The Lebanese Parliament on 28 January approved the country’s budget law for 2003 with a deficit of LL2,125bn ($1.410bn), 45.2% less than the 2002 budget deficit of LL3,875bn ($2.571bn). The 2003 deficit represents 24.7% of total expenditure, down from 41.3% in the budget law for 2002. The actual budget deficit for 2002 at 42.3% - down from 47.7% in 2001 - came very close to the projected deficit in the 2002 budget. The budget was passed after four days of debate by 78 votes, with 26 against and five abstentions. Total expenditure is forecast to fall 8.3% to LL8,600bn ($5.707bn) from LL9,375bn ($6.221bn) in 2002, while revenues are projected to climb 17.7% to LL6,475bn ($4.297bn) from LL5,500bn ($3.650bn) in 2002.

Debt servicing is projected to fall 11.1% to LL4,000bn ($2.654bn) from LL4,500bn ($2.986bn) in 2002, reflecting the positive outcome of the Paris II donor conference last November, at which Lebanon was promised $4.4bn - $3.1bn in low-interest credit facilities and $1.3bn in project loans (MEES, 2 December 2002). Allocations to capital expenditure were slashed by 51.8% to LL397bn ($263mn) from LL824bn ($547mn) in 2002, under the government’s austerity measures. But this will not mean that capital expenditure will necessarily be reduced, because the government intends to finance such expenditure from the $1.3bn project loans pledged at Paris II, as well as from other unutilized concessionary funding of some $1.8bn from international organizations which was previously made available to Lebanon. According to the budget law a primary surplus (ie net of debt servicing) of LL1,875bn ($1.244bn) in 2003 will be generated, an increase of 200% on 2002. The following tables, which were made available to MEES by the Lebanese Ministry of Finance, summarize the budget numbers.

The Lebanese Minister of Finance, Fuad Siniora, said that a tight budget was approved which managed to keep the deficit below 25% of expenditure, even after some proposed taxes and other revenue generating measures were rejected by the parliamentary finance committee. The committee axed planned hikes in taxes on civil service pensions and severance pay, as well as plans to increase public and private employee contributions to pension funds. It also abandoned plans to increase the number of work hours per week; increase road taxes on cars; and raise the state’s contribution to the employees’ cooperative fund rather than that of workers. Mr Siniora warned that without a tight budget Lebanon would be hard pressed to meet its debt-servicing commitments in 2003. The government estimates that the scrapping of these taxes would add over $36mn to the deficit.

Table 1

Lebanese Budget 2002-03

(LLBn)

Table 2

Lebanese Revenue – Budget Law 2003 And Actual 2002

(LLBn)

Source : Lebanese Ministry of Finance.

To offset this loss the government proposed a 5% tax on interest on all bank deposits, which was endorsed by parliament. According to Lebanese economist Kamal Hamdan, “the tax on interest is a positive move that many experts have been calling for. It might harm those who live off interest income, but it is more just.” Mr Hamdan noted that the tax was not too high to frighten foreign depositors, but other analysts disagree and argue that it could discourage potential investors. The tax on interest, which will cover all accounts for residents and non-residents, is expected to generate a revenue of between LL100bn ($66mn) and LL200bn ($133mn). Mr Siniora explained that initially the tax was to be introduced in 2004, but after the positive results of Paris II and the renewed confidence in Lebanon’s public finances and economy, the introduction of the tax was brought forward to compensate for the proposed taxes that were withdrawn from the draft budget. The minister added that income tax is expected to generate 21.1% of total tax revenue in the new budget. In 2002 revenue from VAT, which was introduced in February 2002, amounted to LL993bn ($659mn)

According to the budget law, the government is authorized to issue short, medium and long-term Treasury Bills in local currency in amounts which reflect the needs of the treasury. But for any issues which exceed the limit of the actual budget deficit the government is required to notify parliament and explain the reasons for the increase.

Mr Siniora estimates total public debt at the end of 2002 at LL44,260bn ($29.4bn), of which debt in foreign currency accounts for 44%, and revealed that the government has set itself a ceiling for foreign debt of 50% of the total. The minister added that in the aftermath of Paris II, government policy will aim to replace short-term high interest debt with long-term low-interest debt. He estimates that some $5bn will be available for the government to restructure its debt - $3.1bn from Paris II and $1.8bn from the Central Bank of Lebanon. From the $3.1bn pledged at Paris II Lebanon has already received $950mn and placed them in Eurobonds.

In addition the government will benefit from funds generated from the agreement with the banking sector to invest in zero-interest two-year government bonds to the tune of $4bn for the next two years (MEES, 16 December 2002). The government also expects to use the income from privatization and securitization to lower the public debt and will seek to gradually reduce interest rates on both local and foreign currencies.

In his budget report to parliament, Mr Siniora was upbeat about the prospects for the Lebanese economy. He noted that economic indicators were signaling an improvement, with a GDP increase of over 2% in 2002, a balance of payments surplus of $1.5bn for 2002 after a deficit of $1bn in 2001 and a significant reduction in interest rates in the aftermath of Paris II. The minister also said that Lebanon has a good opportunity to achieve economic, financial and social stability provided it can maintain its reform program, reduce the size of government and establish a partnership with the private sector in order to make the economy more competitive.

Listing the government’s objectives, he said that the budget will aim to reduce current expenditure and limit capital expenditure funding to foreign-sourced project loans; increase revenue by introducing a new automated income tax system on salaries and a unified tax on realized income; complete the privatization program; reduce public debt and debt servicing; carry on with economic reforms and measures to increase job creation; raise public sector productivity; and lower the debt/GDP ratio. According to a recent Fitch rating for Lebanon, this ratio currently stands at 161%. But officials point out that this ratio could decline if GDP is revised upwards in the light of a new study to recalculate the country’s GDP, which is currently underway. 

Lebanon has had to opt for an austerity budget for 2003 and tighter economic reforms in order to convince the international donors who had pledged assistance at Paris II that it is serious in its efforts to deal with its economic problems. In fact government officials have repeatedly stated that they plan to have a balanced budget by 2006. However it may not be able to move fast enough with the privatization of some key utility sectors. The privatization of the GSM mobile system is not going according to plan, with political differences between President Emile Lahoud and Prime Minister Rafiq al-Hariri delaying the licensing and sell-off process. Also some economists doubt the government’s ability to raise $5bn from the privatization and securitization of anticipated sell-off revenues this year. Nevertheless the dividends from Paris II have so far been very positive, with large capital inflows into Lebanon, a strengthening local currency and foreign exchange reserves rising to some $8.2bn in mid-February from $4.97bn in December 2001. Coupled with these developments Lebanon, which earns some $1bn from tourism, is currently enjoying a good winter tourist season.

© Copyright MEES 2004.