Lebanon’s economy struggles amid challenges

The Lebanese parliament's endorsement of a draft law that sets a salary and grade scale for public sector employees has sparked concerns about the burden it would place on an economy already saddled with public debt.

In April, Lebanon's public debt stood at about $77.17 billion. The annual fiscal deficit has risen to $5.5 billion, and is likely to reach $8 billion in the next four years, economists told Al-Mashareq.

Meanwhile, the national economy has been hovering at $50 billion per annum, they said, indicating a weak economy that cannot bear additional pressures.

The increases that would be ushered in by the proposed salary and grade scale for public servants would add a new $1.2 billion burden on the budget.

Since the outbreak of the Syrian war, the Lebanese economy has been facing difficulties, said Antoine Farah, economic editor at al-Joumhouriya newspaper.

All indicators show a decline in growth across the board, from tourism to real estate, he told Al-Mashareq.

Government spending on projects aimed at pleasing certain parties is on the rise, he said, and the salaries bill has reached record levels, consuming 40% of state revenues in the first quarter of 2017, according to the Ministry of Finance.

Tense relations with some Gulf countries over Hizbullah’s role in the region also are having a negative impact on joint Lebanese-Gulf business ventures, and on the inflow of funds from those countries, he said.

"The picture is bleak and difficult to reverse without internal change, which is unlikely, or regional change that carries pleasant surprises," he said.

The public debt burden

"Obviously the size of indebtedness is a warning of a very serious problem, as some see the [public debt] growing to $100 billion over the next three years," economist Kamel Wazna told Al-Mashareq.

This would put Lebanon "on the precipice of real danger", he said, "as the cost of public debt equals 45% of state revenues, and the rise in interest rates worldwide could push it to 75%".

The issue of indebtedness can be solved, he added, "but not in accordance with standard political procedure and established method of treatment".

According to Wazna, the political class is not serious about developing an economic vision that provides for growth and development, eliminates corruption, modernises the system, eliminates waste and rebuilds infrastructure.

The solution starts with reigning in waste and combating corruption by exercising better control over the public sector, he said, and by managing the public debt so that tax income will be sufficient to cover expenditures.

He questioned Lebanon’s ability to lower interest rates in view of the global trend of raising them, as interest costs, when global rates rise, are estimated at $1.2 billion -- equal to the cost associated with the salary and grade scale.

'A dangerous stage'

"The Lebanese economy is at a fairly dangerous stage," An-Nahar newspaper economic editor Maurice Matta told Al-Mashareq.

Moody's Investor Service has lowered Lebanon's credit rating to B3, which is judged as being speculative and carrying a high credit risk, he said.

Additionally, public debt has risen, the Syrian war continues to have repercussions on the Lebanese economy and growth has been weak, barely reaching 1.5% per annum, he said.

He warned of the risk of the government continuing to borrow from banks, as the accumulation of these debts jeopardizes the banks' own credit ratings.

Although the adoption of the salary and grade scale will strengthen the purchasing power of a large segment of the population, the associated tax measures will have a negative impact on a number of sectors, he said.

Concerns over the pay scale arose because the draft law does not provide for any structural financial reforms, he said, which could put public finances at risk.

Meanwhile, sanctions on Hizbullah that would deny those who deal with it access to the banking sector could lead to the creation of parallel economic channels that cause harm to the national economy and the banks, he said.

Call for economic dialogue

In mid-August, President Michel Aoun called for an economic dialogue in an effort to find common ground between employees and economic bodies, to reconcile conflicting views regarding the proposed salary and grade scale.

The latest quarterly economic report issued by Lebanon's Bank Audi showed that the new taxes imposed and entailed by the salary and grade scale are likely to have a contractionary impact on Lebanon's low-growth economy.

"While the [pay] increases brought on by the salary and grade will stimulate household spending in the national economy, they also will have negative effects on private sector investments," the report said.

According to the report, the biggest challenge facing the government is shrinking the tax evasion gap, estimated at more than $4 billion, or 30% of Lebanon’s total public revenues.