Lebanon to record first primary deficit in 12 years

The Finance Ministry building is seen in Beirut, Lebanon, Monday, Jan. 16, 2012. (The Daily Star/Mahmoud Kheir)

BEIRUT: For the first time in 12 years, Lebanon will post a primary deficit of around $460 million in 2012, raising the total budget deficit to around 10 percent of GDP, a former finance minister told The Daily Star.

Jihad Azour, a senior economist who assumed the post from 2005 to 2008, said the 2012 primary deficit compared to a primary surplus of $1.67 billion in 2011 would constitute a difference of some $2 billion.

The Finance Ministry had posted a primary surplus of $430 million for the first 10 months of 2012 but has yet to release the 2012 year-end results. The primary budget figures exclude the cost of debt servicing.

Azour said the Finance Ministry had yet to include nearly $730 million in added expenditures as a result of a hike in the minimum wage approved in December but which became retroactively effective in February 2012.

The minimum monthly wage for both private and public sector employees was fixed at $450, effectively rising by $116 (LL175,000) for those earning the minimum monthly wage. Those who earned salaries above $1,000 (LL1.5 million) received an increase of up to $200 (LL299,000).

A Finance Ministry source told The Daily Star that Finance Minister Mohammad Safadi was in the process of preparing the 2012 year-end figures which would be released soon. The source did not elaborate on whether the figures would take into account the minimum wage hike.

Challenged by a widening budget deficit and a slowdown in GDP growth, the government is also facing mounting pressure to revise the salary scale of public sector employees, another wage increase for civil servants that would cost the treasury around $1.2 billion annually.

Prime Minister Najib Mikati has scrapped plans to raise the value added tax from 10 to 12 percent to secure funds to finance the salary scale increase before referring it to Parliament to ratify it.

Safadi Monday also denied any plans to raise the VAT to 12 percent.

Earlier reports that a VAT increase was on the Cabinet’s Wednesday agenda angered civil servants who have threatened to go on strike. “Raising taxes to finance the wage hike would be giving with one hand and taking away with the other,” public sector employees argued.

The Finance Ministry source said the 2013 draft budget would not feature tax hikes but did not elaborate on how the Finance Ministry planned to bridge the gap between growing government expenditures and shrinking revenues amid lower GDP growth.

“It is difficult to argue in favor or against tax raises in the absence of comprehensive fiscal policy. The issue cannot be addressed separately,” Azour said when asked about the possibility of raising taxes under the current economic situation.

The Daily Star reported last week that the Finance Ministry was drafting a budget that would cut expenditures in 2013 without increasing taxes.

“It will simply include current spending and projected revenues,” sources said of the draft budget.

They also described the bill as an austerity proposal.

Ministerial sources told The Daily Star that reducing expenditures cannot logically entail a wage increase for civil servants. Some observers say the government is stalling discussions on the issue, knowing that an outright rejection of a salary scale increase would fuel anger among public servants and explode in nationwide strikes.

Observers believe that the prime minister will keep stalling the salary scale issue before throwing the ball in the court of the next Cabinet, which will be formed after the next elections.

In addition to a widening budget deficit and diminishing growth rates, the inflation rate was estimated at 6 percent in 2012, presenting another reason to avoid any wage increases, according to Sami Daher, CEO of Investments and Private Equity firm V-Cap.

“The wage hike would defeat its own purpose because it would fuel inflation, which would offset its benefits on employees,” Daher said.

“The government should seek to stimulate productive sectors. Any other measures would be short-term solutions that in the long-run, the country will have to pay for one way or another,” he added.

The Institute of International Finance has estimated Lebanon’s GDP growth at 0.6 percent in 2012. GDP growth has dropped from 8 percent in 2010 to 1.7 percent in 2011, according to IMF estimates. The debt-to-GDP ratio stood at 136 percent up to September 2012.

Government allocations to the cash-strapped Electricite du Liban surged considerably in 2012 to reach $2.2 billion, and higher oil prices in 2013 could raise government allocations to EDL and further widen the budget deficit.

A version of this article appeared in the print edition of The Daily Star on February 13, 2013, on page 5.




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