Instant View: Lebanon Government Agrees Reforms as Protests Grip the Country
Lebanon’s government approved an emergency package of economic reforms on Monday in a bid to ward off crisis and defuse the country’s biggest protests in decades.
Reuters takes a look at some of the views of the financial community:
Kevin Daly, senior investment manager, emerging market debt, Aberdeen Standard Investments
“It is just a mess - and it looks like it is more and more unsustainable. I don’t think it is a final nail in the coffin - but it is looking ominous. It is getting closer to a pretty negative scenario unfolding.
“It doesn’t resolve any problems (to default) - if anything, it creates more problems down the road. If you haircut the debt, it will cripple the banks and it is also going to result in breaking the peg very likely. Let’s turn back the clock to Argentina in 2001 - when they defaulted and the peg went it was just complete chaos. A default in itself does not cure the problems. That is why they need a plan. There has been fiscal adjustment, but it has not been enough,” he said.
Garbis Iradian, chief economist for MENA, Institute of International Finance
“The authorities should have agreed on measures to tackle rampant corruption, reduce tax evasion and reform the electricity sector.
“While I welcome the privatization of telecom, the revenues that will be raised is one-off, that is only in 2020. The international donor community needs strong fiscal adjustment measures to reduce the fiscal deficit on a sustained basis. I wish they would address fundamental fiscal loopholes, including high tax evasion, rampant corruption and those connected (including non-financial corporates) to politicians who continue avoiding paying taxes.
“It is unfortunate that most of the adjustment burden is falling on the banking system in Lebanon. The banks may cope but their profitability, if any, will be adversely impacted. I think the banks are overburdened with taxes and they’re the ones who are contributing the most to the increase in tax revenues. Tax collection from non-financial institutions should be improved and the authorities need to adopt a progressive tax system where rich individuals and non-financial corporations pay more as a percent their combined income from all sources.
“I think the currency peg to the dollar will be maintained in the short term given the comfortable official reserves of the central bank (liquid foreign assets of around $30 billion, equivalent to nine months of imports of goods and services). However, the risk on the peg to the dollar will increase if the Lebanese authorities fail to convince international donors that strong fiscal and structural measures are being implemented, including in particular fighting tax evasion and reforming the electricity company (EdL).
“In the absence of CEDRE $11 billion of concessional loans and if other capital inflows decline, then it would be difficult to finance the persistent large current account deficit (around 20% of GDP). As a result, official reserves could continue to decline at rapid pace and raise the risk of devaluation. In this case, the economy will continue to contract, inflation will spike and unemployment would increase to well above 15%.
“The reforms agreed today include a reduction in interest payments to domestic banks and to the central bank by $3.3 billion, equivalent to 5.4% of GDP, in 2020. Such a reduction could be achieved by issuing new treasury bills at zero or 1% to replace (the) old part of the existing TBs with an average interest rate of around 7%. This is a short-term solution. The authorities need fiscal measures to enhance revenues and contain spending on a sustained basis to reduce the deficit.”
Nassib Ghobril, chief economist at Lebanon’s Byblos Bank
“The target of 0.6% for 2020, if achievable, would be a dream come true,” he said.
“There are a lot of question marks,” he said. “On paper, it sounds very good, much needed and overdue. But will this government manage to regain the confidence of millions of people, or should it step aside in an orderly transition to a government of experts that would implement reform?”
“The taxing of the banking sector is unfortunate,” he said, noting the sector’s role underpinning Lebanon’s stability and that it already accounts for 60% of the tax revenues paid to the government.
Instead, the government should be fighting tax evasion, “sending the army to the border to close illegal crossings and addressing evasions”, he said.
“The approach seems to have not changed in the sense that the government considers the private sector only as a source of tax revenues instead of working to improve the investment climate, the business climate and raising the competitiveness of the economy.”