Lebanon seeks billions at Paris donor conference to keep economy afloat

Lebanon seeks billions at Paris donor conference to keep economy afloat
Growth in the country has plummeted in the wake of repeated political crises, compounded by the 2011 breakout of civil war in neighbouring Syria.
4 min read
04 April, 2018
Lebanon is the world's third most indebted country [Getty]
Lebanon hopes to raise billions of dollars at a French-led donor meeting on Friday to stave off an economic crisis in the world's third most indebted country.

The Paris conference comes as Lebanon gears up for its first general elections in almost a decade in May, after parliament renewed its own mandate three times since 2009.

The Middle Eastern country hopes donor countries and financial institutions at the CEDRE conference will help stimulate the economy through investment.

Growth in the country has plummeted in the wake of repeated political crises, compounded by the 2011 breakout of civil war in neighbouring Syria.

The Syrian war has sent one million Syrian refugees in flight to Lebanon, a country of only four million before the conflict.

Before Syria's war started in 2011, Lebanon's economic growth stood at an average of 9.1 percent for the three previous years.

But from 2011 to 2017, average growth was 1.7 percent, the International Monetary Fund says, and is expected to remain below two percent in 2018.

In parallel, the public deficit has more than doubled since 2011, with $4.8 billion projected for 2018, according to a budget voted last month.

Lebanon hopes to raise "between $6 billion and $7 billion in the shape of credit facilities and funds," Nadim Munla, an adviser to Lebanese Prime Minister Saad Hariri, has said.

Lebanon's parliament last week adopted a 2018 government budget, projecting a deficit of $4.8 billion, more than double the deficit in 2011, when Syria's war started.

Economist Paul Doueihy says this growing budget shortfall means "the probability of a systemic crisis is now higher than ever".

To avoid bankruptcy, the state should "urgently" reduce its spending, he and others say.

"But the state keeps increasing its expenses," Doueihy says.

'State keeps spending'

In July, parliament approved an increase in public salaries, estimated to cost more than $1 billion per year.

Nassib Ghobril, head researcher at Byblos Bank, says the state has also given jobs to 26,000 new employees over the past three years.

In February, the International Monetary Fund warned that Lebanese authorities needed to address "rapidly rising" public debt.

It stood at 150 percent of GDP in 2017, the third highest worldwide after Japan and Greece, the international body said.

With a budget deficit last year equivalent to more than 10 percent of GDP, the IMF signalled a "critical need for a fiscal consolidation plan" and cuts in spending.

On top of budget trouble, fears remain over the devaluation of the national currency.

The central bank in November drew more than $800 million from its foreign reserves to maintain the fixed exchange rate of around 1,500 Lebanese pounds to the dollar, in place since 1997.

Structural factors behind the currency's fragility persist, experts say.

With Lebanon importing more goods and services than it exports, the pound is artificially overvalued, they say. 

This is likely to continue with the current account deficit "expected to remain above 20 percent".

The pound would be worth much less under a floating exchange rate.

'Political will'

And monetary stability has been achieved at the cost of increased interest rates for deposits and loans in pounds.

This will likely affect investment and increase the cost of public borrowing.

On top of this, banks also cannot lend as much money to the state as before because deposit growth has been down.

Deposit growth stood at four percent last year, against 12 percent in 2010 on the eve of the Syrian conflict.

As for increasing revenues, the state in October adopted fiscal measures including increasing VAT to 11 percent to fund its new spending on public salaries.

"But in a context of weak growth and the erosion of purchasing power, it's difficult to increase taxes further," economist Marwan Barakat says.

The state could however fight tax evasion, which stands at an estimated $4.2 billion per year.

"If there is serious political will, Lebanon can get back up to half of what is missing - i.e. more than $2 billion per year," says Barakat, head of research at Bank Audi.

Corruption also remains an obstacle to reforms.

In 2016, more than 92 percent of Lebanon's population saw worsening corruption, graft watchdog Transparency International said. 

In its last report, the watchdog ranked Lebanon 143rd out of 180 countries it surveyed for its perceived corruption index.