Uncertainty lingers despite Lebanon passing austerity budget

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Taxes include the second hike in two years on the interest earned on deposits and government-issued treasury bills and bonds, much to the ire of the banking sector.

by Georgi Azar -Source: Annahar

BEIRUT: Lebanon’s hotly contested austerity budget was finally passed late last week, bringing to an end tumultuous negotiations that saw mass protests grip the streets of Beirut.

The tax-heavy budget, which seeks to curb spending and raise revenues, provoked mostly the ire of retired army personnel over fears that it would cut into their pensions and benefits. Army veterans are looking at new taxes on their pensions as a result of budget cuts, Defence Minister Elias Bou Saab said on Friday.

Taxes include the second hike in two years on the interest earned on deposits and government-issued treasury bills and bonds, much to the ire of the banking sector.

The budget also revokes a number of customs privileges for MPs and elected officials while hiking tariffs on imported products, excluding hybrid and electric cars, food and medicine, as well as machinery and raw materials used for local production.

 

The measures include cuts to ministries’ and public administrations’ budgets, including pensions and benefits of state employees, as well as a reduction in subsidies to the state-owned Electricte Du Liban, which costs the state somewhere between $1.5 and $2 billion a year.

Critics, however, say that the budget merely acts as a band-aid solution as it fails to deal with the root cause of the problem and enact structural reforms.

The budget deficit, which reached some 11.5 percent of GDP at the end of 2018, is expected to be trimmed to 7.6 percent. Oddly enough, lawmakers voted on the budget without seeing the final numbers, which were still being adjusted by the Ministry of Finance after the last round of amendments.

Meanwhile, the fiscal deficit at $1.4bn in the first four months of 2019, the equivalent to 28.5% of expenditures according to Byblos Bank.

The small Mediterranean country is one of the world’s most indebted countries, with public debt estimated at 141 percent of GDP in 2018, according to credit ratings agency Moody’s. Public debt reached $80 billion by the end of 2018 as a result of weak economic activity and high-interest rates.

Last month, Moody’s downgraded Lebanon’s credit rating, highlighting heightened financial volatility.

Coupled with the neighboring Syrian civil war, Lebanon’s economic growth has hovered near the 0.2 percent mark last year, while commercial activity has deteriorated year-on-year in the first quarter of 2019, according to Byblos Bank.

Income, according to the latest figures, witnessed a 4.6 percent drop, hovering around the $3 billion mark as of April 2019, down from $3.5 billion last year-on-year.

A strong source of revenues for Lebanon has traditionally been the tourism sector, which has nearly recovered its peak of 2010, the record year for tourism activity in the Mediterranean country.

In the first half of 2019, tourist arrivals up were up 8 percent, while their spending increased by 12 percent, in part due to Saudi Arabia lifting a ban on its citizens traveling to Lebanon back in February.

Government spending has also dropped to around $4.5 billion as of April, down 11.8 percent from last year. Sources attribute this drop to Finance Minister Ali Hassan Khalil suspending all payments except salaries and wages until the new budget was passed. Late payments, sources say, mainly to hospitals, the state-owned Electricite Du Liban, and contractors, are estimated at around $4 billion.

The budget is seen as the first step for officials’ ability to secure the $11 billion soft loan and grant package agreed upon in Paris last year, with the International Support Group for Lebanon praising its passing.

“It was an urgently needed first step” to correct Lebanon’s economy, the group said following the Parliamentary session Friday.

In a written statement, the ISG said that it “commends the sacrifices which the Lebanese people are making in order to set the country on the path towards economic growth.”

 

 

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