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Abu Dhabi, UAEMonday 18 June 2018

Lebanon approves "realistic" 2018 budget to avert Greece-like crisis, PM says

Debt-laden state is undertaking reforms to raise up to $16bn in donor money in April

“The budget of this year is realistic," Lebanese Prime Minister Saad Hariri said. Nabil Mounzer / EPA
“The budget of this year is realistic," Lebanese Prime Minister Saad Hariri said. Nabil Mounzer / EPA

Lebanon’s cabinet approved the country’s 2018 annual budget – just its second since 2005 - which forecasts a slightly lower deficit amid pledges to lower public sector spending and contain a ballooning debt to GDP ratio of 150 per cent.

The budget, which still requires approval by parliament, will help the country avoid a Greek-like debt crisis, the prime minister said.

Finance Minister Ali Khalil said budget reforms – which include significant spending cuts and a reduction of public institutions - could help Lebanon achieve growth exceeding 2 per cent this year, ahead of the 1-1.5 per cent forecast by the IMF.

“We preserved Lebanon through this budget and we distanced the country from the example of Greece’s crisis and there should be more reforms,” Prime Minister Saad Hariri said in press conference, according to a statement from his office. “The budget of this year is realistic.”

The cabinet’s approval of the budget comes just five months after the country approved its annual budget for 2017, its first since 2005, with efforts over previous years frustrated by political paralysis.

Lebanon is tidying up its finances as it gears up for a donor conference in April in Paris, where it aspires to get as much as $16 billion to help it tame its public debt, which stands at 150 per cent of GDP, amongst the highest in the world.

The country’s debt crisis has in recent years been exacerbated by political uncertainty, internal disagreements and the burden of hosting over 1 million Syrian refugees, which represent about a quarter of the population. Mr Hariri’s sudden resignation in November, which he rescinded later, plunged the country into political uncertainty and instigated an exodus of funds.

The IMF warned last month’s that Lebanon’s debt-to-GDP ratio could wax to reach 180 per cent by 2023 if the government does not undertake reforms to narrow its fiscal deficit, which may reach 10 per cent of GDP amid the current geopolitical tensions.

“We are heading for real reforms,” said Mr Khalil, according to the emailed statement. “We worked on cutting the expenses and increasing the revenues as well as taking measures that could push the economy forward even relatively, especially since we are on the eve of conferences that can and should help in moving the wheel of our economy by injecting funds in development and infrastructure projects.”

Mr Hariri had instructed government agencies in January to cut 2018 budgets by 20 per cent as part of reforms aimed at narrowing the fiscal deficit. Other reforms include reducing the number of public institutions, which currently number 84, Mr Khalil said.

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Lebanon’s government is forecast a budget deficit of 7.26 trillion Lebanese pounds, which is 220 billion pounds less than last year’s shortfall, he said.

The deficit projection is in line with forecasts of Oxford Economics, but the budget shortfall is expected to remain high at above 8 per cent of GDP for the foreseeable future, said senior Middle East economist Maya Senussi.

Nevertheless, the country’s economic growth could accelerate in the coming years, provided the economic status quo does not worsen, she predicted.

“Domestic and regional political challenges are weighing on the pace of recovery but absent deterioration, we should see growth accelerating above 2 per cent this year (our latest forecast is for 2.7 per cent expansion) supported by public infrastructure investment as well as trade and tourism recovery,” she said.

Lebanon’s GDP is projected to accelerate to 2.2 per cent in 2018, thanks to an improvement in the business environment and consumer confidence, which will help benefit the vital banking sector, BMI Research forecast in a new report on Tuesday.

“We maintain our view that the Lebanese banking sector will remain broadly stable over the coming quarters, benefiting from an improving macroeconomic outlook and robust support from the central bank,” said BMI, a unit of the Fitch group. “Lebanese banks will also continue to benefit from a loyal depositor base, fuelling liquidity in the sector and facilitating asset growth.”