Beirut hopes to pass budget

Lebanon has not had a budget for seven years. It is aiming to break the cycle and this year’s spending plan is awaiting approval from parliament. Published in MEED, 2 August 2012

For most countries, drawing up a budget is something of a routine act, but Lebanon is an exception to that rule. Since 2005, a succession of governments has had to survive without setting out a detailed plan of revenues and spending for the year ahead. That may be about to change, after the cabinet recently agreed the details of the 2012 budget, although it still needs to win parliamentary approval.

Early setbacks

Getting to this point has proven a long and tortuous process. Finance Minister Mohammed Safadi submitted the first draft of his budget to the cabinet in September last year. Several months of debate followed among the partners in the coalition government, in particular over proposals to raise taxes in several areas, including real estate investments, deposit interest and the banking sector, as well as a rise in value-added tax from 10 per cent to 12 per cent.

The opposition was strong enough to force the minister to go back to the drawing board and it seemed unlikely that a solution could be found. It was a situation that surprised no one.

“There hasn’t been a budget for several years,” says Nadim Shehadi, associate fellow of Chatham House, a London-based think-tank. “It’s part of the dysfunction of the administration. There’s a dysfunction within the system.”

However, after two further days of discussion, the cabinet finally managed to agree on a much-amended version of the budget on 11 July.

Safadi had made heavy modifications and removed the more contentious issues. On the revenue side, tax increases were removed, while on the expenditure side, the cost of rises in public sector salaries was also excluded.

The budget also failed to include any allocations for Lebanon’s share of the cost of running the Special Tribunal for Lebanon, the UN-led investigation into the assassination of former prime minister Rafiq Hariri in Beirut in 2005. The government says that bill has been paid separately, although it has not said how. In 2011, Prime Minister Najib Mikati transferred the $32.2m from the budget for his own office.

With so much left out, some have questioned whether there is any value in the government of Mikati pushing ahead with the budget at all. “The budget is pretty useless,” says one political analyst in Beirut. “It is full of stuff with little accountability.” Some details of the budget may yet be altered before it is sent to the National Assembly (parliament) for approval.

However, the broad basis of the plans are now clear. According to the local Byblos Bank, the budget is based on $13.9bn in spending and $10.2bn in revenues, leaving the government with a fiscal deficit of $3.7bn, equivalent to around 8.5 per cent of gross domestic product (GDP).

As yet no timetable has been announced for when it will be considered by parliament and there can be little certainty that it will be passed by MPs. If it is not, the government will be forced to fall back on the spending levels agreed in the 2005 budget, as it has done every year since then, and bring in some additional measures. Parliament has already approved a package of extra-budgetary spending for the government worth about $6bn, which will help to alleviate any immediate problems.

Overall, Lebanon’s economy is in a difficult position. In May, ratings agency Standard & Poor’s downgraded the country from a stable to a negative outlook on its B/B rating, due to the risk of prolonged domestic and regional instability.

The continued and worsening violence in Syria in the intervening period has done nothing to improve the situation.

Nonetheless, the economy is still growing, albeit at a slower pace than in the recent past. The country’s GDP is expected to rise by 2-3 per cent this year, according to local economists.

In addition, the government’s finances have been improving. The deficit of spending over revenues last year was £Leb3.5 trillion ($2.3bn), according to the Finance Ministry, its lowest level since 2005.

Lebanon’s fiscal situation has improved further this year. Marwan Mikhael, head of research at the local Blominvest Bank, says that the fiscal deficit declined 22 per cent in the first four months of 2012, falling to $1.1bn, compared with $1.4bn during the same period of 2011.

This was aided by a 24 per cent rise in revenues against an 8 per cent increase in spending, with revenues boosted by increased tourism and customs receipts.

Election year

Even as the country waits to see if parliament will approve the budget, Safadi will soon have to turn his attention to drawing up the state spending plan for next year. Given that there is due to be a parliamentary election in 2013, this is likely to be even more difficult to achieve.

“The Finance Ministry has to start discussions with all the other ministries in order for them to be able to present the 2013 budget to the cabinet and parliament in due time,” says Mikhael. “But next year is an election year in Lebanon. You cannot say if there will be a budget or not.”