Lebanon’s spending plan promises to lower national deficit, but is it possible? | Executive Magazine

Lebanon passed its second state budget in less than six months at the end of March, after being without one for almost 12 years. The 2018 state budget was hastily pushed through cabinet and Parliament ahead of early April’s CEDRE infrastructure investment conference in Paris, and it mandated spending cuts meant to please international donors. The government’s concluding statement at CEDRE promised to reduce Lebanon’s deficit by 5 percentage points of GDP over five years. The cuts to spending may be an indication that local politicians want to do something about the deficit, but not much can actually be done to lower state spending without solving some of Lebanon’s more pressing structural fiscal problems, or by increasing revenues to the state treasury.

At the time of writing, Article 49 of the 2018 budget law was suspended by the Constitutional Council, following an appeal of several articles of the law by the Kataeb Party, the council is expected to appoint a rapporteur to produce a report on the appeal after which the council will issue its final decision. Before the challenge, Executive had received the budget’s high-level spending allocations from the Ministry of Finance, which outlines an overall reduction of about $9 million to $15.85 billion (LL23.89 trillion), a reduction of 0.06 percent from the previous fiscal year. In 2017, total allocations reached $15.86 billion (LL23.91 trillion).

Budget reductions included a 4 percent cut in current spending allocations from $15 billion (LL22.65 trillion) to $14.4 billion (LL21.72 trillion), while capital expenditure allocations were reduced by 12.6 percent from $1.6 billion (LL2.48 trillion) to $1.4 billion (LL2.17 trillion). Increases to the budgets of the Ministry of National Defense (14 percent), Ministry of Education and Higher Education (22 percent), and the Ministry of Interior and Municipalities (10 percent) offset much of the savings.

The numbers that Executive received from the Ministry of Finance, however, are too high-level to discern where exactly the cuts occur (see budget expenditure infographic). According to Mounir Rached, public financial management advisor at the Ministry of Finance, the reductions, in general, include material spending cuts across state institutions, such as stationary and utility bills, and a reduction of allocations to capital expenditures, such as roadwork maintenance around the country. Overall cuts to current spending are probably not significant, Rached says.

Ironically, capital expenditures in the 2018 budget were reduced. At the beginning of April, Lebanese officials had pitched an infrastructure investment plan to donors and multilaterals (see post-CEDRE story). The plan would raise debt to implement the projects, and pledges totaled around $11 billion, mostly in the form of concessional financing. Rached indicates the reduction of capital investment spending in the 2018 budget was cosmetic as most years allocations are not usually fully disbursed. From 2010 through 2016 total capital investment spending averaged just less than $600 million annually, according to the Ministry of Finance’s Public Finance Monitor (PFM) issued at the end of 2016.

Can these reductions impact the deficit? About 46 percent of 2018 allocations—$7.3 billion (LL11 trillion)—will go toward common expenses, such as paying interest on public debt, and salaries and pension payments.The budget’s common expenses declined roughly 4 percent when compared to 2017 allocations, while the government claims that subsidies to the failing public utility Electricité du Liban (EDL) were not written into the 2018 budget.

In 2016, the last full year figures were published in the PMF, public spending reached nearly $14.9 billion (LL22.4 trillion) in spending. According to fiscal sheets also published by the Ministry of Finance last year Lebanon had a primary surplus of nearly $1.5 billion (LL2.2 trillion), however due to debt obligations the bottom line was a total cash deficit of $3.7 billion (LL5.6 trillion).

Target the waste

The efficiency of public spending and revenue collection is not well documented. No audit of public finances has been conducted since 2003. Because no audit was conducted before the passage of both the 2017 and 2018 state budgets, public finance rules and articles of the constitution may have been violated. A clause in the 2017 budget law provided a sort of workaround, postponing an audit for a period of up to 12 months. Because the budget law was not available at end of April, it is unclear whether this 12-month period was extended or whether an audit will be conducted before the end of this year. It is also unclear what time period such an audit might cover, for example dating back until the last audit or further, or only covering last year’s spending.

There are areas where wasteful public spending can be targeted for reduction. Rached advises a deficit reduction and a balanced budget be implemented as soon as possible, which he projects can be completed in less than five years. How? First, by limiting subsidies to EDL. Depending on fuel oil prices, the treasury subsidizes EDL to the tune of around $1.4 billion each year, or 2.5 percent of Lebanon’s GDP. This drain on the state treasury can be lowered significantly by filling much of the gap in unsupplied electricity. The government’s plan in the near term is to fill that gap by renting electricity barges, but the tender has been on hold for nearly a year. Once the electricity gap has been closed, EDL could raise the electricity subscription rates at which it charges its customers. The International Monetary Fund also recommends a return to gasoline excise tax levels of pre-2012, which would mean higher prices at the pump for motorists. Between electricity and gasoline these would be two major changes.

Jean Tawile, economic advisor to MP Samy Gemayel, says the path to lowering the deficit is to increase revenues by curbing tax and customs evasion. He points to a 2017 Bank Audi study that calculated tax evasion and other types of fraud at $4.2 billion annually, and figures customs revenue evasion at between $800 million to $1 billion per year. Added together, he says the state is missing out on revenues of about $5 billion every year. Tawile also says that  capturing these lost revenues would improve the business environment and make markets more competitive. But he argues that amnesty proposals for evaders would reward bad behavior at the expense of those that comply, adding that an amnesty would not be constitutional, and that it has already been tried twice since the end of the civil war, in 1999 and 2001.

Rached says if the state can achieve a deficit reduction of one percentage point of GDP per year, while implementing the Capital Investment Plan (CIP) presented at CEDRE, the deficit would remain high at 9 percent of GDP. A larger deficit, he says, implies Lebanon’s sovereign credit rating may go down, which would imply a hike to interest rates. A high deficit coupled with high debt and high interest rates indicates low growth rates for the economy because of the size of interest payments on state debt and the high cost of credit to private businesses and consumers.

While the numbers are not yet publicly available, the International Monetary Fund projects Lebanon’s public debt to reach 180 percent of GDP by 2023 if the CIP is implemented and no fiscal adjustments are made.

All in all the 2018 budget did succeed in slightly lowering total allocations but the Lebanese state has a poor record of sticking to its spending promises. Between 2005 and 2017 Parliament did not authorize the government to spend or collect money in the form of a state budget. Though it could continue spending at 2005 budget levels, due to inflation and changing needs that amount quickly became chump change. To keep the government open, the state treasury advanced more than $22 billion (LL33.4 trillion) over 472 treasury advance decrees examined by Executive from that 12 year period.

It seems obvious then that Lebanon will need to radically change how it manages public money or else risk CEDRE becoming known as the fourth failed Paris-orchestrated rescue plan.

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About Jeremy Arbid