Lebanon’s draft 2019 budget, set out by the new government instated in January, is insufficient to dramatically lower the country’s heavy debt despite spending reductions and revenue-saving measures, according to Moody’s Investor Services.
The draft budget could restore a primary surplus in Lebanon’s current account, but interest rates remain too high to significantly alter the country’s fiscal position, the rating agency said.
“According to our debt projections, the implied primary balance adjustment and the previously announced interest savings from the refinancing of high interest rate T-bills [State Treasury bills] with lower interest rate bills…remain insufficient to significantly change the debt trajectory because of the persistent interest rate/growth rate differential,” Moody’s said.
As a result, Lebanon’s debt-to-gross domestic product ratio will continue to increase to 155 per cent of GDP in 2023, from around 140 per cent in 2018. That makes it one of the most indebted nations behind Japan, Venezuela and Sudan.
Lebanon's government finalised its long-awaited draft budget last month, aiming for a deficit reduction of 7.6 per cent of GDP in 2019, from 11.5 per cent last year. The budget still requires parliament's ratification which has in the past failed to endorse previous financial plans.
Lebanon's economy has stalled as a result of internal political bickering and an eight-year war in neighbouring Syria. Annual GDP growth rates have fallen to between 1 and 2 per cent, compared to 8 to 10 per cent in the pre-war years.
The country’s financial crisis was compounded by political wrangling amid a nine-month leadership void, until Lebanon finally formed a new government led by prime minister Saad Hariri on January 31. Mr Hariri has said his government must deliver on promises to rein in public spending and overhaul the economy.
Narrowing the fiscal deficit is key to unlocking $11 billion (Dh40.4bn) in loans and grants pledged by international donors at the Cedre conference in Paris last year. Both the International Monetary Fund and the Institute of International Finance have urged the government to find ways to raise revenue collection and curb spending.
The draft budget implies an improvement in the primary balance to a surplus of 1.7 per cent of GDP in 2019, from an estimated deficit of about 1 per cent, Moody’s said. The adjustment is to be achieved through spending cuts and only a limited increase in revenue.
Total expenditures are to be cut to 29.3 per cent of GDP from an estimated 32.9 per cent in 2018. The wage bill is set to be reduced to 9.3 per cent of GDP from an estimated 10.6 per cent in 2018. The budget also implies a reduction in the interest bill to 9.3 per cent of GDP, from an estimated 9.8 per cent, a reduction in transfers to state-owned utility Electricite du Liban and a reduction in other spending of 0.4 per cent.
The projected budget revenue amounts to $12.6bn or 21.7 per cent of GDP, from an estimated 21.5 per cent in 2018.
Other reported debt-reduction measures include an import tax and increase in the tax on interest on banking deposits to 10 per cent from 7 per cent for three years, and on interest income from Treasury bills and the central bank – which could pressure Lebanese banks’ profitability, according to Moody’s.
“In line with the announced budget, we expect limited additional savings from revenue measures in light of weakening growth since 2011,” the agency said.
In addition, the implied reduction in the wage share reduces accumulated excesses from the past few years, “but does not signal a trend reversal unless further cuts are sustained in the future”.
This should be supported by an anticipated improvement in economic activity in the next five years once the $11bn of project loans are disbursed, Moody's said.
