Home BusinessComment The road that was never taken

The road that was never taken

Lebanon’s fiscal reform

by Salim Taha

The definition of reform in the dictionary is “making changes to something in order to improve it.” It seems the fiscal situation in Lebanon has reached a point where no amount of changes can improve it. The challenge has become insurmountable and the country’s finances might fall into a permanent failure trap that might persist for many years.

Let’s look into the major categories of revenues and expenditures historically in Lebanon.

State treasury revenues are generated, in order, by income taxes, value-added tax (VAT), state owned enterprises (SOEs), customs and excises, and real estate registration.

Down, down, down
All treasury revenues in Lebanon were collected at levels far below their optimal level due to endemic corruption; corporates and individuals rarely declared the right level of their income or real estate transactions. Customs and excises generated approximately half of the expected revenues, the VAT tax gap reached around 80 percent, and SOEs such as Middle East Airlines (MEA), Beirut’s port and airport, Casino du Liban, the Régie, Electricite du Liban (EDL), and telecom operators are overstaffed and mismanaged to say the least.

The Lebanese economy is estimated to have shrunk by around 40 percent in the past two years and is going through one of the most complex and dire crises in history. For the same reasons that treasury revenues were under collected, reasons newly exacerbated by the shrinking of the economy, the erosion of purchasing power and increase in poverty, the finances of the Lebanese government in the coming years will be a fraction of what they used to be. In dollars, at the now-deceased official exchange rate, revenues were around $10 billion during the beginning of the collapse which really started in 2016 and was artificially postponed by the “financial engineering” undertaken by the Lebanese central bank, Banque du Liban (BDL), at a very high cost. In the first five months of 2021, according the latest published figures by the Ministry of Finance, the treasury collected 6,658 billion lira, the equivalent of $246 million at the closing black market rate of 2021 (27,000 Lebanese pounds/$1). Extrapolated to a full year, this means the revenues would reach around $590 million, or 6 percent of what they used to be in dollars.

In a sorry state

On the expenditures side, the highest categories are occupied by personnel costs at the top, with debt interest payments coming in at a very close second, followed by subsidies to Electricité Du Liban (EDL), then capital expenditures (capex), then municipalities. An overly bloated government with some 300,000 employees on the payroll between active duty and retired staff (no one really knows the exact figure), where clientelism has always been the name of the game, is not expected to fire anyone anytime soon. End-of-service and pension payments were already unsustainable before the crisis, and printing more Lebanese pound notes to keep them up will only make things worse. Transfers to EDL shrunk by half between 2018 and 2020-due to lack of funds, not to mention the absence of reforms. This has translated as reduced deficit but more blackouts, higher costs on households to substitute increasing blackouts with generators, increased pollution, and less economic productivity. Capex was zero in 2019 and 2020, which means even the small amount of spending on maintaining the minimum infrastructure – post obscene profits margins that had been granted to politically affiliated contractors – is not available, which will only make the country more unlivable, and require much more investment in the future to rebuild it.

As for the interest on debt, following the default decision on Lebanon’s external debt (Eurobonds), billions of dollars in depositors’ funds, in principal and interest, must be factored in with a proper debt restructuring agreement with investors. The restructuring will not be feasible without an International Monetary Fund (IMF) program, which will not materialize without fiscal reforms. But given the clear unwillingness of the political godfathers of the system to reform anything, the country and its government are expected to remain in a zombie state. This means the treasury, with its miniscule revenues and expenditures in real value, will artificially be kept alive with additional printing of Lebanese pound notes, creating a spiral effect of devaluation/inflation/poverty/negative growth, which can go on for a long time.

Succession planning?

You are probably wondering by now what the solution might be. Well, the official answer to that is: reform public service, restructure debt, restructure the banks, restructure the state-owned enterprises, take money from the IMF and rebuild the economy hoping to get back to pre-2019 GDP levels in 15 years. Here you go, la vie est belle.

Is that a realistic scenario? When companies fail, the first thing that bankruptcy administrators do is change the management. A whole country failed and is witnessing the largest exodus of human capital since its civil war 40 years ago, but the managers are still the same. Until the managers are changed, one way or another, we should expect Lebanon to become a small, poor and failed economy, surviving indefinitely on a few billion dollars in net remittances.

Support our fight for economic liberty &
the freedom of the entrepreneurial mind

Salim Taha

Economist specialized in public finance.

View all posts by

You may also like