Lebanon seeks to further slash its deficit after approving a plan to reduce ruinous electricity subsidies as government continues to grapple with high public debt burden.
BEIRUT – Lebanon hopes to halve its ruinous electricity subsidy in 2020 as it targets more spending cuts after proposing a deficit-slashing budget plan for this year, the prime minister’s financial adviser said on Friday.
The coalition government on Monday agreed a 2019 budget with a projected deficit of 7.6% of gross domestic product (GDP), down from 11.5% last year, but it must still be approved by parliament.
“I think the 2020 budget, which will be studied by the cabinet in a few weeks, is going to demonstrate another fiscal consolidation,” Nadim Munla said after a press briefing.
“The main component that will help in the reduction of the deficit will be the reduction in the subsidy to the power sector,” he added.
Lebanon has one of the world’s highest debt burdens, equivalent to about 150% of GDP, and electricity subsidies cost 3.5%-4% of GDP a year, Munla said.
Lebanon’s two other main expenses are the cost of debt servicing and the large public payroll.
Credit ratings agencies have expressed doubt that Lebanon can meet its deficit goals. S&P Global said on Tuesday it expected a deficit of 10% of GDP and Fitch said on Thursday it forecast a deficit of 9% of GDP.
Responding to those estimates, Munla and Labour Minister Camille Abousleiman both said the government could meet its budget targets, but that parliament must agree the plan without big changes.
“It is critical from a financial perspective that we don’t start caving in and deleting some of the difficult measures that are currently in the budget,” Abousleiman told Reuters.
Asked if Lebanon could avoid a default given its very large stock of public debt Abousleiman said: “I am hopeful,” but he added that the country also needed to adopt “ambitious structural reform” on top of the fiscal retrenchment.
Abousleiman has a rare financial background in the cabinet, having acted on sovereign debt issuances for Egypt, Tunisia, Albania, Bahrain, Jordan and Morocco for law firm Dechert.
Munla said he did “not anticipate any problems” regarding a default. “Most of our sovereign debt is internal debt… and the banking sector has the financial resources equivalent to around three times the debt,” he said.
Half of the budgeted reduction in the 2019 deficit comes from spending cuts and half by increasing revenue, Munla said. Some 40% of the revenue increase is projected to come from a temporary rise in the tax on interest to 10% from 7%.
However, “we’re reaching the limit on how much the banking sector can contribute to a reduction in the deficit,” he added.
Lebanon this year approved a plan to reduce electricity subsidies by switching to more efficient generators, raising tariffs and improving bill collection.
Implementing the deficit cuts is vital to restore Lebanon’s credibility in markets and the confidence of investors and depositors, Abousleiman said.
“I can accept that the credibility of the government given its track record is not great, but we need to work on that,” he added. “We’re talking about a six-month period, so please give us a chance and keep an open mind.”
International donors at a Paris conference last year pledged $11 billion in project finance for Lebanese infrastructure contingent on reforms.
Economists from two major donors, the World Bank and the European Bank for Reconstruction and Development this week told Reuters that Lebanon’s budget plan was a good step.
“What they did is fulfilling one of the first commitments to (the conference) which is decreasing budget deficit,” said Bassem Kamar, EBRD’s lead economist for the southern and eastern Mediterranean.