Lebanon: an international conference of support to avoid bankruptcy

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Lebanon has been living for several months in the fear of an economic and financial crisis that has accelerated the holding of an international conference sponsored by France to steal his help and avoid a bankruptcy of the state.

Lebanon’s economy has been out of business for seven years due to repeated political crises that have seen the current Chamber of Deputies extend its own mandate three times: the May legislative elections will be the first since 2009. That has added the conflict in neighboring Syria and the influx of about one million refugees.

It is in this context that a support conference called “CEDRE” is being held in Paris on Friday, with the participation of representatives of several Arab and European countries, as well as regional and international financial institutions.

Lebanon hopes to raise “between 6 and 7 billion dollars in the form of credit lines and donations,” said Nadim Mounla, advisor to Prime Minister Saad Hariri.

Before the conference, the authorities adopted in extremis their new budget 2018 which provides for a deficit of 4.8 billion dollars against 2.3 billion in 2011, at the beginning of the Syrian crisis.

Faced with this sharp deterioration, “the probability of a systemic crisis is now all the higher,” warns economist Paul Doueihy.

– (In) monetary stability –

In the absence of any structural reform, the International Monetary Fund (IMF) warned the Lebanese authorities of the growing weight of the public debt, in an alarming note published in February.

It is estimated at more than $ 80 billion or 150% of GDP, the third highest ratio in the world, after Japan and Greece, and could reach 180% in five years, according to the IMF.

With a public deficit at 10% of GDP, “Lebanon has a crucial need for a fiscal consolidation plan,” warned the international institution.

“But the state is constantly increasing its spending,” said Mr. Doueihy.

The Lebanese Parliament adopted a public sector wage increase in July with an estimated annual cost of more than $ 1 billion.

“The state has hired, in parallel, 26,000 new civil servants over the past three years,” said Nassib Ghobril, director of research at Byblos Bank.

If public finances are in the crosshairs, fears of a currency devaluation have not disappeared either.

The Bank of Lebanon (BDL) drew more than $ 800 million in foreign currency reserves last November to halt conversions to the greenback and preserve the fixed exchange rate at 1507.5 pounds/dollar, in place since 1997.

But the structural factors behind monetary fragility persist. With a chronical deficit balance of the current account – at 20% of GDP last year – the Lebanese pound is artificially overvalued, say experts.

Thus “the effective nominal exchange rate has increased significantly in recent years,” says the IMF report.

– Tax evasion –

The return to monetary stability has, moreover, occurred at the expense of a substantial rise in interest rates – from 6% to 9% on average on deposits in pounds – likely to penalize investment and increase the cost of debt of the state.

Added to this is a decline in the government’s funding margin, due to slower growth in deposits. In 2017, these increased by 4%, against 12% in 2010, on the eve of the war in Syria.

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However, the government recently adopted a series of tax measures, including the 11% VAT increase, to finance the new salary scale.

“It is difficult in a context of sluggish growth and erosion of purchasing power to further increase taxes,” said Marwan Barakat, head of the research department at Bank Audi.

To bail out its coffers, the state can, however, fight against tax evasion, estimated at $ 4.2 billion per year.

“If there is a serious political will, Lebanon can recover up to half of the shortfall, or more than $ 2 billion a year,” says Barakat.

But these reforms are the test of a recrudescence of corruption, that 92% of the Lebanese affirmed in 2016 to have noted. In its latest report, the NGO Transparency International ranked Lebanon 143rd out of 180 countries, according to the perception of corruption index.