As Lebanon stares down increasing deficits, mounting debt, a history of fiscal inefficiency and recent complications posed by the Syrian war, the state’s finances are yet again in troubled waters. Executive sits down with the person charged with keeping the government’s fiscal ship afloat, Alain Bifani, director general of the Ministry of Finance since 2000.
[pullquote]If you abide by the rules and wait for the windows of opportunities then you can achieve plenty of things. [/pullquote]
You’ve been at the Ministry of Finance for nearly 15 years. When you approached the job the first day, five years, or 10 years in, did you have a mindset of “this is what I want to be doing this year in the medium and long term” in the context of the national budget?
When I joined the ministry, I had in mind to review the whole tax system, for instance. The part I was successful in was that we introduced VAT [value added tax], and we introduced it very quickly, despite tremendous political resistance. Now I’m more and more into the details that make a huge difference like, for instance, developing a macrofiscal framework for Lebanon — which we did — [in addition to things] such as being able to have a debt directorate that works well and finalizing a medium term debt strategy.
I’ve never had a draft budget the way I wanted it to be. This is one source of frustration that I still have. It has become a very big source of worry to me because we don’t have a budget. I have to be inventive all the time because we don’t have a budget that is formally voted upon. And this is really bad for the country, really bad for the ministry and for the whole system. We are not in a context where [fiscal] reforms are easy to do — where the system has a decisionmaking process that allows change to happen whenever it should happen. But it is just like any other system — a game that has rules. If you abide by the rules and wait for the windows of opportunities then you can achieve plenty of things.
Capital spending seems to be very low, and it also seems that the only focus is on satisfying expenditures rather than on sustainable investment. But you’ve stated quite recently that this situation is being restructured away from short term measures and that, for example, a massive investment is taking place in electricity, which accounts for some 40 percent of the deficit. Can you explain how this infrastructure investment is shifting?
It really started shifting when the electricity plan was approved in 2010. It was clear at that point that we would have a peak in capital expenditure in the energy sector. Normally we’ll have more supply and if you have more supply it means that people will rely more on Électricité du Liban and less on private generators. This will provide room for a tariff change — the main reason why we’re losing money. We’re losing money not because we want to, [but] because electricy is subsidized very heavily.
Altogether we will probably see the deficit decrease, plus hopefully, fixing some issues of governance within the institutions will also help improve the situation. I cannot estimate by how much now — it’s not the right time to give figures. But it’s a big amount; the bracket has been close to $2 billion as a whole.
[pullquote]One might argue that we have even more reserves than required, so this in itself is a very positive and good indication [/pullquote]
Jim Yong Kim, president of the World Bank, stressed on his visit to Lebanon earlier this year the importance of public–private partnerships (PPP) to reform institutions, particularly in the electricity sector. What are some indicators of whether Lebanon is following this advice?
The government of Lebanon already prepared a draft law for PPP a long time ago. It hasn’t been passed yet. To have a proper PPP operation you need to first know exactly what you want. Second, you need to make sure that you’re able to attract private funding at a lower cost than public funding, or at an equivalent cost, or at slightly higher cost. Here we’re talking about investment and there must be a return on investment. If, from the beginning, you say, “I don’t have the money to invest,” you let somebody else invest and get the return, [but] maybe you are losing more than what you are gaining. We have to have a very pragmatic approach looking at each and every project, seeing what we can achieve in terms of a partnership. But if you want to attract foreign or private investors, it is always good for them to have the guarantee of a legal framework.
The central bank’s foreign currency assets climbed to new levels, reaching $38.4 billion in September. Does this indicate structural weakness in the context of the state’s finances?
Well it is not obvious that it indicates financial weakness, but when someone needs to have high reserves it is probably because there is a need to maintain confidence. I wouldn’t say myself that it is an indicator of weakness; I think it is one of the main indicators of strength. One might argue that we have even more reserves than required, so this in itself is a very positive and good indication. It is a very good cushion and it helps to maintain confidence.
Is the trade deficit a vulnerability for state finances?
Of course, it is a historical vulnerability to Lebanon. We are a country that for a very, very long time [has had a] structural trade deficit that is very large. And that means we are a country that doesn’t produce enough and that we overspend compared to what we produce, which means that we tend to rely on what people produce abroad — which is not necessarily the best structure to have.
What role does the Ministry of Finance play in mitigating this vulnerability or the negative outcomes from the trade deficit?
In this, one can argue that we need to review our export policy, we need to have synergies created for exporters, we need to review taxes and customs, we need to revisit the way many administrations work, but that is a policy that has to apply to everybody.
At the end of June, the central bank held 30 percent of local currency government debt. Does that level of debt holding enable the central bank to leverage greater influence over state finances?
I’m sure the central bank would like to have much more leverage than what it has, but I don’t think this is at all its intent. I think the central bank has simply been doing this to prevent a deterioration of the situation, which has been the case for a very long time. Of course one can argue that the level is high, others would argue that it shouldn’t happen at all. But you have to be very pragmatic, and I think that both the Ministry of Finance and the central bank have been very pragmatic. It is simply the case that in the previous couple of years or more, it wasn’t easy at all to continue to offload the government paper from the balance sheet of the central bank. But this has happened in the past and we are hoping to find the opportunity again to decrease the exposure of the central bank to the state.
[pullquote]I think it would be unfair to say that the central bank has a bigger say because of a situation which it wouldn’t like to be in anyway[/pullquote]
Because it has a lot of exposure — and you do sit on the board of the central bank — does that practically allow the bank to leverage more influence? Do you see this as a reality?
Let’s take a few steps back and look at it from the beginning. We have a government in Lebanon that has started, from the [end of the Civil] War, to accumulate deficits and debt, which clearly shows that the government itself has not managed to have a proper fiscal policy. And if you are not able to have a proper fiscal policy, this necessarily means that the central bank is going to have a bigger say, or is going to wish to have a bigger say, because it is in charge of stability here. I think that the weakness of the policies of the government induced this intervention — I don’t like to call it intervention, but this exposure of the central bank. Even if it would theoretically give it a bigger say, [it] is definitely not something that any central bank would wish to have. I think it would be unfair to say that the central bank has a bigger say because of a situation which it wouldn’t like to be in anyway.
You’ve been here for nearly 15 years; you sit at the nexus — the connection point between all the various factions and powers. When it comes to a budget, because of your position, do you not have a lot of leverage to say, “It’s 2014, 2013 has passed and so has 2012, 2011, 2010 … let’s pass these draft budgets”?
Oh, but we keep doing that. Let me tell you, every single year, we have been in full respect of the law and we’ve always produced our draft before August 31. We hand it to whoever is minister, who would either send it to the council of ministers by the deadline or not. For instance, this budget [draft budget 2015] was sent to the council of ministers [before] the legal deadline. Now I’m not at all in the position to tell the government to convene for a budget meeting —
[pullquote]It is unfair to continue to bear with all of the complications of not having a budget. It is unfair to Lebanon[/pullquote]
You kind of are in the position —
Well I keep doing that, but the fact is it doesn’t bear fruit. The director general talks to his minister, the minister talks to the government [council of ministers]. Now if the minister of finance insists, the government might not answer. And if the minister of finance doesn’t insist, it’s one more reason why the government is not going to feel under pressure. My job is to do my homework on time, and the minister does his homework on time, and then the government is supposed to study the draft, amend it, and send it to Parliament on time and then Parliament has to pass it.
Of course we would have this never ending discussion of “yes, but initially in the 90s it wasn’t done properly and now we want to do it properly and so on.” Fine. We want to do it properly but whatever and however we see things, this country needs a budget and it needs it quickly. It is unfair to continue to bear with all of the complications of not having a budget. It is unfair to Lebanon.