Lebanon’s reforms face ‘enormous challenges’
The Lebanese government’s approval of fiscal reforms in the wake of massive protests over proposed austerity measures highlight the “enormous challenge” authorities and the central bank face, according to ratings agency Moody’s.
As the Lebanese army moved on to the streets on Wednesday to remove protesters and counter-protesters after a week of disruptions, the government and the Banque du Liban are trying to simultaneously achieve “fiscal consolidation to preserve government debt sustainability, maintain financial sector stability and the currency peg with the US dollar, and appease the demands of an increasingly restless population”, said Elisa Parisi-Capone, a vice president at Moody’s.
On Monday, Lebanon’s government passed a budget that cut the heavily-indebted nation’s budget deficit to 0.6 per cent, which it said would be achieved without the imposition of any new or additional taxes on people.
The measures announced included a 50 per cent cut to the salaries of senior politicians, a higher tax on bank profits and a plan to cancel interest rates on local currency debt holdings to provide-much needed liquidity given the pressure the Lebanese pound has faced in recent weeks because of the scale of the country’s debt obligations.
“Additional financial sector taxes would be credit negative for banks, further pressuring the poor returns that Lebanese banks are seeing in light of previous rounds of tax increases, and therefore their ability to absorb shocks, while further reducing shareholders’ incentives to invest in Lebanon and incentives for banks to attract deposits and invest in government paper,” said Alexios Philippides, another Moody’s vice president.
Lebanon is one of the most indebted countries in the world, with a debt to gross domestic product ratio of more than150 per cent.
“The underlying problem is that the authorities have continually failed to tackle the wide budget shortfall,” Jason Tuvey, senior emerging markets economist at Capital Economics in London said in a note on Wednesday, pointing out that the country’s deficit has averaged 11 per cent since the turn of the millennium.