A sobering reality emerges in the shadow of the long-awaited 2019 budget, declared by Prime Minister Saad Hariri as the most austere in Lebanon’s history. As a stop-gap fiscal rescue package, it falls short of the transformational budget, based on a grand national vision for debt reduction and upgrading of critical infrastructure that is sorely needed at this juncture. Justifiably, the refinancing of near-term maturity Eurobonds is on hold as foreign investors ponder the absence of the promised public reforms. Similarly, the CEDRE creditors—about 8 percent of the pledged amounts are grants, with the majority of the funding in new loans—have also withheld the pledged funding on the requirement that Lebanon undertake serious public reforms.
An unnecessary ordeal
A unanimous austerity consensus across the political class was met with anxiety, disappointment, and anger by large segments of the population, particularly public sector employees, military officers, teachers, and pensioners. The budget follows unusually gloomy statements over the last 12 to 18 months by top political and community leaders regarding the financial crisis and the severe lack of liquidity. These announcements often coincided with the customary reassuring statements of Banque du Liban (BDL), Lebanon’s central bank, regarding the stability of the currency and the health of the financial sector. This dual-track discourse has generated a sense of deep financial crisis and an overall distrust of institutions, gradually amplifying a national suspense about a possible looming disaster, and the usual flight to foreign currencies. Combined with the mounting geopolitical risks, the repatriation of large numbers of previously-employed Lebanese citizens from the Gulf countries, and the continuing burden of the refugee crisis, a national ordeal of negativity has befallen consumers and producers alike. This has affected investment and spending decisions and depressed entire asset classes, such as the real estate sector.
Since much of the pressure from creditors is tied to the high 2018 budget deficit and debt-to-GDP ratio, Lebanon should defer any further debt, and instead, reduce its total debt by enacting structural, organizational, and financial deleveraging reforms on a fast-track basis. Instead of utilizing debt to rebuild infrastructure, Lebanon should reorganize the power sector into independent private utilities, with equity and debt issues to be owned by a majority of Lebanese investors. The delivery of a long-awaited reliable electricity sector should be entrusted to competitive private utilities subject to public regulation regarding rate setting. A reform of the capital markets in support of an “Invest in Lebanon” program would help reduce debt through new infusions of capital into the public and private entities, and create a new investment vehicle for future employee retirement plans.
Lebanon has made inroads in startup formation, information services, tourism, healthcare, and higher education. With potential major new revenues from energy production within the next decade or so, Lebanon now needs a long-term vision for success. It needs to chart a clear course on the enlightened socio-capitalism spectrum, both geopolitically and economically, with similarities to Switzerland, Singapore, Monaco, UAE, and others. This vision must be communicated to Lebanese citizens and international markets alike, in order to elicit the essential trust in the direction of the country, and the acceptance of the austerity measures as a means to an end: a new more vibrant Lebanese economy.
The Lebanese political leadership has elected an unusually tough stance regarding the austerity measures. To many, such cuts—while unwelcome—could be acceptable, if perceived as a worthwhile sacrifice and an investment in the future of Lebanon. The communication of such measures—which affect not only public employees and pensioners, but also investors by boosting the tax on interest income—as a national short-term sacrifice for all, is critical to their acceptance and renewed public confidence.
Lebanon is at a crossroads, but also a tipping point. It can either solve its problems through sound long-term measures, or continue to avert the short-term crisis by further mortgaging the future and increasing a future risk of default. In order to gain the trust and patience of its population, it is in sore need of a grand vision, better coupled with prudent management of its finances, and a deleveraging and modernization of the public sector, in order to lead its citizens to a period of renewed prosperity. Adding more debt to the balance sheet is by no means the highest priority.