BEIRUT: Without concrete reforms, Lebanon risks heading towards a combined currency, sovereign and banking crisis, a recently published report by the European Commission warned.
Lebanon is currently treading an unsustainable path as it struggles with a surging twin deficit and slumping economic growth, estimated at 0.3 percent in 2018.
The fiscal deficit, which has climbed steadily, is expected to have "reached double-digits in 2018," pushing public debt to over 150 percent of GDP, the report notes.
Meanwhile, the current account deficit stands at around a dangerous 27 percent of GDP as foreign deposit inflows have slowed over the years, "turning negative over the first two months of 2019 month-on-month."
Lebanon has always relied on foreign remittances from expats to shore up its dollar reserves and fund a large part of its financing requirements, which have taken a hit recently as oil prices have dropped and affecting Lebanese working in oil-rich Gulf states.
The government has widely relied on the 'Vision for Stabilisation, Growth and Employment’ reform plan presented at the CEDRE conference in Paris last year, which was widely endorsed by the EU and managed to secure around $11 billion in soft loans and grants.
This lifeline, however, is conditional on the implementation of hard-hitting reforms and other preconditions in several areas, including revamping the electricity sector and putting a lid on corruption.
With debt servicing eating up around half of revenues, and subsidies to the government-owned Électricite Du Liban totaling another 15 percent, Lebanon is in dire need to cut expenditures and boost earnings.
Lebanon's banking sector, which has endured the test of time, is now facing further risk given that the central bank and commercial banks are holding around 50 percent of the government's public debt combined.
The report also touches on the government's current lackluster tax collection, which could play a major role in potentially alleviating the state's coffers.
Despite the tax hike of 2017, the "expected revenue increase from these measures was largely neutralized by a public sector pay rise at the time," the report notes.
Lebanon's central bank has gone to great length to maintain the Lira peg to the dollar, remaining at LBP 1507.5 per USD since 1997.
Yet gross foreign reserves declining to $39.7 billion at end-2018, coupled with "Redemptions of Eurobonds worth USD 2.2 billion in 2018, as well as currency conversions in the wake of political uncertainty," have cast doubt on Banque Du Liban's ability to maintain that peg.
Lebanon's Achilles heel is the current account deficit, ballooning to around 27 percent of GDP as a result of weak exports and strong imports.
To address that and boost exports, the report suggests that Lebanon improves compliance with technical requirements and quality standards to "better reap its trade potential with the EU."
In the midst of the current outlook, banks have remained resilient so far with assets worth 440 percent of GDP in 2018. But with deposits becoming highly dollarized and their exposure to the public sector and the central bank increasing to more than two-thirds of assets, there is cause for concern.
To boost investor confidence and revive financial inflows more sustainably, Lebanon needs to reinvigorate the reform momentum, pass the 2019 budget and present a credible medium-term fiscal adjustment strategy, the report concludes.
The budget, which aims to reduce the budget deficit to around 7 percent of GDP, has yet to be discussed by Parliament after almost a month-long back and forth in the Cabinet.
Mass protests held by public sector workers and retired army personnel have rocked the capital in recent weeks, as the new budget targets both their salaries and their end of service indemnities in an attempt to slash public spending.
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