OPINION: Lebanon needs fiscal reforms to avoid a Greece scenario

Published July 8th, 2015 - 01:53 GMT

One of the main lessons Lebanon should learn from Greece’s economic “tragedy” is that the country should avoid sinking deeper into the debt abyss and devise new ways to boost revenues and cut unnecessary spending.

This was the general view of all economists and experts interviewed by The Daily Star as the embattled Greek government negotiates with international creditors to prescribe a less painful medication to economic and financial woes.

Although the financial and monetary situation in Lebanon is still far better than Greece, the economists stress that the country should not sleep on a silk pillow and pretend that the country will not encounter such a storm.

“We need to improve tax collection and rationalize public expenditures. We also need to end tax evasion, which according to our estimates is close to $3 billion a year,” Marwan Barakat, the head of Bank Audi research department and senior analyst, told The Daily Star.

This view was also supported by Nassib Ghobril, the head of research at Byblos Bank, who advised the government to reduce its borrowing needs.

“We don’t have a contagion effect but we still need to reduce the borrowing needs of the government, and tackle tax evasion in the country instead of imposing new taxes,” Ghobril argued.

He also called for improving the pension system and cutting waste in the National Social Security Fund.

One of the more serious issues facing Lebanon in recent years has been the failure of all successive governments to end or even reduce the size of tax evasion.

Experts note that the gray economy, or the parallel economy, has always evaded taxes and this is depriving the treasury of billions of dollars in revenues.

The parallel economy is based on black money, or unaccounted money as some merchants and unlicensed industrialists run businesses in certain areas that are not subject to taxes.

There are no official figures on the size of the parallel economy, although it is estimated at 30 percent of the actual size of the Lebanese economy.

Barakat said improved tax collection could provide sufficient funds to the treasury.

“Imagine that we had a $3.2 billion deficit in 2014 and we had $3 billion annual tax evasion. This is the sum of income tax evasion, electricity bills evasion, property tax evasion,” Barakat said.

But he noted that Finance Minister Ali Hasan Khalil has started to improve tax collection, particularlyin the real estate sector.

But despite the pressing need for reforms, all economists agreed it was wrong to draw a parallel between Greece and Lebanon in terms of the size of the public debt and the financial crisis, noting that Lebanon has not exploited its resources to properly adjust the fiscal deficit.

“Many Lebanese ask, ‘Are we in the same situation as Greece?’ The answer is no,” Barakat said.

Citing available statistics, Barakat indicated that Lebanon’s debt to GDP is lower than Greece by a good margin. In Lebanon, debt to GDP is 134 percent while in Greece it is 180 percent.

Furthermore, in the last 10 years, the debt-to-GDP ratio has fallen by 50 percent, while in Greece this ratio went up by 74 percent. “The most important thing is that most of Greece’s debt is external [around 87 percent] while in Lebanon the foreign debt does not exceed 10 percent of the total debt,” Barakat said.

In 2014, Lebanon’s public debt reached $66.5 billion while in Greece this debt exceeded 320 billion euros ($350 billion).

Lebanese banks and investors still hold the bulk of the public debt and this has enabled the country to remain relatively immune to volatile international financial markets. Experts stress that the domestic debt means Lebanon is not at the mercy of international creditors.

“Lebanon also benefits from a good external position. The Central Bank’s foreign currency reserves, excluding gold, is $39 billion and if we add the gold reserve, this figure will reach $50 billion, almost two times the size of our foreign currency debt,” Barakat explained.

Other statistics show that Greece’s real GDP growth since 2008 was minus 25 percent, and in Lebanon the real GDP growth was plus 30 percent.

Remittances to GDP in Greece are less than 2 percent and in Lebanon this figure is 18 percent, one of the highest ratios in the world. Primary liquidity in Lebanese banks has also exceeded those of Greece.

The primary liquidity in Lebanese banks has reached 40 percent and in Greece this figure did not even exceed 10 percent.

Experts and bankers also boast that even during the peak of war in Lebanon, there was no run on the banks to withdraw money in panic as was the case of Greece.

The Greek Central Bank has closed all banks in the country until Wednesday and put a small limit for withdrawals from ATM machines.

Ghobril saw some positive benefits for Lebanon in the foreseeable future if the crisis in Greece persisted.

“Oil prices fell by 8 percent yesterday and the euro currency depreciated in face of the US dollar. This means that the allocations to buy fuel oil for Electricite du Liban will fall further than this, and the import bill will also drop if the euro remains low,” he added.

By Osama Habib

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