Tax rises and bailouts will not save Lebanon

The country needs a long-term strategy and serious economic reforms to resolve its financial crisis

epa07537659 Retired army officers and soldiers carry Lebanese flags as they block the Lebanese Central Bank during a protest in Beirut, Lebanon, 30 April 2019. According to media reports, retired military and security personnel blocked entrances to the Lebanese Central Bank and the Beirut Port as a preemptive strike against any austerity measures in the 2019 draft state budget that might affect their retirement wages or benefits.  EPA/NABIL MOUNZER

Just a month after Lebanon introduced controversial austerity measures, Fitch has downgraded the nation’s credit rating to CCC. If the downgrading makes a mockery of Lebanon’s attempts to tighten its breeches, Fitch is not alone. Laughter echoed around the chamber last month when Lebanese MP Salam Saadeh addressed his fellow parliamentarians over the country’s first austerity budget: “The international donors know we’re lying and we know that they know we’re lying, so everything is fine,” he joked. Even long-time parliamentary speaker Nabih Berri couldn’t resist a chuckle.

Mr Saadeh might have a point about the so-called austerity budget. Financial analysts think the aim of reducing this year’s deficit to 6.59 per cent from last year’s 11.5 per cent is overly optimistic; they think it will be closer to 9.75 per cent. Bloomberg recently reported that payments to contractors and public entities have been delayed to bolster the figures. Other cost-saving measures are pinned on hopes of the government being able to issue treasury bonds at well below market interest rates, something Lebanese lenders are already refusing to do.

To date, the full details of the new budget have not been made public. The measures we do know of include a three-year freeze on state hiring, a 3 per cent tariff increase on imported goods, a tax hike on interest on deposits from 7 per cent to 10 per cent, cuts in government spending and a tax on military pensions. There have also been promises made in terms of overhauling the state-owned electricity company, which costs the government more than $2 billion a year in subsidies. These meagre measures will most likely fail to lower the budget deficit or truly put Lebanon's economy back on track. Ironically, Lebanese MPs scrapped a proposal to limit their own salaries, which they receive for life at a total cost of $20 million per year, paid by the Lebanese state.

Storm clouds have been brewing over the Lebanese economy for some time now. GDP growth has been hovering at less than 2 per cent over the last few years. But the real alarm bell that woke the Lebanese government came in January this year when Moody's further downgraded Lebanon's credit rating to junk over debt default concerns. The fallout from the downgrade caused the cost of insuring Lebanon's debt to skyrocket and spurred rumours of a debt haircut – a reduction applied to the value of an asset – and currency devaluation.

Further, Lebanon's debt-to-GDP ratio is projected to rise to nearly 180 per cent by 2023, surpassing that of Greece. The public debt has increased 1.3 per cent in the first three months of the year to $86.2bn from the end of last year. From 2005 until 2017, parliament did not even pass a formal budget, creating a lack of financial accountability. A public-sector wage increase in 2017, a decrease in remittances from Lebanese people working abroad and a decline in tourism due to political and regional instability have only exacerbated matters.

Faced with the third-highest public debt in the world and nearly non-existent economic growth, Lebanon has been forced to pass austerity measures in the hope of unlocking $11 billion in loans from Cedre conference donor countries and promises of investment hinged upon Lebanon correcting its finances. But those measures are a mere drop in the ocean. Lebanon’s structural problems and crippling corruption need to be tackled to solve its economic woes.

Despite the constant boast of the country being the "Switzerland of the Middle East", Lebanon ranks 138 out of 180 on Transparency International's Corruption Perception Index and 142 on the World Bank's ease of doing business scale. Its infrastructure is in disarray. The country lacks round-the-clock power and its landline internet speed ranks among the slowest in the world. The mounting garbage crisis, in a country that boasts natural beauty as one of its assets, is adding to its troubles.

There are still some members of the government banking on much-touted tourism to save the day. Yet Lebanon receives less than half the tourists neighbouring Cyprus does and a week-long package holiday is cheaper in nearby Turkey, which has a stronger tourism infrastructure. Years of unbridled construction have seen Beirut’s beautiful old houses disappear and large swathes of the country’s woodlands, among the major attractions in the country, have been cut down to make way for grandiose luxury property projects.

Tariff hikes and bailouts will not be enough to save Lebanon. With such high levels of debt and borrowing costs, the country has very little bandwidth to continue without real reforms.

The government must adopt a long-term strategy and economic vision for the country. Lebanon still has some of the best universities and hospitals in the region, coupled with a high literacy rate. There is no reason the country could not attract major foreign investment and regain its former glory days as a major financial hub. Donor countries should push for the privatisation of corrupt state-run companies, and revisions in investment laws and the bureaucracy to open up the country’s business landscape. Only then will Lebanon be on stable ground and enjoy the prospect of growth.

Paul Gadalla is a former Beirut-based journalist who worked in communications at the Carnegie Middle East Centre. He has an MA in political science with a focus on the Middle East from Northeastern University in the US