Lebanon Pulse

Lebanon on wrong economic track

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Article Summary
Lebanon is trying to fix structural economic problems by raising taxes, which will make matters worse.

Lebanon today stands on the edge of upheaval. The matter is not about the spilling over of the terrorist bombings from the Syrian war, nor even about another sectarian war in the country.

Lebanon is threatened by a social revolution, the first indicators of which appeared just days ago, in protests that swept the streets and paralyzed the country. Parliament and the Cabinet face two bitter choices: either agree to the unions’ demands and raise their positions and salaries, bringing disaster to the Lebanese economy, or refuse to bow to street pressure and preserve what’s left of the economy, but trigger a popular revolution.

This crisis comes as no surprise. The “escape forward” policy of borrowing in the absence of growth could not continue indefinitely, and it finally hit the wall. For the third year in a row, the deficit and the debt were growing beyond what revenues could justify. Meanwhile, the citizens’ purchasing power eroded and pushed them into despair. The previous government tried to buy time by enacting a new promotion and raise schedule and submitted it to parliament just before resigning. This was a major error, not because the demands weren’t fair, but because the money wasn’t available, neither in the treasury nor in the economy. Today, parliament is trying in vain to find funds, because resources have dried up and raising taxes will reduce revenues and grow the deficit even more.

Raising the value-added tax will harm the poor, who are the ones calling for higher salaries. It is as if the government takes with one hand and gives with the other. The proposal to increase taxes on profits from bank deposits will reduce transfers to the banking sector. Those profits recently declined, threatening another economic pillar: currency stability.

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The cost of the promotions and salaries schedule is estimated at 2.7 trillion Lebanese pounds ($1.79 billion), equivalent to 45% of the deficit, which increased 70% during the year and today represents more than 10% of the gross domestic product (GDP). The GDP growth rate for 2012 and 2013 did not exceed 1.5%, while debt is growing by 4% a year. In fact, the irregular government work and institutional paralysis are the real reasons for the worsening of the problem. Raising salaries is not being done gradually, annually or in any other proper manner, while government spending has increased in a way that cannot be justified, considering the recession.

The question of the day is: Where would the money to fund this schedule come from? There is only one answer: Stop the waste, accelerate reforms and boost growth. A preliminary reading of the 2014 budget shows that the deficit of the state-owned Lebanese electricity company will be nearly 3.9 trillion Lebanese pounds ($2.59 billion), or 60% of the fiscal deficit. If just this item is deleted from the budget by privatizing the electricity sector, then the promotions and salaries schedule could be easily funded regardless of the revenues generated by the involvement of the private sector and positive growth. What’s dangerous is that matters are not being addressed this way. The problem is portrayed as a conflict between the unions and the economic bodies. The boat is sinking, and no one is trying to plug the leak.

Even today, parliament seems unready for radical solutions to move forward with structural reforms that increase production and protect the rights of both workers and employers.

The unions have warned that the schedule must be passed by April 13, or they will escalate their actions. But parliament seems to lack a long-term economic vision that understands the structural obstacles to passing the laws needed to speed up reform. Rather, the debate is stuck in a vicious cycle in which efforts center around easy solutions to finance the schedule by raising taxes. No one is proposing structural reforms that address waste and boost growth.

The government also seems to lack a macroeconomic vision and is dealing with the issue as a zero-sum game. It so far has made no proposal to boost growth, which is the only way to fund the economic and social bill.

The main reason why growth is low is because certain political parties have chosen to fight in Syria. The cost of the Syrian war on Lebanon is prohibitive, and until last September, the World Bank estimated the toll at $7 billion, equivalent to 15% of GDP. The Lebanese parties fighting in Syria are costing Lebanon opportunities, delaying reform and paralyzing the institutions. It’s the cost of a social revolution, which is now very near.

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Found in: salaries, lebanon crisis, lebanon, lebanese domestic politics, lebanese-syrian relations, economic reform, economic policy, deficit

Sami Nader is a columnist for Al-Monitor's Lebanon Pulse, an economist, Middle Eastern affairs analyst and communications expert with extensive expertise in corporate strategy and risk management. He currently directs the Levant Institute for Strategic Affairs, focusing on the economics and geopolitics of the Levant, and is a professor for USJ University in Beirut. On Twitter: @saminader

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