. There have been weeks of protests and strikes from public sector employees and military veterans, who fear the budget will lead to salary, pension and benefit cuts.

One of the key steps to structural reforms of the country's economy is exploring “serious revenue-enhancing measures”, accompanied by significant cuts in non-productive expenditures, Institute of International Finance, said last week. Reforming the wage bill to minimise the negative impact on poorer segments of the population and restructuring the utility company Electricite du Liban, which has been bleeding funds, have to be the priorities for policymakers. The electricity company costs the government more than $2bn a year in subsidies.

If structural reforms are not implemented, Lebanon's debt-to-GDP ratio is forecast to surge to 180 per cent. The country's public debt has increased 1.3 per cent in the first three months of the year to $86.2bn from the end of 2018.