2004 national budget

Despite a more

There was much debate and not a little bad feeling, but in the end Parliament, after a three-day marathon debate, approved the 2004 state draft budget on April 7, with a vote of 65-31 and one abstention. It was a more realistic budget to the one originally set for 2003, probably due to the government’s failure to even come close to achieving the previous year’s budget targets. Nevertheless, despite the new budget’s “more realistic” terms, many remain skeptical of the government’s ability to meet its targets.

The overall budget deficit is forecast to drop to 32.5% of expenditures in 2004. This compares well to the 42.3% of 2002, and could be achieved given that the deficit during the first eight months of 2003 peaked at 38.0%. It also remains more realistic than the 26% target originally set for the year 2003. As such, the total deficit is expected to level off at LL3,300 billion, compared to LL 2,525 billion for the draft law of 2003, and LL2,695 of the first eight months of the year. The deficit target results from total expenditures of LL9,250 billion, and revenues of LL6,400 billion, in addition to net treasury expenditures of LL450 billion. However, according to the ministry of finance, the 2004 draft budget does not account for the potential impact of any reforms outlined in the 2003 budget law, reforms that were meant to increase the productivity of the public sector, reduce its costs, and enhance its efficiency on the economy and its profit on citizens.

Elsewhere, total government expenditures under the new budget are expected to amount of LL9,250 billion, almost 8% above the 2003 draft law, and only 1.3% below those actually incurred in 2002. Unlike the case with the 2003 draft budget, the government currently acknowledges the fact that little cost cutting can be implemented given the budget’s existing cost structure. Non-debt servicing expenditures are expected to reach LL4,950 billion, almost 8% above those earmarked for 2003, while debt-servicing costs are expected to amount to LL 4,300 billion, also 8% above the 2003 estimates. On the other hand, debt servicing accounts for a staggering 47% of total expenditures, at LL4,300 billion in 2004. According to the ministry of finance, the debt servicing remains high due to the fact that some older, higher interest bearing obligations have yet to mature and result in a higher overall cost. A more significant reduction in such costs is expected to materialize in 2005 and 2006, as the older loans mature, and the impacts of lower-interest obligations, and the non-interest bearing funds injected into the treasury, are felt. Nevertheless, the ministry of finance has estimated that the proceeds of privatization and securitization, should such plans be implemented, would effectively reduce expenditures by LL400 billion, or 4.3%.

Admittedly, LL7,700 billion, or 84% of total expenditures, are seemingly fixed costs, with little or no room for further cost-cutting. In that regard, personnel wages account for 37% of total expenditures. With such costs including wages and salaries, related benefits, pensions, and end of service indemnities, they inherently lack flexibility. This leaves the government with potentially manageable expenditures of only 16% of the total spending. However, given that the items making up these expenditures have been subjected to several previous reduction attempts, it has become apparent that realizing any significant reduction on this level will be difficult in the absence of certain structural reforms.

While most ministries will benefit from higher funding in 2004, compared to the 2003 draft law, some have benefited from some substantial increases. The presidency of the council of ministers, for example, was allocated an additional LL118 billion, mostly to the benefit of the Council of the South and the Central Fund for the Displaced. The ministry of public works and transport and the ministry of public health benefited from additions of LL62 billion and LL44 billion respectively.

It is worth noting, however, and perhaps on a more negative note, that no additional allocation was provided to social expenditures in the 2004 budget. Total social expenditures are expected to remain unchanged compared to the 2003 budget law, at LL2,291 billion, with the majority going to pensions and end of service indemnities. Government revenues originally expected to be reaped in 2003 return, mostly unchanged, in 2004, the budget of which was drafted on the basis of not introducing any additional taxes, or amending existing ones. While the ministry of finance has repeatedly expressed its concerns regarding the Treasury’s liquidity position, and the resulting necessity in increasing Value Added Tax (VAT) from 10% to 12%, such an increase has not been taken into consideration in the new budget, and no plans for its imminent implementation are in the pipeline, according to ministry officials.

Total revenues are expected to amount to LL6,400 billion in 2004, almost unchanged from the 2003 budget. Tax revenues are expected to reach LL4,645 billion, compared to LL4,726 in the 2003 budget law. The drop is mainly due to a drop in tariffs on trade and international exchange, resulting mostly from a reduction in custom duties. Nevertheless, around LL100 billion in additional VAT revenues are expected to result from improvements in tax collection, and the reduction of the threshold of businesses eligible for VAT.

While many praised the “more rational” numbers included in the 2004 budget, it remains to be seen if such numbers are actually achievable, given the current economic, socio-political, and security conditions. The budget does appear to not take into consideration the substantial benefits (in excess of LL400 billion) that might result from the implementation of privatization and securitization plans. As such, any benefits from such progress will be a welcome bonus over and above the numbers reported in the budget.

On the expenditure side, and excluding debt servicing, total expenditures for the first eight months of 2003 reached LL2,672 billion, compared to a full-year budget for 2004 of LL4,950 billion. As such, and accounting for the LL350 billion additional expenditures earmarked for 2004, the government may be able to keep spending within the assigned range. Certain unforeseen events should be factored in, as they might adversely impact expenditures. Following the announcement of the results of the cellular license management tender in April, both MTC and Detecon have indicated plans to expand and upgrade the country’s cellular network. While no concrete plans have yet been presented in that regard, such expansions are likely to necessitate substantial capital investments, which are to be fall on the shoulders of the Ministry of Telecommunication.

The numerous problems facing the government with upgrading and running the port of Beirut bear substantial costs. While the burdens resulting from problems with the unions have not been quantified, they may significantly impact costs. Nevertheless, the government is seemingly working on a plan to auction off the management of the port operations to a private-sector third party, but such plans have yet to materialize.

Moreover, and while many officials have proclaimed to transform Lebanon into the health and medical center for the region, the country’s medical infrastructure is, by international standards, mediocre, according to industry experts, and is beginning to lag behind others in the region (such as the UAE and Kuwait). If the government is serious enough to undertake a transformation in the health industry to achieve its aim of repositioning the country as the regional medical center, it will again need to undertake substantial investments in that regard, and run the risk of overstretching the budget.

Finally, it remains to be seen, however, how the government’s efforts to meet the set budget for 2004 will react to the outcomes of the municipal elections in May, and the presidential elections in August.

On the one hand, the Hariri bloc is leading a massive campaign, especially in the Greater Beirut area. Historically, the Hariri bloc, represented by Rafik Hariri and minister of finance Fouad Siniora, has favored economic growth, over other economic issues. While some proclaimed that such strategies have resulted in the massive debt burden on the country, Siniora’s latest comments maintain that stimulating growth in the economy is likely the optimal solution to the growing debt burden. Moreover, the minister clearly stated that a successful effort in curbing the debt would necessitate some “unpopular” privatization steps and cutting in expenditures.

Such strategies do not agree well with the Lahoud bloc, which has thrown its presidential weight behind halting the privatization process due to its “unfavorable national aspect.”

With the elections looming, the outcome is likely to dictate the government’s fiscal and monetary policies in the future. A win for the Hariri will likely result in more spending, growth, and serious efforts to implement privatization plans in the shortest timeframe possible. A win by Lahoud would delay privatization until “more favorable conditions” arise, and curb expenditures in an effort to reduce the deficit.

In that sense, the fate of the budget, the economy, and ultimately the welfare of the Lebanese people hangs in the balance during the second half of the year, and is ultimately in the hands of those, foreign or domestic, that will determine the outcomes of the elections.