BEIRUT: Prime Minister Saad Hariri had spoken of austerity “unprecedented in the history of Lebanon.” Foreign Minister Gebran Bassil mentioned “difficult decisions” and hinted at cuts to civil servants’ salaries. Finance Minister Ali Hasan Khalil had promised “wide reductions” and exceptional measures in the budget.
But that did not appear to be the case, according to a portion of the 2019 draft state budget leaked over the weekend.
The 136-page document is missing nine important pages and hundreds of pages of schedules listing line-item minutiae, but includes most of the main measures to be put before Cabinet Tuesday.
For all the hype, it looks strikingly like last year’s document.
Authorized spending is shaved from LL23.9 trillion (around $16 billion) to LL23.6 trillion, less than $200 million in cuts. Projected revenues also fall from LL18.7 trillion to LL18.3 trillion.
If the top-line numbers are to be trusted, 2019 would see a budget deficit of $3.5 billion, or just 6 percent of gross domestic product.
However, just like last year’s document, the question is how closely it aligns with reality.
The 2019 budget, for instance, appears to ignore the state’s subsidies to Electricite du Liban, often $1.4 billion or more. With a third of the year already behind us, the proposed plan to fix the electricity sector will not be implemented quickly enough to eliminate this drain on state coffers.
The 2018 budget also took EDL subsidies off-book, resulting in the appearance of an overall cut when there was none.
Cutting the deficit is a major goal of politicians. With debt at 150 percent of GDP, servicing eats up around a third of the budget, a slice that gets larger every year. Cutting the deficit is key not only to righting the state’s fiscal ship; it could also release some $11 billion in international loans and grants pledged at the CEDRE conference in Paris last year.
Like this year’s proposal, the 2018 budget also envisioned a $3.5 billion deficit. Yet the true number is expected to be close to twice as much: about $6.7 billion.
The Finance Ministry has not yet released fiscal figures for all of 2018; when they are made public, it will be the longest-delayed release since Khalil took office in 2013.
Yet there are reasons to believe this year’s figures may be closer to reality than last year’s.
Digging beneath the numbers is a series of measures to cut spending and raise revenues.
On the spending side, many capital investment projects will see their 2019 budgets slashed or eliminated, elongating multiyear infrastructure works; civil servants who get 16 monthly salaries per year will see that number reduced; those who receive salaries from multiple state bodies will have to downsize to just one; other extrasalary compensation will be limited; paid leave days will be cut from 20 to 15 days per year; early retirement will now come only with a hefty 25 percent fine on one’s pension; retired military personnel will see a 3 percent cut to their pensions; the state will observe a three-year hiring freeze, although with certain exceptions; high-ranking civil servants will have their salaries capped at the same level as the president’s; and the president, prime minister, ministers and MPs will all take a 50 percent cut in remunerations.
There will be no across-the-board cuts to public sector salaries, a major fear of civil servants.
To raise more money, taxes on the highest-earning individuals and companies will be raised to 25 percent. Taxes on interest from banking deposits will also be raised from 7 to 10 percent. There will be no increase to the value added tax or to fuel tariffs - regressive measures that would have hit both rich and poor.
A measure heavily rumored to either be in the full 1,200-page document or proposed alongside the budget: a sovereign debt swap of up to $8 billion with banks.
Banks would give back their current notes averaging 6-7 percent in interest for ones bearing just 1 percent interest.
The measures have seen a mixed reaction from observers.
“These are not structural measures; they are technical measures,” complained Roy Badaro, economic adviser to Lebanese Forces leader Samir Geagea.
But the lack of major structural changes or other controversial measures may be key to getting the draft passed into law.
“From what I’ve read, there’s no mention of any [major] deduction of wages or increase in VAT or fuel taxes,” said Jad Chaaban, a professor at the American University of Beirut and a leading critic of the country’s financial system. “The bulk of it is debt replacement.”
That view was echoed, albeit negatively, by Nassib Ghobril, head of economic research at Byblos Bank.
“Of course the budget has some [substantive] measures, but they are relying mostly, unfortunately, on the idea that banks have to subscribe” to the debt swap, Ghobril said.
“I don’t think the banks should do this, because that will become an excuse [for the government] not to implement other measures,” Ghobril added, pointing to a similar debt reform scheme undertaken 17 years ago at the Paris II conference.
“We already did this in 2002.”
Ghobril’s worry is that if the banks offer a lifeline to the government, politicians will see no need for painful reforms, leading to the same result the country saw after Paris II when reforms were promised but not enacted.
Yet the banks may have little choice: Many are connected to politicians, and the sector has made staggering profits over the past several years as other parts of the economy have stagnated. Last year alone, the country’s two leading banks made over $1 billion between them.
Whether the debt swap happens, and how the fine print reads, will likely be key to the 2019 budget’s overall effectiveness.
But that does not mean the other details are settled: Veterans and some civil servants are set to protest Tuesday over the cuts, while labor unions meet to decide their next steps.
The protest aims to influence Cabinet, which will hold its first budget session Tuesday in Baabda Palace. A statement from President Michel Aoun’s office said the former Army commander would take a stance on the military pension cuts Tuesday.
Cabinet is set to meet in consecutive sessions until the draft budget is passed. At that point, the document goes to Parliament for another round of examination and amendments. The entire process is expected to take at least two months.