A thread on the “sweeping economic reforms” announced in #Lebanon today:
Let’s start with some simple math. Lebanon needs to run a primary surplus of 4-5% just to keep its debt ratio stable (not even to bring it down sustainably). That is a tall order for any country.
Let’s start with some simple math. Lebanon needs to run a primary surplus of 4-5% just to keep its debt ratio stable (not even to bring it down sustainably). That is a tall order for any country.
Interest payments run at around 9.5% of GDP. Interestingly, that’s almost exactly how much Hariri has pledged to cut the deficit by next year. So a nominal deficit target of 0.6% of GDP in 2020 (from around 10% now), would bring the primary surplus well within the comfort zone
In fact, Lebanon probably doesn’t even need an adjustment that severe for sustainability purposes. Which makes me think the numbers are both unrealistic and more for show (both domestically and to appease CEDRE donors+ foreign investors)
Secondly, how realistic are those figures? On the revenue side, all previously proposed taxes and pension cuts have been rolled back. And nothing concrete on progressive income taxation has been announced. And the proposed bank tax is just a one-off for 2020.
On expenditures, public salaries (35% of total) can’t be touched, and lower servicing costs on LL debt held by BdL will help but not create a large enough dent. That the rest can come from cuts to salaries/MPs and to other state funds gives you an idea of the extent of wastage.
And on EdL, it’s hard to see how the subside can be reduced in half (~$1 bn) in such little time and without costs being transferred to end-users. If it can be done so quickly now, people will undoubtedly be wondering what took so long
No mention of the biggest elephant in the room: the 25% current account deficit, and the fact that, thanks to the peg, the lira’s real effective exchange rate is now overvalued by anything from 50% to 66% (according to IMF’s latest Article IV).
So with confidence running this thin, both domestically and among foreign investors, we’re unlikely to see pressures on the LL nor questions of debt/fiscal sustainability abating anytime soon. The worst may have been avoided, but the issues have definitely not gone away.
