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A fiscal space to breathe

Financial Recovery Plan

by Rayane Dandache

In its efforts to address the grim situation that the economy and financial system are in, the Government of Lebanon published in April 2020 a financial recovery plan aimed at restoring confidence and putting the country back on a long term sustainable path. Most importantly, the program pointed at forcefully addressing “fiscal and financial imbalances” – the main pillars of the scheme that has fueled Lebanon’s downfall. These imbalances were addressed within one of the nine central headlines targeted at fiscal adjustment and focused on improving tax compliance, streamlining expenditures, and reforming the public sector.

Unfortunately, the government has failed to embark on immediate reforms to create fiscal space and support existing social safety nets despite the impact of the compounded crises falling hardest on the poor and the vulnerable.  As such, we address in this article the need and means to create this space and prioritize a set of actions from within the proposed reform pillars stipulated in the government’s plan.

As a result of the multiple crises, particularly during the last two years, Lebanon’s GDP dropped to below $20 billion, and the UN-ESCWA report on multidimensional poverty in Lebanon (2019-2021) stated that poverty almost doubled from 42 percent in 2019 to 82 percent in 2021, with nearly four million people facing deprivation in education, healthcare, public utilities, housing, assets, employment and income.

These alarming figures, coupled with rising inflation rates and the ongoing devaluation of the local currency, have exacerbated already existing vulnerabilities and exerted further pressure on the Lebanese people who are facing dire shortages of food, medicine, and fuel.

The medium-term fiscal strategy at a glance

In order to reduce the country’s fiscal deficit that has exceeded 10 percent of GDP, the recovery plan stressed on the need to re-evaluate the state’s fiscal policy and to define a clear set of targets or “golden rules” on which future budgets need to be based.

Several corrective measures were proposed – at the level of expenditures and revenues – geared toward creating a primary surplus by mainly cutting off wasteful spending and enhancing tax revenues. These proposals include but are not limited to increasing budgetary revenues by curbing tax fraud and evasion, improving the compliance rate, and revamping the entire tax system.

At the level of expenditures, proposals tackle the need to build spending priorities on the basis of clear criteria that meet the economic, social, and financial needs of the country such as controlling the public sector wage bill, addressing the hefty pension scheme, limiting transfers to Electricité du Liban, and reducing transfers to and financing of state-owned enterprises, agencies, and funds.

Despite the importance and inevitability of all these reform pillars to achieve the Government’s fiscal objectives, it is essential to recognize the fact that the majority require a relatively long process and, in many cases, the adoption of a set of reform laws. As such, most of them cannot yield a much needed immediate impact.

Fiscal space can exist

Sad to say, the social component in the program does not address the severity of the situation in the country. Despite surging poverty rates, the plan merely focused on the support that can be provided by international organizations (i.e., the World Bank) without realizing the importance of prioritizing many of the proposed corrective measures to create fiscal space.

Fiscal space is normally defined as the ability of the government to confidently use the available room in its budget without risking any unfavorable impact on its financial position or the economy’s stability. 

The reality is that Lebanon has no fiscal space. The country’s financial position and economy’s stability are already jeopardized; however, this does not deny the importance of looking at readily-available options to be implemented.

Delving deeper into these alternatives, the main titles of re-prioritizing expenditures and increasing tax revenues top the list. In terms of spending, the government should immediately opt for implementing the plan aimed at addressing the ineffectiveness of many of the 73 public entities by “merging entities when feasible, reigning salaries and benefits, and rationalizing operational costs, while closing other obsolete entities and eliminating redundancies when deemed relevant” .  Accordingly to a recent report by Institut des Finances Basil Fuleihan, despite there being many revenue-generating State Owned Enterprises (SOEs), others constitute a liability to the State. Lebanon’s classified off-budget spending is equivalent to more than 16 percent of total budget with large SOEs operating outside the budget, and managing substantial amounts of public funds that are not submitted to the legislature’s approval or reported into consolidated data.

At the level of revenues, quick-wins lie in increasing taxes on luxury goods and improving tax collection by first and foremost closing illegal crossings, fighting smuggling, and enforcing fines on projects illegally built on public domain maritime and other sites.  The occupancy of these large properties, whether licensed or not, fails to bring in the revenues corresponding to the value of the occupied areas mainly due to failure in collection. According to figures from previous draft budget laws, the average expected revenues amount to roughly $100 million.

These decisions do not only address inefficiencies and complement the government’s efforts in building fiscal resilience, but also support the already existing and weak social safety net program in adapting to the major economic downturn that the country is witnessing.

Reallocate spending for a better social safety net system

According to International Labor Organization (ILO) 2019 figures, Lebanon spends around 13.8 percent of its GDP and 30 percent of its public expenditures on social protection. Unfortunately, social coverage remains among the lowest and most inequitable.

That being said, and given the recent removal of subsidies that have long crowded out social spending, the reallocation and reprioritization of existing government spending has become unavoidable. This re-arrangement in fact feeds into expanding the budget allocated for the existing social safety net program (i.e., the National Poverty Targeting Program) in efforts of building a comprehensive system that is catered to the poor and the vulnerable Lebanese.

While the World Bank funded Emergency Social Safety Net (ESSN) and the foreseen Broad Coverage Cash Transfer (BCCT) programs can address the situation, they remain temporary solutions to all of Lebanon’s woes – a truth that further justifies the necessity of creating fiscal space that is able to provide a longer term solution in anticipation of the Government reaching an agreement with the International Monetary Fund.

However, it is worth noting that the support provided by the World Bank in terms of financing and the development of social safety net registries and databases would proves crucial to capture current and future vulnerabilities and to allow Lebanon’s current social safety net program to scale up and expand its coverage successfully in the future.

The need to act now

While many of the deeply rooted structural problems require medium- to long-term actions, the government must act immediately when addressing social issues and related policy responses by at least trying to implement one of the reform pillars they initially suggested in the recovery plan.

People are in the heart of the storm, and unless the latter’s impact is mitigated, the situation will remain a ticking social bomb.

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Rayane Dandache


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