Fiscal deficit for Lebanon

On 30 April 2019, the Lebanese cabinet began discussing the stalled 2019 draft budget, which Prime Minister Saad Hariri has called the "most austere" budget in Lebanon's history. Suggested cuts to civil service hiring, benefits, and pensions are part of measures to reduce the excessively large budget deficit, anticipated to have reached 10.6% of GDP in 2018. Over the past month, public-sector labour unions have protested against possible forthcoming measures. The General Confederation of Lebanese Workers began a three-day strike on 2 May 2019 over the proposed measures.

Significance

The draft 2019 budget, as circulated in local media, appears inadequate in reducing public spending, but it is likely to be passed by parliament in the coming weeks. Stricter economic policies, such as increased taxes and reduced subsidies, are needed to support the economy which is constrained by its large debt-to-GDP, approximately 153% and consistently high deficits in recent years. Our economists assess that Lebanon remains at risk of a major currency devaluation in the coming three to five years, despite recent positive developments such as forming a national unity cabinet in February 2019 and passing long awaited legislation to the energy sector in April. Lebanon has maintained sizeable foreign exchange reserves, USD40.2 billion or 72% of GDP as of January 2019, although they have declined by 13% since their peak in May 2018. The budget avoided the most contentious items such as civil service wage cuts and deciding on military pension reform, which would likely have resulted in larger and more disruptive protests and strikes. Nonetheless, recurring protests engaging hundreds to thousands of people are likely in central Beirut against government policies in the coming months. To help address its deficit, IHS Markit anticipates the government will increase the tax rate on bank deposits from 7% to 10% as part of the 2019 budget. The need for this tax increase would be reduced if banks elect on a "voluntary" basis to swap state debt for reduced coupons and/or extended maturities to assist government budgetary objectives. Implementation of the budget also remains sensitive to political cohesion: increased infighting within the administration would indicate increased risk of policy blockage including a delay to the budget with the consequence of increasing risks to debt sustainability, prompt payments of contracts, and further delayed planned infrastructure projects.

Rebecka Freeman is an analyst on the country risk team at IHS Markit