Lebanon: Growth of the economy at risk without reforms

Lebanon’s economy has surged despite global recession, but with one of the world’s highest levels of public debt, growth may not be sustainable without reforms to cut its deficit and engage the private sector.

The International Monetary Fund this week raised its 2010 growth forecast for Lebanon to at least 8 percent, citing domestic stability and prudent policies.

That would be close to 9 percent growth last year when the economy attracted capital inflows from the Gulf, and Lebanese abroad, as conservative banking regulations and strict secrecy made the country a safe haven during the financial crisis.

Rapid economic growth helped cut the debt-to-GDP ratio to 147 percent in 2009 from around 180 percent previously. But high spending will push the fiscal deficit to $3.7 billion, or 10.7 percent of GDP this year, from $3.25 billion, or 8.6 percent in 2009, according to the government.

Nominal debt, meanwhile, is set to reach $55 billion, up from $51 billion in 2009. Analysts warn that if the government does not act to cut spending and boost revenues, public debt could increase to as high as $65 billion in the next three to five years with the deficit widening even more.

The formation of a national unity government early this year ended more than four years of political instability. But seven months after taking office the cabinet has yet to endorse the 2010 budget.

“There is no political consensus on them (the reforms), there is no political will and it’s very unfortunate,” said Nassib Ghobril, head of research and analysis at Byblos Bank.

Unless the government can make progress towards liberalising key industries and overhauling the tax system, Gulf and other foreign money which has headed to sectors like real estate — as property prices nearly doubled last year — will go elsewhere.

“We are in an increasingly competitive region. Since the global crisis, competition has increased to attract funds, capital, tourism, multinationals,” said Ghobril.

The IMF suggests the government could raise revenues by introducing a capital gains tax and gradually raising value-added tax. But when Hassan suggested increasing VAT to 15 percent from 10 percent the 2010 budget was delayed for months as some politicians argued Lebanese could not afford more taxes.

“If the capital inflows decrease … we will be forced to increase the interest rates to attract capital … (then) the private sector investment cost will be higher,” said Marwan Mikhael, head of research at Blominvest.

“And we will reach a time where we are in a vicious circle — higher interest rates to attract capital which will mean higher debt and a higher deficit — it will be non-stop until it explodes.”

Privatisation plans – on governments’ agenda since the end of civil war in 1990 – are also stalled.

Privatising the telecoms sector, which could generate up to $7 billion, is key to cutting public debt. But it has been repeatedly delayed by opposition politicians who say government will be stronger if it has control of key assets.

Analysts and some Lebanese officials estimate that reforming the power sector, which needs structural reform and capital investment, could cost up to $5 billion.

The state-owned Electricity du Liban can only meet two-thirds of peak demand. More than a third of the power it generates gets lost in distribution or is not paid for and tariffs were fixed in 1996 when oil cost $21 a barrel.

The new government believes better results could be achieved through public private partnerships (PPP) rather than privatisation of the power sector, but has yet to implement the policy which would have to be formalised in a law.

Deficient infrastructure also poses an economic risk. The telecoms sector lags most countries in the region in terms of Internet and mobile services due to high prices and scarce capacity, making investors hesitant to establish businesses.

Analysts say investment in the Lebanon is too focused on Beirut and the government needs to invest in infrastructure in other cities. Tourism, which jumped 39 percent in 2009, real estate and banking also attract disproportionate amounts of investment while industry and agriculture are ignored.

“This growth is concentrated in very few square metres in Lebanon … the nice areas of Beirut and a few tourist places,” said George Corm an economist and former finance minister.

“The rest of the country is barren and poverty pockets are … getting bigger year after year because the government’s economic policy does not focus at all on these regions.”

Large sectors of the population in the regions are either living in poverty or very close to it. Corm warns that without investment those people will be an easy target for extremist groups who are increasing their presence.

“Unfortunately neither the IMF, the World Bank or the big donors, nor our government really realise the magnitude of the problem. Everybody is so happy with what is happening to the real estate sector … and with tourism, that we tend to forget the rest of Lebanon,” he said. (Reuters)