Challenges Facing Lebanon in 2018, and How to Solve Them

Published January 8th, 2018 - 02:00 GMT
As the Lebanese bid farewell to 2017, economists are busy now analyzing the challenges Lebanon will face in 2018 hoping to revitalize the sluggish economy. (Ibrahim Chalhoub/ AFP)
As the Lebanese bid farewell to 2017, economists are busy now analyzing the challenges Lebanon will face in 2018 hoping to revitalize the sluggish economy. (Ibrahim Chalhoub/ AFP)

As the Lebanese bid farewell to 2017 with mixed reactions, observers and economists are busy now analyzing the challenges Lebanon will face in 2018 hoping to revitalize the sluggish economy.

But the lingering question echoed by all the economists and bankers interviewed by The Daily Star is how to reduce the mounting deficit and public debt and achieve significant GDP growth.

“Of course what we need to do in 2018 is reduce the budget deficit and check the rise of the public debt, which has reached $80 billion, representing 150 percent of the GDP,” economist Ghazi Wazni said.

He added that the other challenge facing the government in 2018 is to achieve higher GDP growth, noting that the GDP growth did not exceed 1.5 percent over the past two years.

Lebanon’s high public debt has risen by $4 to $5 billion each year despite pledges by successive governments to tackle the chronic problem.

The bulk of government revenues go to cover the cost of debt servicing and the salaries of the government employees, including public school teachers and Army and security forces personnel.

With an annual budget deficit of $5 billion, this leaves the government with hardly any available cash to invest in the country’s infrastructure.

“We need to reduce expenditures and one of the sources of waste is Electricite du Liban,” the state-run power company, Wazni said.

EDL’s annual deficit ranges between $1.5 billion to $2 billion annually depending on the fluctuations of the oil price in the international market.

The International Monetary Fund has repeatedly urged the government to seriously tackle the issue of EDL’s deficit and one of the solutions it suggested was raising electricity tariffs on consumers.

The government subsidizes the cost of electricity bills and this is one of the causes of the deficit in the electricity company.

Wazni warned that the cost of debt servicing is expected to rise in 2018 due to the hike in interest rates, which will also cover sovereign bonds.

“The government needs to unify the tax system and improve tax collection in order to reduce the deficit. I also recommend increasing taxes on gasoline and reinstating the tax on diesel oil which was removed by the previous government,” he added.

Marwan Barakat, the head of Economic Research at Bank Audi, also expressed concern about the unchecked rise of the public debt and deficit.

“All in all we forecast 8 percent growth in the budget deficit in 2018. But we are pinning high hopes on the convening of Paris 4 donor conference, which should inject billions of dollars that will be earmarked to the rebuilding of the infrastructure,” Barakat told The Daily Star.

Prime Minister Saad Hariri has been lobbying the United States and the European Union to help raise between $16 billion and $20 billion in grants and soft loans that would be entirely dedicated to infrastructure.

However, observers do not expect Saudi Arabia and the United Arab Emirates to commit any money for Lebanon due their strong opposition to Hezbollah’s role in the wars in Syria and Yemen.

Barakat expects customer deposits to grow by $8 billion in 2018 if the country records sound GDP growth.

He added the new government taxes that will take effect in the beginning of 2018 will only generate $1.2 billion and this will cover the cost of the salary scale and end-of-service benefits of retired government employees.

“This increase in the revenue of the government will not be enough to help the treasury to reduce the budget deficit based on our calculations,” Barakat said.

He ruled out the possibility of further hike in interest rates on the Lebanese pound even if the U.S. Federal Reserve decides to increase interest rates on the dollar by 50 basis points.

But Makram Sader, the secretary-general of the Association of Banks in Lebanon, was blunter about the woes in Lebanon.

“Naturally there are many reasons for the country’s economic and financial problems but one of the issues the government needs to address is rampant corruption. Even the IMF has raised this issue with Lebanese officials during their meetings,” Sader said.

He added that there should be a mechanism for allocating funds for building a bridge or a highway.

“The bills for some of the projects are way above the actual cost of the project, and this is called corruption and waste,” Sader stressed.

He insisted that one of the conditions to attract private investment is a healthy business environment.

“Corruption is causing mistrust among the investors and private businesses. This matter should be looked at by the government,” Sader said.

He argued that the money which was wasted in some contracts could have been wisely used to invest in infrastructure projects.

“The IMF suggested that the government should implement institutional reforms as one of the ways to tackle corruption,” Sader said.

He believes that the other way to control corruption is to allow the private sector take part in infrastructure projects.

Sader said that in the absence of private investment the only source for growth is bank loans.

“But the banks can’t continue to keep lending if there is no real growth in the economy,” he added.

Sader noted that Lebanon has signed $3 billion in agreements with certain countries and international organizations, but that this money has yet to be used for any infrastructure investment.

He added that the World Bank has agreed to validate and give its seal of approval for any project financed by the international community in the future to control or reduce corruption.

By Osama Habib


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