Lebanon’s parliament on 4 February passed an austerity budget for 2002 which aims to reduce the country’s heavy debt burden (both public and foreign) and, for the first time, rein in expenditure. Total expenditure is forecast to fall to LL9,375bn ($6.2bn) or 35% of GDP from the 2001 budget’s LL9,900bn ($6.6bn), or 39% of GDP. Revenues are slated to climb to LL5,565bn ($3.7bn) in 2002 from LL4,900bn ($3.3bn) in 2001, with the ratio of revenues to GDP rising to 21% from 17% in 2001. In its budget statement, the government said it planned to make a gradual cut in debt servicing, keeping it under control through proceeds from privatization, foreign currency bond issuance and tax collection improvements. Nevertheless, debt servicing will still see an increase in 2002, climbing to LL4,500bn ($2.99bn) from LL4,300bn ($2.85bn) in 2001, absorbing a staggering 80% of the country’s revenue. The budget also fixes the ceiling for foreign borrowing at $2bn from the $3bn the government originally proposed and aims to convert some debt from local to foreign, which would thus bear a lower interest rate. Total debt up to October 2001 was LL42,363bn ($28bn) or 170% of GDP with internal debt accounting for LL27,969bn ($18.6bn) and foreign for $9.6bn.

While reducing the country’s debt burden is of prime importance this year, the government also wants to continue to modernize its economy, through prioritizing the role of the private sector and improving the country’s integration with the global economy. Other aims are to maintain currency stability, with Prime Minister Rafiq al-Hariri reiterating that despite some calls for devaluation of the currency he has no plans to make such a move. A devaluation could provoke social unrest and would not likely result in significant economic improvement, given that Lebanon has an import economy and its exports are limited. Since it came to power towards the end of 2000, the government has passed legislation to reform customs, facilitate foreign investment and impose VAT and public accounting laws are currently in parliament. Also, the Euro-Med agreement has reduced tariff barriers. “Our relationship with Europe and accession process to WTO will entail a revision and introduction of a broad-based legal framework, that will modernize the entire legal structure underpinning economic activity,” Lebanon’s Minister of Economy and Trade Basil Fuleihan told MEES last month (MEES, 21 January).

The government’s imposition of a 10% VAT as of 1 February on transactions of businesses that have annual sales of over LL500mn ($331,785) is expected to help ease the country’s budget deficit and generate some $500mn/year (MEES, 17 December 2001), boosting revenues by about 15%. The government is also hoping to improve tax collection and plans to sell up to $2bn in eurobonds this year. In 2001 its three eurobond issues generated $3.1bn, minus $500mn which was used to reschedule 1998 debts. The government has made the necessary preparation for public utility privatization and is drafting a law for privatization of the electricity, water and telecom sectors, which will soon be submitted to parliament. It has also hired international consultants to facilitate the divestment process. The privatization of the electricity industry, which was approved by the Council of Ministers in February 2001, yet subsequently delayed by bill collecting troubles, is expected to take place mid-year. The government is also trying to streamline its airline industry and last year laid off 1,500 employees at the loss-making Middle East Airlines (MEA). The Minister of Finance, Fuad Siniora, said it was essential for Lebanon to reduce its budget deficit in order to achieve growth and pointed out that there would be no additional spending unless it was accompanied by additional revenue or added economic and social benefits. “The challenges we are facing in the economic and financial fields are comprehensive, so we should deal with them in a comprehensive way,” he said.

The budget was passed after five days of debate by 83 votes, with 18 against, 12 abstentions and 15 absences. MP Nasib Lahoud criticized it saying it entailed taxes, debts and high interest rates, accompanied by a lack of vision. He claimed it would prolong the economic crisis and raise taxes by 38% from LL2,961bn ($1.96bn) to LL4,100bn ($2.72bn), although he conceded that such measures must be accepted if the country wanted to cut its debt. Mr Hariri is facing further discord and there are worries that his abilities to deliver the economic reform program are threatened by differences with parliamentary speaker Nabih Birri, according to the Economist Intelligence Unit (EIU) in its February 2002 country risk report. While the government has relied on the sale of domestic debt to fund its deficits, liquidity has dried up, forcing Banque du Liban (the central bank) to absorb a growing volume of treasury bills. They are likely to remain limited as a source of budget financing, and instead the government will look increasingly to borrow US dollars through the sale of sovereign eurobonds which will remain attractive, noted EIU.

Through eurobond issues, privatization revenue and additional financing from foreign aid, the Lebanese Government is expected to be able to fund its projected deficits this year and next, said the EIU. It estimates GDP growth in 2002 and 2003 of 1.2% and 2% respectively – lower than official estimates – but these figures could be on the conservative side if Mr Hariri’s reform program proves fruitful. The EIU warns that the most serious risks are on the downside and that if the fiscal deficit pushes government finances into crisis, the economy will return to recession. It also cautioned “any sign that the government is struggling to finance the deficit – such as indications that it might prove unable to roll over a maturing eurobond – would also move the currency peg to breaking point.” Through 2001, confidence in the pound was weak and the central bank was forced to intervene heavily to support it and hold it within the authorized trading range of $1=LL1,501-1,514. However, the pressure on the pound eased in the last quarter of 2001 and the central bank’s forex reserves have started rising again.

Lebanese Budget: 2002

(LLBn)

_________

($1=LL1,507)

Copyright © 2002 Middle East Economic Survey

© Copyright MEES 2004.