Bud­get­ing for the fu­ture

Executive Magazine - - Economics & Policy - By Jeremy Ar­bid

Le­banon passed its sec­ond state bud­get in less than six months at the end of March, af­ter be­ing with­out one for al­most 12 years. The 2018 state bud­get was hastily pushed through cab­i­net and Par­lia­ment ahead of early April’s CEDRE in­fras­truc­ture in­vest­ment con­fer­ence in Paris, and it man­dated spend­ing cuts meant to please in­ter­na­tional donors. The gov­ern­ment’s con­clud­ing state­ment at CEDRE promised to re­duce Le­banon’s deficit by 5 per­cent­age points of GDP over five years. The cuts to spend­ing may be an in­di­ca­tion that lo­cal politi­cians want to do some­thing about the deficit, but not much can ac­tu­ally be done to lower state spend­ing with­out solv­ing some of Le­banon’s more press­ing struc­tural fis­cal prob­lems, or by in­creas­ing rev­enues to the state trea­sury.

At the time of writ­ing, Ar­ti­cle 49 of the 2018 bud­get law was sus­pended by the Con­sti­tu­tional Coun­cil, fol­low­ing an ap­peal of sev­eral ar­ti­cles of the law by the Kataeb Party, the coun­cil is ex­pected to ap­point a rap­por­teur to pro­duce a re­port on the ap­peal af­ter which the coun­cil will is­sue its fi­nal de­ci­sion. Be­fore the chal­lenge, Ex­ec­u­tive had re­ceived the bud­get’s high-level spend­ing al­lo­ca­tions from the Min­istry of Fi­nance, which out­lines an over­all re­duc­tion of about $9 mil­lion to $15.85 bil­lion (LL23.89 tril­lion), a re­duc­tion of 0.06 per­cent from the pre­vi­ous fis­cal year. In 2017, to­tal al­lo­ca­tions reached $15.86 bil­lion (LL23.91 tril­lion).

Bud­get re­duc­tions in­cluded a 4 per­cent cut in cur­rent spend­ing al­lo­ca­tions from $15 bil­lion (LL22.65 tril­lion) to $14.4 bil­lion (LL21.72 tril­lion), while cap­i­tal ex­pen­di­ture al­lo­ca­tions were re­duced by 12.6 per­cent from $1.6 bil­lion (LL2.48 tril­lion) to $1.4 bil­lion (LL2.17 tril­lion). In­creases to the bud­gets of the Min­istry of Na­tional De­fense (14 per­cent), Min­istry of Ed­u­ca­tion and Higher Ed­u­ca­tion (22 per­cent), and the Min­istry of In­te­rior and Mu­nic­i­pal­i­ties (10 per­cent) off­set much of the sav­ings.

The num­bers that Ex­ec­u­tive re­ceived from the Min­istry of Fi­nance, how­ever, are too high-level to dis­cern where ex­actly the cuts oc­cur (see bud­get ex­pen­di­ture in­fo­graphic, page 32). Ac­cord­ing to Mounir Rached, pub­lic fi­nan­cial man­age­ment ad­vi­sor at the Min­istry of Fi­nance, the re­duc­tions, in gen­eral, in­clude ma­te­rial spend­ing cuts across state in­sti­tu­tions, such as sta­tion­ary and util­ity bills, and a re­duc­tion of al­lo­ca­tions to cap­i­tal ex­pen­di­tures, such as road­work main­te­nance around the coun­try. Over­all cuts to cur­rent spend­ing are prob­a­bly not sig­nif­i­cant, Rached says.

Iron­i­cally, cap­i­tal ex­pen­di­tures in the 2018 bud­get were re­duced. At the be­gin­ning of April, Le­banese of­fi­cials had pitched an in­fras­truc­ture in­vest­ment plan to donors and mul­ti­lat­er­als (see post-CEDRE story, page 18). The plan would raise debt to im­ple­ment the projects, and pledges to­taled around $11 bil­lion, mostly in the form of con­ces­sional fi­nanc­ing. Rached in­di­cates the re­duc­tion of cap­i­tal in­vest­ment spend­ing in the 2018 bud­get was cos­metic as most years al­lo­ca­tions are not usu­ally fully dis­bursed. From 2010 through 2016 to­tal cap­i­tal in­vest­ment spend­ing av­er­aged just less than $600 mil­lion an­nu­ally, ac­cord­ing to the Min­istry of Fi­nance’s Pub­lic Fi­nance Mon­i­tor (PFM) is­sued at the end of 2016.

Bud­get re­duc­tions in­cluded a 4 per­cent cut in cur­rent spend­ing al­lo­ca­tions from $15 bil­lion (LL22.65 tril­lion) to $14.4 bil­lion.

Can these re­duc­tions im­pact the deficit? About 46 per­cent of 2018 al­lo­ca­tions—$7.3 bil­lion (LL11 tril­lion)— will go to­ward com­mon ex­penses, such as pay­ing in­ter­est on pub­lic debt, and salaries and pen­sion pay­ments. The bud­get’s com­mon ex­penses de­clined roughly 4 per­cent when com­pared to 2017 al­lo­ca­tions, while the gov­ern­ment claims that sub­si­dies to the fail­ing pub­lic util­ity Elec­tric­ité du Liban (EDL) were not writ­ten into the 2018 bud­get.

In 2016, the last full year fig­ures were pub­lished in the PMF, pub­lic spend­ing reached nearly $14.9 bil­lion (LL22.4 tril­lion) in spend­ing. Ac­cord­ing to fis­cal sheets also pub­lished by the Min­istry of Fi­nance last year Le­banon had a pri­mary sur­plus of nearly $1.5 bil­lion (LL2.2 tril­lion), how­ever due to debt obli­ga­tions the bot­tom line was a to­tal cash deficit of $3.7 bil­lion (LL5.6 tril­lion).

TAR­GET THE WASTE

The ef­fi­ciency of pub­lic spend­ing and rev­enue col­lec­tion is not well doc­u­mented. No au­dit of pub­lic fi­nances has been con­ducted since 2003. Be­cause no au­dit was con­ducted be­fore the pas­sage of both the 2017 and 2018 state bud­gets, pub­lic fi­nance rules and ar­ti­cles of the con­sti­tu­tion may have been vi­o­lated. A clause in the 2017 bud­get law pro­vided a sort of work­around, post­pon­ing an au­dit for a pe­riod of up to 12 months. Be­cause the bud­get law was not avail­able at end of April, it is un­clear whether this 12-month pe­riod was ex­tended or whether an au­dit will be con­ducted be­fore the end of this year. It is also un­clear what time pe­riod such an au­dit might cover, for ex­am­ple dating back un­til the last au­dit or fur­ther, or only cov­er­ing last year’s spend­ing.

There are ar­eas where waste­ful pub­lic spend­ing can be tar­geted for re­duc­tion. Rached ad­vises a deficit re­duc­tion and a bal­anced bud­get be im­ple­mented as soon as pos­si­ble, which he projects can be com­pleted in less than five years. How? First, by lim­it­ing sub­si­dies to EDL. Depend­ing on fuel oil prices, the trea­sury sub­si­dizes EDL to the tune of around $1.4 bil­lion each year, or 2.5 per­cent of Le­banon’s GDP. This drain on the state trea­sury can be low­ered sig­nif­i­cantly by fill­ing much of the gap in un­sup­plied elec­tric­ity. The gov­ern­ment’s plan in the near term is to fill that gap by rent­ing elec­tric­ity barges, but the ten­der has been on hold for nearly a year. Once the elec­tric­ity gap has been closed, EDL could raise the elec­tric­ity sub­scrip­tion rates at which it charges its cus­tomers. The In­ter­na­tional Mone­tary Fund also rec­om­mends a re­turn to gaso­line ex­cise tax lev­els of pre-2012, which would mean higher prices at the pump for mo­torists. Be­tween elec­tric­ity and gaso­line these would be two ma­jor changes.

Jean Taw­ile, eco­nomic ad­vi­sor to MP Samy Ge­mayel, says the path to low­er­ing the deficit is to in­crease rev­enues by curb­ing tax and cus­toms eva­sion. He points to a 2017 Bank Audi study that cal­cu­lated tax eva­sion and other types of fraud at $4.2 bil­lion an­nu­ally, and fig­ures cus­toms rev­enue eva­sion at be­tween $800 mil­lion to $1 bil­lion per year. Added to­gether, he says the state is miss­ing out on rev­enues of about $5 bil­lion ev­ery year. Taw­ile also says that cap­tur­ing these lost rev­enues would im­prove the busi­ness en­vi­ron­ment and make mar­kets more com­pet­i­tive. But he ar­gues that amnesty pro­pos­als for evaders would re­ward bad be­hav­ior at the ex­pense of those that com­ply, adding that an amnesty would not be con­sti­tu­tional, and that it has al­ready been tried twice since the end of the civil war, in 1999 and 2001.

Rached says if the state can achieve a deficit re­duc­tion of one per­cent­age point of GDP per year, while im­ple­ment­ing the Cap­i­tal In­vest­ment Plan (CIP) pre­sented at CEDRE, the deficit would re­main high at 9 per­cent of GDP. A larger deficit, he says, im­plies Le­banon’s sov­er­eign credit rat­ing may go down, which would im­ply a hike to in­ter­est rates. A high deficit cou­pled with high debt and high in­ter­est rates in­di­cates low growth rates for the econ­omy be­cause of the size of in­ter­est pay­ments on state debt and the high cost of credit to pri­vate busi­nesses and con­sumers.

While the num­bers are not yet pub­licly avail­able, the In­ter­na­tional Mone­tary Fund projects Le­banon’s pub­lic debt to reach 180 per­cent of GDP by 2023 if the CIP is im­ple­mented and no fis­cal ad­just­ments are made.

All in all the 2018 bud­get did suc­ceed in slightly low­er­ing to­tal al­lo­ca­tions but the Le­banese state has a poor record of stick­ing to its spend­ing prom­ises. Be­tween 2005 and 2017 Par­lia­ment did not au­tho­rize the gov­ern-

While the num­bers are not yet pub­licly avail­able, the In­ter­na­tional Mone­tary Fund projects Le­banon’s pub­lic debt to reach 180 per­cent of GDP by 2023 if the CIP is im­ple­mented and no fis­cal ad­just­ments are made.

ment to spend or collect money in the form of a state bud­get. Though it could con­tinue spend­ing at 2005 bud­get lev­els, due to in­fla­tion and chang­ing needs that amount quickly be­came chump change. To keep the gov­ern­ment open, the state trea­sury ad­vanced more than $22 bil­lion (LL33.4 tril­lion) over 472 trea­sury ad­vance de­crees ex­am­ined by Ex­ec­u­tive from that 12 year pe­riod.

It seems ob­vi­ous then that Le­banon will need to rad­i­cally change how it man­ages pub­lic money or else risk CEDRE be­com­ing known as the fourth failed Paris-or­ches­trated res­cue plan.

The gov­ern­ment’s spend­ing plan prom­ises to lower na­tional deficit

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