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Abu Dhabi, UAESunday 23 September 2018

Lebanon's donor conference is a 'Band-Aid' to the debt-laden country's financial woes

Country is seeking financial support for least $16bn worth of projects at the CEDRE meeting

Th iconic Martyrs' Monument in downtown Beirut, Lebanon. The government is struggling to control its finances amid political instability stemming from the 7-year old conflict in neighbouring Syria. Hassan Ammar/AP
Th iconic Martyrs' Monument in downtown Beirut, Lebanon. The government is struggling to control its finances amid political instability stemming from the 7-year old conflict in neighbouring Syria. Hassan Ammar/AP

Lebanon is set to present a raft of proposed projects worth $16 billion to some 50 countries and international financial institutions in Paris on Friday as the debt-saddled state seeks soft loans to modernise its dilapidated infrastructure.

The CEDRE Conference takes place as Lebanon grapples with a ballooning public debt, widening fiscal deficit, low growth and the economic burden of hosting around a million Syria refugees in a country with a population of 4 million – the world’s highest per capita refugee figure.

Prime Minister Saad Hariri is leading the Lebanese delegation to Paris, which has hosted donor conferences for Lebanon before. The investment plan that will be presented to CEDRE was prepared in co-operation with the World Bank and the International Monetary Fund, the prime minister has said.

The donor conference is taking place amid stark warnings from the IMF. Lebanon’s debt-to-GDP ratio could balloon to 180 per cent by 2023 from the current 150 per cent 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, the fund said in February. The IMF is forecasting growth of between 1 and 1.5 per cent for 2018, which is a far cry from the 8 per cent expansion in 2010 – the year prior to the outbreak of the Arab Spring and the civil war in neighbouring Syria.

Lebanon's economy is hurting from the ongoing seven-year war, which has curtailed an important trade and business route, and led to the influx of refugees. The country's heavy debt burden is also a concern for investors, who are not as eager as before to invest in a country struggling to control its finances.

Following the approval of the 2018 budget by the cabinet in March, Mr Hariri said the country had averted a Greece-like crisis. The cabinet’s approval of the budget, which has a slightly lower fiscal deficit than 2017, 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.

“We preserved Lebanon through this budget and we distanced the country from the example of Greece’s crisis and there should be more reforms,” Mr Hariri said in March. “The budget of this year is realistic.”

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Read more:

S&P affirms Lebanon's sovereign credit ratings despite rising government debt

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

Lebanon's debt-to-GDP could balloon to 180% by 2023, IMF warns

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At the donor conference Lebanon wants loans to help rebuild its battered infrastructure, which has been battered by war and is crumbling under the strain of hosting refugees. Lebanon has enlisted the help of consultancy McKinsey &Co to draft an economic road map for the country.

Analysts say the conference is essential for the survival of Lebanon.

“The Paris conference is very important because it would mobilise adequate financial support, at concessional terms, from multilateral and bilateral sources to finance crucial projects, including in the energy, transportation, and water sectors,” said Garbis Iradian, chief Mena economist at the Washington-based Institute of International Finance. “The implementation of such projects would raise the potential growth in the country and improve public sector services.”

Mr Hariri has said the CEDRE conference aims to ensure the financing of the first five-year period of the Capital Investment Programme spanning 2018 to 2022, with proposed funding for projects worth $10bn. Out of that figure, $3bn to $4bn will be executed through partnership between the public and private sectors.

The remaining $6bn is expected to be financed by the Lebanese government through credit facilities that carry interest rates not exceeding 1.5 per cent and maturities ranging between 10 to 30 years.

While Lebanon will not be able to break the cycle of wide budget deficits and high debt, the donor conference will be a “Band-Aid” for the country’s fiscal problems, according to Maya Senussi, senior economist for the Middle East at Oxford Economics.

“Even if funding pledges fall short of expectations, they will support capital expenditure the government has not been able to afford," said Ms Senussi.

The conference is taking place at a time when the economic conditions in Lebanon are deteriorating. Investor confidence is low, the real estate sector is stagnating and new taxes imposed last year to help finance public salary increases are dampening private sector growth.

The Blominvest Purchasing Managers’ Index, a gauge of the health of Lebanon’s private sector economy, continued to worsen in March, falling to 46.5 from a 10-month high of 47.3 in February due to a drop in output and lower employment. A reading below 50 signals contraction.

“The importance of CEDRE is that the international community has high expectations that the Lebanese authorities will implement the much-needed and long-awaited structural reforms in order to justify and make the case for the international support,” said Nassib Ghobril, chief economist at Lebanon’s Byblos Bank Group.

“Unfortunately, the conference has become part of the campaign for the upcoming parliamentary elections to be held on May 6.”

Despite its financial woes, Lebanon does not need an IMF rescue programme, according to analysts. Lebanon’s Central Bank reserves exceed $44bn or about 80 per cent of GDP and the country has never defaulted on its debt.

“The state is solvent and is meeting all of its debt obligations to creditors,” said Mr Ghobril. “In addition, the IMF has one remedy to all countries, which is to raise taxes and lift subsidies. This will not solve the challenges of public finances in Lebanon. Instead, it will exacerbate them.”

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