Lebanon on edge as government threatens austerity

 

It is expected that this will be the most austere budget Lebanon has witnessed in its history, with the aim of satisfying international donors that have promised the country a much-needed US$11-billion bail-out.

 

The money will be disbursed on the condition that the country of four million, which has a debt-to-GDP ratio of more than 150%, proves it is serious about implementing economic “reforms.”

Ahead of a Cabinet meeting to hammer out the budget on Tuesday, demonstrations took place in the capital Beirut and cities throughout the crisis-ridden country.

 

“We warn the government against implementing any of these destructive suggestions being discussed,” said Mohammed Dweik, a delegate of the Public Administration Assembly, one of a number of representative groups charged with mediating between workers and the government.

 

As Dweik sounded his warning from a protest on Friday in the southern city of Nabatieh, the teachers’ union held its own press conference in Beirut.

 

Teachers earned just 1.23 million Lebanese lira ($815) per month until July 2017, when their salaries were raised to 3 million lira (nearly $2,000). With Beirut ranked as the Arab world’s third most expensive city, that wage would not be sufficient to support dependents without a second breadwinnear or supplemental income.

 

“Every time the government finds itself in a corner, it extends its hands into the pockets of the poor. All so they can avoid having to lay a hand upon what they consider to be the sacred money,” Hussein Jawad, secretary of the Association of Teachers of Basic Education, said in a speech. 

 

He was referring, of course, to Lebanon’s banks and big companies, which consistently manage to gain tax exemptions.

 

“Despite all the reassurances we received from officials that they do not intend to reduce wages, what is being leaked to the media says otherwise. They do not have a reform plan other than to pounce upon poor people’s money and benefits,” Jawad said.

Reforms demanded from Lebanon by the International Monetary Fund and World Bank are the same as those sought from every country facing an economic crisis – slash the national deficit by cutting public spending, usually by reducing the salaries of public sector employees, retirees’ pensions and cutting social services.

 

They also include fighting corruption, tax evasion, and privatizing any public entities that can be sold.

 

Europe has turned the page on austerity, with countries realizing it does not revitalize economic growth, especially after the experience of Greece. But big creditors and international institutions continue to demand that any government requiring financial assistance must crush its public institutions and export them to the private sector – moves that also reduce their budgets and ability to pay off the deficit.

 

It is not clear how austerity and salary cuts in Lebanon can help reduce high unemployment or fix deteriorating infrastructure, or attract foreign investment and support competition and other problems identified by the International Labour Organization.

 

A 2018 report by UNCTAD, the United Nations body dealing with trade, investment and development, highlights a lack of any productive sectors in Lebanon capable of shifting the economy towards growth and protecting it from the risks of financial upheaval.

 

Lebanon, thus, fails to raise investor confidence and only manages to attract investments to the financial sector due to high-interest rates on deposits in its banks – investments which never make it out into the productive sectors.

 

 

The Lebanese government reportedly aims to reduce its budget deficit from 11.4% of last year’s GDP to 7.5% in 2019.

 

According to the numbers on which the government has based its draft budget, GDP is expected to rise by 1.2% this year,  from $56.8 billion to $59.6 billion. The government pledged to Paris IV donors that it would reduce its deficit by 1%. And yet the latest reported target suggests the government is aiming for a 3.3% deficit reduction in the last six months of this year – reducing the overall budget deficit by $2 billion.

 

For Mohammed Zbeeb, a Lebanon-based journalist and economic researcher, that target would be an arbitrary one. It is more than the amount agreed to reassure investors, and one which would require immense budget cuts.

 

The Lebanese government is no stranger to austerity, having already implemented it for years. Given the fact that there is virtually no plan set forth to reduce debt or support the real economy (industry, investment, infrastructure), it has become increasingly clear that the vast majority of the burden is going to fall upon the shoulders of public employees, who have long struggled to achieve wage raises and secure the benefits their jobs are meant to guarantee.

 

The Cabinet has already approved a number of austerity measures targeting benefits of state employees, reducing pensions by 9%, cutting daily transport allowances from 8,000 lira ($6) to 6,000 lira ($4) and slashing annual leave from 20 days to 15 days per year. It has also set a ceiling for additional benefits, bonuses and overtime hours, at no more than 75% of the base salary.

 

Zbeeb notes that the government is still debating the possibility of reducing the basic salary for workers who receive more than 3 million lira ($2,000) a month, but the amount has yet to be determined.

So far, no policies have been put forward to reduce interest on public debt, which drains about 50% of state revenues. The government did, however, agree to raise the tax on interest-based profits from bank deposits from 7% to 10% for three years.

 

Despite it being a relatively small tax, which will have virtually no effect on the profits of big accounts, it was considered a “serious step” by the president of the Bank of Beirut. The banking sector has since lobbied non-stop in an effort to have it canceled.

 

The fundamental problem with this tax, however, is that it is not progressive, and thus does not differentiate between a salaried worker’s savings and those of a big investor, which means it will only be substantially felt by the former.

 

As a report in the Lebanese daily Al-Akhbar points out, if this 10% tax is implemented, big investors – particularly those with deposits of $1 million and above – will still manage to make a profit at least $20,000 more than what they would have in 2018.

 

And even if the tax was raised to 30%, they would make the exact same profit they made in 2018, just by having their money deposited in Lebanese lira.