Lebanon’s budget: One hurdle is passed, many more remain to be overcome

Missing signals

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Three months is not a long time, depending on one’s perspective. If you are a rock that has had Mediterranean waves washing up against you for the last 11,000 years, three months are almost nothing. A blink. On the other hand, if you are a silk moth eager to feast on mulberry leaves, three months is more than you can expect to live under any circumstances. And if you are an annual budget, three months are 25 percent of your shelf life.

For the Lebanese political process, it was a sort of qualified success to see the 2019 budget move over the course of three months through three stages of its life cycle. Beginning with intense cabinet deliberations throughout May, the draft budget endured scrutiny by Parliament’s finance and budget committee in June. It then underwent a purported final metamorphosis into a veritable law in the second half of July, albeit with extremely assiduous expenditure of hot air over three days of debate on the floor of Parliament with voting on the fourth day and achievement of a solid majority of almost 65 percent of votes.

The success of the budget process at the end of July must nonetheless be seen as limited or even very limited. This is not only because the 2019 process was late in commencing. What raises the bigger questions is that firstly, the process was kidnapped time and again by competing practitioners of political brinkmanship. Cabinet leaders, stakeholders, and members of Parliament all underperformed in emitting signals of real and traceable reforms. Secondly, the political class failed to send signals of their will to make meaningful sacrifices, such as forgoing part of their own wealth for the sake of the country.

Most of what is known about the budget’s removal of privileges from holders of political offices is a rectification of non-productive privileges that should never have existed in the first place, such as the right of MPs and highest officials to import a, however luxurious or showy, car per year and not pay customs excise tax for it. In contrast to sending convincing signals of personal sacrifice as role models that citizens can emulate, the members of the supposedly reform-eager Lebanese cabinet and Parliament have, judging by conversations on the streets of Beirut and squares of outlying villages, excelled only in increasing the Lebanese people’s already ample levels of doubts about political sincerity among MPs, their disaffection with the leaders of political parties, and the outright deep systemic distrust that most Lebanese people express, sometimes explosively, when you ask them about their government. 

What comes next?

As such, budget-making was far from immune to the self-interests of political dons and their influence blocs in cabinet and Parliament; the budget that was voted on in Parliament on July 19, moreover, remained questionable as to its actual capacity to bring achievements for fiscal health and more than questionable as far as the budget’s projected net fiscal benefits when juxtaposed with its real economic impacts on enterprises in fragile Lebanon. On top of that, even three months proved not enough time to arrive at a law that could be published in the Official Gazette by the end of July. That was the moment when the sudden, and perhaps not even the last, strange twist in the tale came in the form of the revelation that disputed formulations in one article in the 2019 budget, article 80 containing a provision about specific ranking civil servants and their hiring, was holding up President Aoun’s signature.  

The resulting pupa of a budget is filled with a body of law of which no one can be sure if it will emerge as a nocturnal moth that just sucks money and is as scary as many in the business community perceive it, or take flight as a butterfly whose scintillating flutter lures investors into committing funds to Lebanon’s flowery bouquet of infrastructure, public-private partnerships, Capital Investment Plan, and Lebanese Economic Vision propositions.

Another looming question is even if the budget law will be able to fly; in the most adverse speculation, it might be too heavy to lift off the ground or yet be annihilated by some unforeseen factor. Even if it flies like a butterfly and produces some numerical results of revenue enhancements and cost reductions—albeit no one can predict which ones—and turns out to be the most prolific of all of history’s budgetary butterflies in the art of seducing multilateral lenders with the Lebanese scintillation under the CEDRE plan, all that such success will hatch with certainty is an increased national debt.

That running up debts is anything but risk-free and increases a debtor country’s dependency on the goodwill of multilateral agencies, such as the World Bank and the International Monetary Fund (IMF) is self-explanatory, but this truth was also made specifically clear last month. Running on this track, there were the various structural reform recommendations by the IMF in its July 2 Staff Concluding Statement of the Article IV Mission. These were recommendations that were on one side formulated as a long list of “authorities should” statements down to detailed and very precise demands, for example that reforms should include “incorporating Council for Development and Reconstruction (CDR) spending in the budget and passing a public procurement law.”    

Then there were the fiscal recommendations. Calling it “critically important for debt sustainability,” the IMF advised Lebanon in no uncertain terms to implement a fiscal plan “based on credible and permanent measures” able to yield a substantial primary surplus over the medium term. The hints that followed were not subtle. Increase VAT. Stop tax exemptions of diesel and increase fuel excises. Make the temporary interest tax hike into a permanent one. Improve tax collection. 

These measures make perfect economic, and in case of proper tax collection, social sense, if the latter is linked to progressive taxation and comes with transfers to the poor but avoids creating poverty traps and barriers to seeking employment. But measures such as the ones so strongly proposed by the IMF that it feels like an imposition and intrusion into the political realm—tilting it further away from democratic processes where social and economic goods should be negotiated inside a polity—can only remind of the fact that the economic thinking of the IMF has no companion of social wisdom. This realization has forced itself upon clearheaded observers time and again in the interventions that the IMF has historically dictated and imposed on states in need of bailouts.

Funnily enough in this context, the IMF, at the end of July, launched its search for its next managing director (and successor of departing Christine Lagarde) with the top two requirements stipulating a “distinguished record in economic policy making” and an “outstanding professional background” with proven managerial and diplomatic skills. Terms like social competency or social policy-making do not feature in the job description.

In Lebanon’s case, where there is no request to have a bailout program under IMF tutelage, the fund should restrain itself from prescribing any fiscal measures that would come with crippling impacts on far too many families and entire regions whose social realities no IMF delegation has diligently explored. The social needs of the Lebanese polity with its many fragmentations and insular communities are something no international assessment has ever fully comprehended, let alone addressed.   

Need for credible signals

It is a different matter if central bankers consult with the IMF and ask them for monetary and financial advice, which the IMF has expertly delivered, including repeated acknowledgements of the economically counterintuitive, but in Lebanon’s case prudent, dollar peg of the Lebanese lira (the 2019 Article IV statement says nothing about floating the lira, but offers instead reassuring sentences such as “The BdL has been the linchpin of financial stability and the guardian of the peg”).

This runs up to the conclusion that the only reasonable way fiscal recipes would conceivably be near-imposed on Lebanon’s politicians by an institution like the IMF is that the Lebanese political class has failed to do two core jobs, the first being the job of sending signals that the citizenry sees positively and that generate a demonstrable level of mutual confidence between government and people of Lebanon. Moreover, the political class, despite all the efforts invested into the 2019 budget creation process, has secondly not delivered a law nor formula that emits trustworthy structural reform signals.

Executive, therefore, calls for the political class of Lebanon to start understanding the people and their social conditions, to send credible signals of personal sacrifices and commitment to the country’s public goods, and to legislate socioeconomically sustainable policies—not waiting until the increasing indebtedness and global financialization of the country gives the voting blocs of multilateral institutions, investors, and financial market players control over the social affairs of the Lebanese. 

Furthermore, our law and policy-makers need to exponentially increase their efforts to understand the interdependency between structural reforms and economic rebirth. Our political class would need to start sending convincing messages showing that Lebanon’s power groups can forget their adolescent fantasies of omnipotence, control their jealousies of their co-religionist peers in the next village, and actually get their hands clean by doing constructive legislative work and implementing reforms.  

Just like cultivation of the humble silkworm enabled enterprising people in hillside villages to spin silken threads into a pillar of economic prosperity in the period during which the Lebanese polity was still a pupa enclosed by the Ottoman Empire, the 2019 budget still could, in a very unlikely, but almost ideal, scenario of structural reforms and reconstruction of trust, give birth to a reality of political sanity, administrative efficiency, and more sustainable economic prosperity in Lebanon.

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