In recent years, the Lebanese economy faced several difficulties, of which worsening public debt stands out. The rising levels of public debt were exacerbated by escalating internal political crises, and weakened the government’s ability to deal with issues such as power outages and the accumulation of waste. Furthermore, the ongoing conflict in Syria imposed an additional burden of hosting some one and a half million refugees
However, especially after the end of the presidential vacuum in October 2016, the government sought to introduce some core reforms such as the ratification of the public-private partnership law, regulation of the oil industry and, most recently, the launch of exploration and drilling activities in the country’s territorial waters.
The government became aware of the need for securing foreign funds to strengthen economic stability and support the country’s infrastructure. Hence the government’s reliance on the Paris IV donor conference, also known as the Cedar Conference, to garner billions of dollars in funding. Yet, the success of its bid hinges on several economic and political variables.
Needed Reforms
The above-mentioned pressures imposed direct implications on the Lebanese economy. For one, economic growth slowed down to 1.5 per cent in 2017 and is forecast to remain unchanged at 2 per cent this year. Additionally, Lebanon’s declining tourism industry and real estate sector pushed the current account deficit to 18 per cent of the country’s GDP in 2017, hovering around the same level in 2015 and 2016. The government failure to rein in public finance caused a debt-to-gross domestic product ratio of 152 per cent in 2017.
As a result of the Lebanese government’s weak performance in recent years, new issues emerged including shortage of power shortage and growing garbage mountains in Lebanese cities. Such issues triggered popular protests. The widest of which broke out in 2015.
However, when the presidential vacuum crises came to an end in October 2017, the government took significant steps to enhance confidence in the economy. Most importantly, in the same month, the parliament approved the country’s first budget in twelve years. Failure of successive governments to approve the budget was caused by a series of political crises in the aftermath of the assassination of former Prime Minister Rafik al-Hariri in 2005.
The government tool further steps to encourage the private sector to participate in supporting the country’s infrastructure after passing the public-private partnership law in August 2017. The law enabled the government to sign agreements in February to purchase 200 megawatts of electricity in total from three Lebanese companies that plan to generate power from wind turbines.
Earlier, in January 2017, the Ministry of Energy and Water announced a plan to generate 12 percent of the country's total total power consumption, relying on renewable energy, by 2020.
Moreover, the government succeeded in launching a licensing round for exploration drilling for oil and natural gas in the Mediterranean territorial waters in early 2017. Later, it approved a bid by a consortium made up of France’s Total, Italy’s Eni and Russia’s Novak to drill in Block 4 and Block 9 off Lebanon’s coast this year. Together, the two steps represent one major shift that can bolster the economy and allow the country not only decrease the oil imports bill, but also increase foreign currency revenue.
Mutual Interest
The government is aware that, due to limited local resources, it has no choice but to cooperate with its partners to garner funds needed for supporting economic stability and developing infrastructure. This prompted the government to call for several international conferences to attract funding from international parties. The first was the Ministerial Meeting in support of Lebanon's Armed Forces and Internal Security Forces, held in Rome on March 15, 2018, which brought together 40 countries that showed interest in backing Lebanon’s efforts to strengthen its security capabilities.
The government also counts on Paris IV, or Cedar I, to secure USD 16 billion in funds from various international parties to develop infrastructure and support the economy. The government’s success in garnering a part of these funds would contribute towards overcoming economic challenges facing it.
On another note, the international community is aware that responding to these efforts is an essential matter not only for economic considerations, but also for political reasons. That is, involved international powers believe that supporting the current government may enhance the Future Movement’s ability to achieve prominent results in the parliamentary elections to be held in May.
Procedural Measures
Some international powers have already started to support Lebanon’s vital sectors, with the European Bank for Reconstruction and Development signing a cooperation agreement to provide Fransbank with a USD 50 million trade finance line to support the expansion of international trade in Lebanon.
Additionally, the European Bank acquired 2.51 per cent of Bank Audi's overall outstanding common shares, for a total of USD 65 million. The World Bank, following the ratification of the public-private partnership law, approved a USD 295 million package on March 16 to contribute towards overhauling Lebanon's transport sector. The European Union pledged another USD 61.3 million package to support the Lebanese security sector.
No doubt, the extent of Lebanon's success in attracting international support will be reflected in the outcome of the Cedar I conference, to be held in April this year, where Lebanon hopes to garner billions of dollars.
However, additional support to Lebanon will hinge on two main factors, the first of which are trends in political balances of power in the coming period, that will be determined by the results of the May parliamentary elections. The second factor is the government’s ability to approve an emergency plan for economic reforms that would encourage donor and investors to promote cooperation with it in the coming period. The International Monetary Fund, in a February report, said that Lebanon is in urgent need of putting financial controls in place to address the issue of increasing debt. This would require a combination of increases in revenues and cuts in current spending.
That is because the country is in dire need of controls on finance, especially amid the growing issue of high public debt that requires the government to introduce measures to increase revenue and rein in spending.
The government appears to be determined to take such actions in the coming period, with Finance Minister Ali Hassan Khalil stating, on March 12, that “we are heading toward real reforms. We know that we cannot do everything at one time, but what's important is that we are putting ourselves on the right track.”
According to the 2018 budget, although budgets of ministries are expected to drop 20 percent, or USD 145 million compared with 2017, they are projected to remain high at USD 4.8 billion.
Additionally, the Fund believes that containment of financial stability risks is of particular importance. This should be achieved through taking actions designed to strengthen credit quality, introducing reforms to the electricity sector and enhancing the anti-corruption regulatory framework to make it effective.
In conclusion, it can possibly be said that the government’s success in passing these tests will remain tied to the country’s ability to overcome the current political and security challenges that emanated from developments in the internal and regional arenas over the past years.
