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Under pressure from donors, Lebanon mulls austerity budget

Workers at Lebanon's central bank went on strike briefly earlier this month
AA/AFP/File
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Beirut (AFP)

After decades of civil war and repeated political crises made it one of the world's most indebted countries, Lebanon is drafting its "most austere" budget to secure billions of dollars in international aid.

The small Mediterranean country has promised donors to slash public spending as part of reforms to unlock $11 billion in aid pledged at a conference in Paris last year.

Growth in Lebanon has plummeted in the wake of endless political deadlocks in recent years, compounded by the 2011 breakout of civil war in neighbouring Syria.

The country has been racking up public debt since the end of its 1975-1990 civil war, which now stands at 152 percent of gross domestic product (GDP), according to the finance ministry.

Eighty percent of that debt is owed to Lebanon's central bank and local banks.

Prime Minister Saad Hariri last month vowed to introduce "the most austere budget in Lebanon's history", sparking fears of benefit cuts in the public sector.

The cabinet has not yet released a full austerity package for 2019, but already it has faced a string of small protests.

Lebanon's government is under pressure from all sides, said Nassib Ghobril, head of the economic research at Byblos Bank.

At home, "the pressure comes from the Lebanese citizen who sees job opportunities and the economy are in decline", a private sector suffering from cost increases, and a banking sector weighed down by having to fund the public sector, he explained.

And the cabinet has to meet the expectations of "countries and institutions" who have promised billions in aid, he said.

- 'Social upheaval' -

Despite previous promises of reform, Lebanese have continued to complain of unemployment, poor infrastructure, and dire public services including an ageing electricity grid plagued by frequent power cuts.

More than a quarter of all Lebanese live in poverty, according to World Bank figures.

At the Paris conference, Lebanon committed to gradually reducing its public deficit over five years, but appears to have missed the mark for 2018.

The World Bank estimates the public deficit reached 11.5 percent of GDP for that year, above the figures for previous years.

As the cabinet mulls how to cut expenses in 2019, Lebanese public employees are warning their benefits are a red line.

For the first time in the country's history, a strike by central bank employees briefly crippled the country's stock exchange earlier this month.

Also clamouring against austerity measures that would affect them are army pensioners, port workers, public university staff, and employees of the national electricity company.

"We're against any measure that will affect disadvantaged sections of the population," Lebanon's labour union chief Beshara Asmar told AFP.

"If the government does not take note of the remarks we have submitted to it... the budget will lead to social upheaval," he warned.

So far, to decrease the public deficit, the cabinet has announced it will increase taxes on interest income from bank deposits from seven to 10 percent.

The government is also expected to slash salaries and freeze recruitment in the public sector.

- Tax evasion -

But Ghobril said measures like raising taxes showed "a lack of seriousness in finding sources of revenue"

Instead, he suggested tackling rampant tax evasion, and chasing up unpaid utility bills.

The state should also fight smuggling to increase custom revenues, and make sure influential businessman who have built illegally on state-owned land along the coast actually pay fines.

"Around 50 percent of individuals and companies in Lebanon do not declare all taxes" they should pay, Ghobril said.

"All these measures just require political will. They could easily bring in $1 billion in 2019 without even increasing taxes," the economist said.

Many Lebanese are disillusioned with the ruling class, whom they accuse of nepotism and graft.

After previous pledges of aid have failed to bring about structural reform in Lebanon, international creditors last year set conditions on handing out more cash.

A government finally formed in January after an eight-month political deadlock is grappling to complete the requirements on time to receive these monies.

In April, the cabinet approved a plan to reform a costly but underperforming electricity sector.

And as the cabinet now moves on to cutting budget expenses, members of the Lebanese public are making sure they are not trampled in the process.

"This is the last warning," said retired general Ali Amer at a recent protest in Beirut against feared pension cuts.

If the budget does affect their retirement benefits, "we will be on the streets every day, all over the country, burning tyres and blocking roads," he said.

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