Amid protests, Lebanon’s Cabinet faces difficult choices on public sector austerity

Analysts doubt that Lebanon’s Cabinet will be able to reduce the budget deficit and salvage the long-term health of the Lebanese economy without taking unpopular austerity measures, and not taking them would lead to an even more dire economic situation.

al-monitor Lebanese President Michel Aoun heads the first meeting of the new Saad Hariri's Cabinet at the presidential palace, Baabda, Lebanon, Feb. 2, 2019. Photo by REUTERS/Mohamed Azakir.

May 22, 2019

Lebanon is at a significant economic precipice — with its debt sitting at 150% of its gross domestic product (GDP) in 2018, its growth was limited to only 1% that year according to the World Bank. To avoid debt restructuring and the economic collapse that would likely accompany it, prospects for growth hinge on restoring confidence in the economy, unlocking a host of pledged foreign investments and tackling the country’s budget deficit.

Lebanon’s deficit amounted to 11% of GDP last year, and since April, the country’s Cabinet has been working to prepare what Prime Minister Saad Hariri has said would be the “most austere budget in Lebanon’s history” — but it has had little success so far. After missing several deadlines to prepare a draft budget, Lebanese leaders are reportedly now preparing to publicly announce on May 22 decisions on cuts to public wages, salaries and pensions, which represent the lion's share of expenditures that are available for reductions.

The issue of public pay and benefits has animated a widespread debate in Lebanon since April. Protests and strikes against such cuts have taken place across the public sector over the course of the past few weeks, fueled by long-running anger with the political class and deep economic inequality in the country.

Demonstrators and public figures alike have urged politicians to avoid placing the burden of austerity onto public workers, and to improve tax collection and fight tax evasion and corruption instead. Although some leaders have made promises to public employees that their interests would be safeguarded, as the Cabinet approaches the tail end of the negotiations, it remains unclear whether these promises will be kept and whether adequate cuts will be made.

Following weeks of negotiations, not much has been made public yet regarding expenditures, and member of parliament Ibrahim Kanaan, head of the parliamentary Finance and Budget Committee, told Al-Monitor that many ideas were still being shared among the ministers. But so far it seems likely that the army’s share of the budget will be cut down and public pensions will be capped at 75% of corresponding wages.

Since April 15, unions, retired eachers, military veterans and others have voiced their opposition to public sector wage and salary cuts, and demonstrations and strikes have taken place across the country. On May 3, employees of Lebanon’s Central Bank, Banque du Liban (BDL), began a rare strike in opposition to a proposed budget article that bank workers fear would limit their yearly pay.

“We have our salaries and we have arranged our lives accordingly,” Abbas Awadeh, head of the employees’ syndicate at BDL, told Al-Monitor. “Any salary cuts will definitely affect my family and my life, that’s what we are defending.”

Awadeh and BDL employees suspended their strike indefinitely on May 7 in order to give the Cabinet more time to negotiate a draft budget. Awadeh said that BDL Gov. Riad Salameh, who had spoken with politicians, had reassured the syndicate that their salaries would not be impacted by the budget.

Retired security personnel and military veterans received similar guarantees during weekslong protests against a potential cut to their pensions and another relevant reduction, and veterans groups suspended their protests May 13.

But as with many of the budget proposals, conflicting statements have emerged on this issue. Defense Minister Elias Bou Saab stated to Annahar May 15 that salary reductions for active or former military personnel were not up for discussion, and Kanaan — who is not privy to Cabinet discussions but has been involved in budget talks in parliament — told Al-Monitor he does not believe public beneficiaries are being targeted. Yet other politicians like Labor Minister Camille Abousleiman hinted that cuts affecting the public may still be on the table.

“I have to protect the lower class and the middle classes, and it has to be proportional,” Abousleiman told Al-Monitor, referring to the austerity measures. “But I do believe there is runaway expenditure that needs to be addressed.”

Citing the ongoing discussions, he urged demonstrators to wait until after a budget is passed to make their opinions heard.

Abousleiman is not alone in this view. Foreign Minister Gebran Bassil voiced his own dissatisfaction with protests in April, and Hariri went even further calling for legal penalties to be imposed on public employees who impede the functioning of state bodies.

According to Mona Fawaz, professor of urban studies and planning at the American University of Beirut, public anger at the status quo, and the politicians who enable it, is only growing. “Dissatisfaction [with the economy ] has been boiling for years,” she told Al-Monitor. “People see income inequality growing, they see their lifestyles eroded. Wage cuts — especially for the lower classes — will just do the same.”

Bassil and religious leaders, like Maronite Patriarch Bechara al-Rai, suggested alternate solutions that would target the wealthy instead of public workers, including tamping down on tax and customs evasion. Kanaan echoed such ideas to Al-Monitor as the budget discussions were underway, but above all, urged the Cabinet to undertake structural reforms to state finances and to eliminate waste in the public sector.

In addition to cuts, ministers are looking to raise revenue — the Cabinet has already decided to raise taxes on bank deposit interest for three years.

Although Finance Minister Ali Hassan Khalil stated May 19 that the budget will reduce the deficit to 8.3% of GDP, Sami Nader, director of the Levant Institute for Strategic Affairs, claimed this will likely not be the case.

“In times of recession this does not work,” Nader told Al-Monitor, saying that new taxes would only squeeze the economy further. “I don’t believe given these facts that they’re going to decrease the budget deficit, because what they are doing is keeping the same amount of expenditures without saying it.”

Nader said that in his view, significantly cutting wages and salaries cannot be done because it would unleash even more social unrest, as recent demonstrations have shown.

Nevertheless, the possibility remains that Lebanon’s Cabinet may be forced to take at least some unpopular austerity measures for the sake of salvaging the long-term health of the Lebanese economy. If they fail to do so, an even more dire economic situation is likely to follow.

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