Lebanon plans to maintain its public debt level level and economic growth rate this year as the country seeks to introduce reforms aimed at dispersing over $11 billion of aid pledges, a finance ministry official said.
Lebanon’s public debt, which stood at 150 per cent of gross domestic product (GDP) in 2017, is forecast to rise one percentage point this year, while growth will dip slightly to 2.2 per cent from 2.3 per cent, said Alain Bifani, the director general of the finance ministry. The fiscal deficit is projected to reach 8.3 per cent of GDP this year.
“If we continue to have a primary surplus of 3 trillion Lebanese pounds over the coming years, definitely we will see positive developments in public debt,” Mr Bifani said. “To have this primary surplus, we need to limit [public sector] hiring in some departments. We need to have structural reforms to lower spending.”
Lebanon’s economy is saddled with one of the world’s highest debt-to-GDP ratios as a result of recurring and widening fiscal deficits and an economic slowdown, which started in the wake of the 2011 uprisings that swept the Arab world and displaced Syrians who made their way to the country.
Lebanon hosts over 1 million Syrian refugees, among the highest per capita refugee figures in the world, which has strained the country’s finances and infrastructure.
To help alleviate the financial burden, donors from various countries pledged at the Cedre conference this April in Paris to provide Lebanon with over $11 billion in soft loans to fund mainly infrastructure projects. The pledges were linked to reforms, which include lowering the fiscal deficit by 1 percentage point annually over five years among other measures. Public wages, debt servicing and contribution to the loss-making state-owned power utility eat away over 70 per cent of the budget, leaving little room for investments on infrastructure.
“We need to continue to demand and look for [donor] support because we are providing a global public good [by hosting the refugees],” Mr Bifani said. “When we develop our infrastructure, the displaced will benefit from it as well.”
The conference was held amid warnings from Lebanese officials and the International Monetary Fund (IMF) about Lebanon’s public finances.
Lebanon’s debt-to-GDP ratio could balloon to 180 per cent by 2023 if the government does not undertake reforms to narrow its fiscal deficit, which may reach 10 per cent of GDP amid the current geopolitical tensions, the IMF said in February. It is forecasting growth between 1 and 1.5 per cent for 2017 and 2018 as the three contributors to GDP – tourism, real estate and construction – remain weak.
“We increased revenue significantly last year, now we need to concentrate on containing spending,” said Mr Bifani. “If the expenses of wages, salaries and compensation keep on increasing at the existing pace, it will be very difficult to lower the deficit. Public sector hiring costs twice [as much] because of the increase in wages and salaries.”
The political mayhem gripping Lebanon is not helping the country fight corruption and introduce reforms needed to contain spending that has ballooned after the government and parliament approved a series of public sector wage hikes last year which were partly financed by an increase in various taxes.
Prime Minister-designate Saad Hariri has been appointed to form a government following the May parliamentary elections –the first to be held since 2009. Consultations however are expected to be long-winded as all the political factions need to agree on the choice of Cabinet members.
All of these factors are taking a toll on the private sector economy, according to economic surveys.
The Blom Lebanon Purchasing Managers Index remained nearly flat at 46.4 in May, from 46.2 in April. The index, sponsored by Blominvest Bank and compiled by IHS Markit, indicates contraction when it is below 50 and expansion when it is over 50.
“In spite of the minor rebound registered by the BLOM Lebanon PMI in May, the overall picture of the private sector economy remains grim on account of subdued domestic demand,” said Riwa Daou, economist at Blominvest Bank. “Although the first parliamentary elections in 9 years, held on May 6th, marked a positive step towards the implementation of a long-overdue reform agenda, the country remains in a wait-and-see mode ahead of the government’s formation.”
