Finance Minister Fouad Siniora presented an unimaginative 2004 draft budget on Sunday, making it very clear that politicians should get their act together and immediately push hard for extensive reforms.
However, Siniora’s bold statement has apparently proven the fears of many economists and investors that the current government will not be able to deliver promises as long as President Emile Lahoud and Prime Minister Rafik Hariri remain opposed over many issues.
Hariri has hinted that the convening of a “Paris III” conference hinges on one important factor: the implementation of all the reforms that were mentioned at “Paris II.”
The prime minister was alluding to the privatization of state-owned assets and the reduction of spending.
“Lahoud and Hariri realize the dangers that lie ahead. But neither of them is willing to give an inch to the other,” one economist said. He added that the new budget will be approved by the Cabinet and Parliament with few amendments.
Observers agree that there is tension between Lahoud and Hariri, adding that the country will definitely pay the price for this lengthy debate.
Privatization, which is a key element in the government’s program, appears in jeopardy despite the expected launching of the tender and auction of the two cellular licenses.
Six local and international companies are bidding for the licenses although telecommunication experts fear that the current state of the market does not encourage good prices for the companies.
The government may opt for securitization of the cellular revenues if the companies do not come up with a good price for the networks.
But even securitization is facing serious hurdles as the government debates the mechanism for implementation.
However, Siniora told The Daily Star that the budget is not the real test, as he stressed that the government may be forced to issue new Treasury bills within one month to cover the massive expenses.
Siniora explained that the ministry will probably buy the three-year certificate of deposits (CDs) at 4 percent instead of 9 percent.
He added that the Central Bank will sell some of the CDs that are held by some banks and customers to the government, hence the CDs that carry 9 percent yield will be transferred to the ministry at a cost of 4 percent.
The minister admitted that the money that came from Paris II will not be sufficient to reduce the debt servicing by $400 million. “What we need now is a new realistic look at our spending. We can no longer afford to pretend that there is no problem in the spending,” Siniora said.
“The failure to implement the necessary structural reforms has led to a less than required but realistic 2004 budget proposal,” he added.
Siniora’s figures have indicated that some 86 percent of total expenditure, excluding debt servicing, has been allocated to non-discretionary expenses such as staff salaries. According to Siniora, unless certain reforms take place, this leaves the margin of change at almost nothing.
The 2004 budget projects total expenditure, excluding debt servicing, of LL4,950 billion, as compared to LL4,600 billion in 2003. Around LL3,400 billion (69 percent) is allocated for public sector wages and related expenses.
Expected total revenue is projected at LL6,400 billion with an initial surplus of LL1,450 billion. The budget draft includes investment expenditure of about LL614 billion, which constitutes a LL218 billion increase on 2003.
According to Siniora, debt servicing is set to reach to LL4,300 billion from the projected LL3,900 billion in the absence of reforms and privatization. Thus the deficit could range between LL2, 850 billion and LL2, 450 billion or 30.8 percent and 27.7 percent respectively.
Citing examples, Siniora said that Lebanon’s major expenditure goes on education and health, stressing that the government must figure out a way to “trim spending,” but declining to say how.
The draft budget, which project a deficit in spending between 30.8 and 27.7 percent, has failed to impress across the board, despite the fact that the government is not introducing new taxes.
Even if the government manages to privatize some
assets next year, the deficit will only drop to 27.7 percent.
This means that channeling all the proceeds from privatization into the empty coffers of the Treasury will not be enough to put the house in order.
The International Monetary Fund (IMF), which Siniora met in Dubai last month, expressed its concern over the delay to privatization.
The IMF warned a few months ago that privatization will only generate $4.7 billion in the coming few years, adding that the debt to gross domestic product ratio will remain too high by all standards.
It is unlikely that the IMF will rebuke Lebanon or call for the devaluation of the Lebanese pound.
“The IMF realizes that political differences are obstructing fiscal reforms and privatization,” one economist said, adding that Lebanon will not get any additional help from the international community if the government fails to show seriousness in tackling the deficit.