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|14 May, 2019

Goldman Sachs praises endorsement of Lebanon’s electricity plan

In its recent report on the performance of economy in Lebanon and Egypt, Goldman Sachs economic research said the approval of the electricity plan was a step in the right direction

The Goldman Sachs company logo is seen in the company's space on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., April 17, 2018.

The Goldman Sachs company logo is seen in the company's space on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., April 17, 2018.

REUTERS/Brendan McDermid

BEIRUT: International investment bank Goldman Sachs has hailed the endorsement of Lebanon’s electricity plan, but underlined the importance of implementing wide reforms to cut the budget deficit. In its recent report on the performance of economy in Lebanon and Egypt, Goldman Sachs economic research said the approval of the electricity plan was a step in the right direction.

“The first item on the government’s agenda, power sector reform, was approved last month by Cabinet. Lebanon’s power sector suffers from poor service levels, regular power outages of up to 12 hours a day, and losses at the state-owned power company, Electricite du Liban amounting to as much as 4 percent of GDP, contributing over one-third of the budget deficit last year,” the report said.

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It added that successive governments had failed to address these issues over the past two decades.

“We consider the approval of the plan in itself a significant achievement and an important step forward in addressing the long-term sustainability of the public finances,” Goldman Sachs said.

It underlined the need to put the plan into perspective.

“To begin with, implementation risks are high, in our view. The plan depends on a sustained effort by the government over a period of at least six years. Given Lebanon’s history of political instability and its fractious government, we think such a sustained effort would be an extraordinary achievement.

“Certainly, we find no precedent in the country’s recent past, and the experience of previous reform programs, for example following successive donor conferences between 2001 and 2009, does not augur well,” the report said.

It argued that the plan required strong political will to ensure its success. “One example of this is the intention to raise electricity tariffs. Although restoration of 24-hour electricity under the plan should lower costs to consumers (who will no longer need to rely on expensive private generators) and facilitate the raising of tariffs, this is not a given and will require an affirmative political decision to do so next year.

“Another example is the plan to cut off illegal connections to the grids, which are responsible for 20 to 25 percent of EDL’s electricity losses,” Goldman Sachs said.

It noted that such connections dated back to the days of the Civil War. “Ending access to ‘free’ electricity will likely be deeply unpopular and strongly resisted, particularly among residents of poorer areas who form the grass-roots support of key political parties. In our view, this may prove politically expensive and is likely to test the resolve and ability of the government to curtail losses in the coming months and years,” the report said.

The report also focused on the challenges facing the government to implement badly needed reforms, adding that planned austerity measures had trigged demonstrations and protests across the country.

“In the past week in Lebanon, demonstrations and strikes against proposed austerity measures being considered in the budget have highlighted the difficulties the government is facing in advancing its economic agenda, and the political and economic risks associated with it,” Goldman Sachs said.

But the investment bank expressed cautious optimism on the chances of implementing the reforms. “Despite this, we are cautiously optimistic regarding reform progress and believe enough can be done on electricity reform and fiscal consolidation to release CEDRE donor funding from next year, and that these factors together could strengthen the country’s longer-term macro outlook,” the report said.

However, the investment bank said the critical question was whether progress on reform was enough to alleviate near-term external financing pressures, which were the most immediate threats facing Lebanon today.

“So far, the evidence points to continued weakness in deposit inflows and tightening FX liquidity. Social instability over the past week may not have helped in this regard.

“We argue that in the absence of a significant uplift in sentiment, Lebanon’s reform efforts will do little to reduce near-term risks,” it added.

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