Lebanon’s draft budget

Lebanon’s draft budget

Lebanon’s government is banking on an expanding economy to prop up a $4 billion fiscal deficit and a mountain of public debt.

June 30, 2010 1:42 by Katherine Azmeh

Lebanon’s cabinet last week approved the country’s first draft budget in five years – a $13 billion jolt of confidence in a nation where political consensus has often been elusive, and the paths to political accord, protracted. The expansionary budget includes a 15.5 percent increase in spending, widening the fiscal deficit to a forecasted $4 billion – more than 10 percent of gross domestic product.

This $4 billion budget shortfall is the backdrop for a crushing national debt burden, projected to reach $55 billion this year – more than 1.5 times the gross domestic product, largely accumulated since the 1975-1990 civil war.

But scores of big red numbers did little to discourage lawmakers on the merits of the budget. Lebanon’s finance minister Raya el-Hassan said the strategy for managing the deficit and national debt is to ensure that the country’s economic growth continues to outpace debt.

On that front, so far, so good. The economy expanded 9 percent last year, 8.5 percent in 2008, and stands to grow another eight percent this year, according to IMF forecasts. Real estate investment and tourism are credited with buoying the economy, and Lebanese banks are flush with cash. While global interest rates plummeted, banks maintained interest rates on deposits of Lebanese lira at around 7 percent, attracting a staggering 1.5 billion a month from abroad in 2009.

So, what’s the upshot for the average Lebanese? A grab bag of pros and cons: While a staggering one-third of the budget is dedicated to servicing the public debt, it doesn’t call for any new taxes. The country’s power sector had been earmarked for 15 percent of the government’s draft budget, and consumers will not see an increase in the VAT rate. The Energy Ministry said it intends to build more power plants to reduce the severe electricity rationing in the country.

On the down side, consumers probably shouldn’t expect any relief from the outrageous prices on communications, either. Lebanon has the region’s least competitive mobile market and some of the slowest internet in the world, but the budget does not call for privatizing the telecoms sector – a move opposed by opposition ministers.
The finance minster emphasized the need to allow the private sector to participate in financing some of the large infrastructure projects, such as electricity and water dams, saying that government does not have sufficient funds to pay for some of the ambitious projects they presented. But borrowing more money is worrisome for some ministers, who suggest a government ceiling on debt.

While a $4 billion budgetary shortfall is nothing to sneeze at, Lebanon’s urgent need to improve delivery of public services – including water, power, waste, roadways, technology, and communications – is an investment that many, particularly in business, feel the country cannot afford to avoid.