Lebanon's budget plans in disarray
The following article is the second and final installment of a two-part series, the first of which was published in the Feb. 15 issue of The Daily Star.
Following my assessment in the first article of this series of the manner in which the current government has handled Lebanon’s economic development and performance, it’s time to tackle an even more complex topic: the budget. Let’s start with the “missing” $11 billion spent over the allowed cap of the last budget in 2005. The funds were spent between 2006 and 2009 on the basis of budget proposals that were prepared and sent to Parliament, which was forced to close down soon after.
The national unity government of 2010 prepared a budget which was held back by MP Ibrahim Kanaan, chairman of the budget committee, for reasons that probably had to do with the financing of the Special Tribunal for Lebanon.
Now this is history, but for the present, does anybody have an idea what is going on? The current government, which never submitted or even prepared a 2011 budget, spent in that year alone $5 billion over and above the cap allowed by the fiscal rule. In 2012, a budget proposal was proposed and withdrawn, twice: once after the IMF expressed concerns that the primary surplus built up over a decade had suddenly disappeared, and the second time due to disagreement (bordering on chaos) among the various components of the ruling coalition regarding the funding of the increase in the public sector salary scale.
Meanwhile, spending above the allowed cap continued, and on the illegal basis of Treasury advancements, totaling around $6 billion in 2012 alone. So the current government spent in two years the same amount over the allowed cap that the previous governments spent in four years.
Going back to the salary scale discussion: Where did this come from? Why is it that in the midst of a recession, and a global trend in reducing the size and/or the pay of public sector employees, the current government has decided not only to confine itself to a discussion regarding cost of living adjustments but also reconsidering the public sector salary scale.
Well of course elections are on politicians’ minds, but the story they give – as stated by Economy Minister Nicolas Nahas in several conferences and forums that I had the honor of attending – is that 2011 was a good year, recording a growth of 5 percent in real terms, and therefore ministers decided to reconsider the salary scale. But then 2012 turned out to be a bad year (due to the Syria uprising), so the government discovered that it could not increase taxes, and perhaps the time was nor right to advance this issue after all.
Well I am not sure what to call this, other than an insult to the intellect of the Lebanese. First, 2011 was not a good year, and growth was surely not 5 percent; according the IMF, the World Bank, the U.N., the Institute of International Affairs, and even the BDL, growth was at most 2 percent. Of course national accounts take time to be completed as they are done on an annual basis, and to date we have not actually seen the official 2011 figures.
But surely, as economy minister, Nahas, along with Finance Minister Mohammad Safadi and the other members of the economic team, should be monitoring the BDL Coincident Indicator of Economic Activity, compiled and published by the Central Bank, on a monthly basis, and with a lag of just three months.
This indicator has shown that economic activity has been slowing down since the summer of 2010, when the issue of the tribunal and the false witnesses caused a rift in the national unity government. The slowdown in economic activity accelerated in 2011 (prior to the Syria uprising) and then deteriorated significantly in 2012.
So for those who wanted to see it, the writing was on the wall starting in 2011, and what it said was very clear: The economy is slowing down. And of course, the finance minister should have included in his assessment while preparing the 2012 budget that raising taxes in a dragging economy was not in the cards.
Instead, they decided to embark on a salary scale discussion, and with no talk whatsoever of reforms that seek to ensure that these salary hikes are accompanied by an increase in productivity, which would limit inflationary repercussions. So now inflation is up, eroding already-low salaries, and the salary scale discussion is postponed, along with the budget proposal, not only for 2012, but also for 2013!
All this leaves us heading toward an eighth year with no ratified budget that tells us in which direction fiscal and economic policy is moving. We are headed toward a deeper economic recession with tourism, foreign direct investment, and local consumption all declining due to a severe confidence crisis. Inflation is sure to rise whether or not a new salary scale is implemented, because no productivity-enhancing reforms are being proposed or even discussed, and because expectations have been poorly managed.
We are headed toward perpetual balance of payments deficits which started in 2011 with -$2 billion and continued in 2012 with -$1.8 billion after over a decade of surpluses
And we are headed toward a further decline of the primary surplus in the budget, and possibly a deficit if the salary scale adjustment is passed.
And as a result of all this, we are heading toward higher unemployment and higher poverty rates which conveniently tend to make voters more radical ahead of national polls.
But are we even sure there will be elections? MP Mohammed Raad of Hezbollah said last week it would be OK if polls were postponed for technical reason. Well, in a country where everything is on hold, where economic policy is frozen and where budgets have not been passed for seven years, some may have a “so what” view if elections also being postponed.
The Arab world does not need us to be a model anymore: Free and open elections have finally started to take place elsewhere in the region, and some may believe that we, in Lebanon, can take a break from democracy. That would be very dangerous, and very sad indeed.
Dr. Mazen Soueid is a leading economist and wrote this article for The Daily Star.
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