The Lebanese Ministry of Finance has issued the 2014 draft budget. If compared with developed countries, the step is to be considered late, since budgets must be presented at the beginning of the year or the end of the previous year. However, in a country like Lebanon — which has been dealing with continuous institutional vacuums on the level of the government and presidency, and in which the process of budget ratification was never organized — the step seems, at first glance, positive and promising in terms of form. Yet, after examining the budget and its details, concerns overcome the positive aspects of the form.
The first comment, or rather surprise, is related to the $5.1 billion deficit, registering an increase of 20.6% from last year. This is startling, and prompts questions about whether those in charge of public affairs are aware of the seriousness of the economic situation and capable of solving the problem. It is a disaster if they are oblivious to the true nature of the problem, and a greater disaster if they are aware of it and are, nonetheless, still holding on to current spending policies and disregarding reform.
The main problem of the Lebanese economy is the budget deficit, which exceeds all acceptable standards. The deficit is threatening the financial and fiscal situation with collapse, since it is the main reason behind the increase of public debt. According to the international rating agencies, the absence of reform and the excess of noninvestment spending — especially amid the almost sustainable recession that has been ongoing for the third consecutive year — have exacerbated the problem of debts and the subsequent risks. What made things worse and added more crises are the repercussions of the Syrian war, which directly encumbered the economy and created crises in Lebanon, the least of which is the deadly institutional vacuum.
What is remarkable is that at a time when Lebanon is suffocating economically and politically, and no signs of solution or return of growth are looming, the Ministry of Finance presented a draft budget, exerting no efforts to limit the deficit and reduce spending, or at least maintain balance between the expenditures and the expected growth rate. A good reasoning would require, amid gloomy growth potentials and far-fetched political solutions, to let the crisis pass at the lowest cost possible. Yet, the budget is doing the complete opposite.
The proposed expenditures amount to $14.5 billion, with an increase of 6.6% compared to 2013. The expected revenues, however, are estimated at $9.5 billion, with an increase of 0.4%. How will these expenditures be funded with the current deficit and a 2% estimated growth? Will it be done through further indebtedness and issuance of treasury bonds? This is no longer possible amid the current recession. Banks have exhausted their capacities to fund the deficit.
Banks are standing between the government and its bad performance on the one hand, and regulatory bodies and international ranking agencies on the other. The latter are pushing the banks to stick to the Basel III standards, and believe that the inflation of the treasury bonds portfolio is a source of concern that can raise the risk ratio related to Lebanon. The budget did not send any positive signs to the markets and investors at a moment when the economy is dealing with a decrease in the inflow of capitals — reaching 30% last year — and desperately needs growth policies to be launched.
The issue is not limited to the absence of growth policies and of any suggestion that points in that direction — such as tax incentives or increase in investment spending. The details of the budget indicate an absence of reform policies. The structural dysfunction is still as is, reflected in the structure of the budget. The running expenditures constitute 90.2% of the total of expenditures. The service of public debt constitutes 26.9% of the running expenditures, or $3.9 billion, equivalent to 8.2% of the gross domestic product (GDP), knowing that these figures reduce any possibility for productive investment. On another note, the electricity deficit remains intact. According to the budget, $2 billion was allocated to fund the deficit of Electricite Du Liban, the state electricity company, an amount that makes up 4.5% of the GDP. It is important to note that the law on the liberalization of electricity production, which was ratified by parliament and is supposed to contribute to the reform of the sector, will remain useless as long as it is not accompanied with a law or measures on price liberalization.
More importantly, the proposed budget did not mention the cost of the salary scale, which constitutes a controversial issue that has contributed to paralyzing the institutions of all vital facilities, ending recently in crippling schools and official exams. The cost of the salary scale exceeds $2 billion, and in case it was passed and added to the budget, the deficit will reach $7.1 billion, with an increase of 28.7% compared to last year, equivalent to 15% of the GDP. This issue is raising alarming concerns inside and outside Lebanon.
Sami Nader
Source/Fuente: http://www.al-monitor.com/pulse/originals/2014/06/lebanon-draft-budget-i...
