Abu Dhabi, UAETuesday 21 May 2019

Lebanon moves a step closer to $11bn economic boost

Formation of new cabinet should allow country to unlock funds pledged for building infrastructure

Lebanese Prime Minister Saad Hariri arrives at the presidential palace in Baabda for his new cabinet's first meeting on February 2, 2019. AFP
Lebanese Prime Minister Saad Hariri arrives at the presidential palace in Baabda for his new cabinet's first meeting on February 2, 2019. AFP

After nine months of political deadlock, the formation of a new government in Lebanon on Thursday removes a major obstacle to receiving nearly $11 billion in international funding that should allow the heavily indebted country to move forward with economic reform.

The funds pledged at the Cedre conference in Paris last April, coupled with expected investments from the private sector estimated at $7bn, will serve to finance Lebanon’s ambitious eight-year capital investment programme (CIP) comprised of 250 projects to revamp the country’s crumbling infrastructure.

In return, Lebanon, which has the third-highest debt-to-GDP ratio in the world, has promised to reduce its fiscal deficit by 1 per cent of its GDP per year over the next five years.

In line with the CIP, the cabinet’s first step will be to entirely redesign the country’s inefficient electricity sector, Nadim Munla, economic adviser to Prime Minister Saad Hariri, told The National.

The state-run national utility company, Electricite du Liban (EDL), never recovered from the damage to its infrastructure in the 1975-1990 civil war and has been unable to provide regular power supply ever since. Subsidising the EDL's losses represents the treasury’s third-largest expenditure, after servicing debt and public sector salaries. In 2017, the power utility cost the treasury $1.33bn, a jump of 43.3 per cent from the previous year caused by increased fuel imports and prices.

“The electricity file is the government’s top priority," said Mr Munla. “I assume it will be put on the table in the next few weeks." He added that over the next two years, there will be power purchasing agreements with private companies such as Siemens and General Electric and that electricity production will gradually shift from fuel oil to imported gas.

Electricity reform generates unanimous enthusiasm among Lebanese economists. “Electricity will become cheaper even for the poor, because they won’t have to pay for generators anymore," said Charbel Cordahi, economist and chief financial officer of the telecom operator Touch. The Lebanese pay from $50 to more than $100 a month for power from unregulated private generator operators.

However, some analysts, such as Jad Chaaban, associate professor at the American University of Beirut, caution against Lebanon borrowing further. “The government could finance infrastructure projects by cutting down on EDL subsidies and debt payment as well as tackling tax evasion," he said. “That would save between $3bn to $4bn a year."

Hazar Caracalla, another of Mr Hariri's economic advisers, argues that the concessional interest rates on loans under Cedre, at 1.7 per cent, are much lower than market rates which can exceed 10 per cent.

“It’s true that we are borrowing money, but this money is going towards infrastructure projects that will generate growth and jobs. Coupled with fiscal consolidation, it will allow us to see a decrease of our deficit-to-GDP ratio," she said.

But Moody's Investor Service warns that fiscal consolidation will be difficult “in the context of very weak growth”. “As long as deposit growth remains weak, potentially because of lingering uncertainty about the capacity of the government to shore up macroeconomic stability, Lebanon’s fiscal and external positions will remain amongst the weakest across the sovereigns that we rate," vice president Elisa Parisi-Capone said on Friday.

To provide a more attractive environment for foreign investors and the private sector, Lebanon committed to passing a series of much needed laws to improve governance. Some legislation, particularly regarding commerce, has not been updated since before the civil war, and the country suffers from rampant clientelism encouraged by its sectarian power structure.

“The investment climate suffers from red tape, corruption, arbitrary licensing decisions, complex customs procedures, high taxes, tariffs and fees, archaic legislation, and inadequate intellectual property rights protection," Forbes said in its latest ranking of the best countries to do business, in which Lebanon came 92nd out of 161 countries.

Five of the laws were passed by parliament last September, Mrs Caracalla said, and the remaining eight will be hopefully be “approved and ratified during the course of this year”.

However, despite the laws’ laudable goals to improve transparency and fight corruption, Mr Chaaban argues that they do not hold accountable the one Lebanese body that exclusively manages all foreign-funded projects: the Council for Development and Reconstruction (CDR).

“Since 1990, the CDR has spent $14bn – and we don’t know where the money went," he said. “The new laws might set up anti-corruption courts and protect whistle-blowers, but if they don’t tackle corruption top down, they will remain simple cosmetic changes."

Lebanon created a ministry of state for combating corruption in December 2016 but, in an ominous sign of the new cabinet’s priorities, it was not renewed this week.

Updated: February 2, 2019 08:03 PM

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