The Center for Economic Studies at Fransabank has recently conducted a study entitled “Lebanon: Cedre Reforms vs. Economic Imbalances”. The study sheds light on the results of the Cedre Conference, specifies the required fiscal and economic reforms, analyzes the existing economic imbalances, and concludes with policy recommendations.
The study says that the Cedre Conference and its results, especially with respect to its foreign aid of USD 11.6 billion, constitutes a big positive moral shock to Lebanon. It reflects the continued confidence in Lebanon and its ability to face the current and future problems and challenges.
The study explains that the Lebanese authorities are challenged today by its capability to meet the obligations of the Cedre Conference, especially the implementation of fiscal, structural and sectorial reforms required by the international donors.
The study said that the Lebanese authorities should focus on enlarging the base of the national economy, mainly through activating the activity of leading economic sectors, such as tourism, real estate, construction, and the banking sector. The economic growth rates should rise from the currently low levels of 1-2% to reach 7-8% per annum in the coming years, as recorded in some previous years. These higher growth rates are necessary to decrease the current levels of unemployment, which are estimated at 20% according to the World Bank and 30% among youth according to UNICEF estimates. This is necessary to strengthen social stability in Lebanon.
The study assured that Lebanon needs to ration consumption spending, enhance export potentials, control the growth of national imports, downsize its public sector, and increase private and public investments. Lebanon’s economy is a consumption-led economy, because it highly depends on private consumption spending which constitutes nearly 70% of GDP, while the size of the public sector is growing up to 26% of GDP. Private investment spending constitutes 42% of GDP, while net exports or trade deficit negatively contribute to nearly 38% of GDP.
The study mentioned that the Lebanese authorities should control two deficits in the national economy. The first is the foreign deficit represented by the trade deficit which is so huge because of the high levels of imports (nearly USD 23 billion for 2017) and low levels of exports (nearly USD 3 billion for the same year). The second deficit is the internal deficit represented by the deficit in public finances which reached USD 3.8 billion in 2017, due to higher spending (USD 15.4 billion) over revenues (USD 11.6 billion). Keeping in mind that the largest share of public spending, nearly 92%, is current spending consisting of wages and salaries of the public sector, financial transfers to EDL, and interest payments on the public debt. These continued fiscal deficits feed the growth of public indebtedness which stood at USD 80 billion as of end-2017, with an annual growth rate of 5-6%. The debt-to-GDP ratio is high at nearly 150%, together with a high fiscal deficit-to-GDP ratio of nearly 8% as of end-2017.
The study stressed the significance of increasing public and private investments in Lebanon’s infrastructure, especially the sectors of electricity, telecoms, roads, water and others, in order to stimulate further economic growth. The spending on the electricity sector since 1991 has recently reached USD 13 billion and is, thus, contributing to the fiscal deficit. The government’s financial transfers to EDL reached USD 1.3 billion or 34% of the total fiscal deficit and 8.4% of total spending in 2017. Therefore this sector need substantial private and public investments, mainly to construct new production units, so as to increase power supply in order to meet the growing power demand. Also, private investments in the telecoms sector is highly needed, in order to develop this sector and increase its income which stands today at USD 1.3 billion or 11.2% of total revenues. Liberalization of the telecoms sector is a prerequisite for expanding the scope of competition in this sector, thereby leading to its modernization and better economic contribution.
The study indicated that the Lebanese authorities should undertake serious, effective, and firm actions and measures to control and decrease the high rates of corruption, tax evasion (nearly USD 4 billion or 7% of GDP), customs gaps, and low collection of water and electricity tariffs (only 40% for electricity). Such sources affect negatively the public finances and growth rates in Lebanon.
The study also indicated that the government of Lebanon should be aware of the potential rise in inflation rates in the coming years. This could be influenced by the flow of Cedre funds to the economy, in case reforms are implemented. Also if some tax rates are raised, mainly the VAT and fuel taxes, besides raising the electricity and water tariffs. This in addition to the wage scale burden whose real cost reached USD 1.8 billion instead of the estimated USD 800 million. The government should equally be aware of the possibility of growth of the debt-to-GDP ratio, since 93% of the Cedre funds is in the form of loans whereas grants constitute 7% only. Higher inflation rates have negative repercussions on economic sectors, growth, and living standards.
The study stressed the importance of launching private investment projects in the oil and gas sectors very soon, in order to diversify the economic structure, diversify and increase national income and personal income, and strengthen future economic and social stability.