Lebanese Ministry of Finance issued, in early November 2023, a report in the wake of the recent developments stating that Lebanon lacks the necessary resources to face the repercussions of a potential war, especially in the face of its continuous and severe crises for over four years. This has resulted in a significant contraction of its economy, with GDP decreasing from around $50 billion in 2019 to an expected $16-18 billion in 2023. Additionally, it is grappling with extremely high inflation, with a Consumer Price Index (CPI) of 230% in August 2023, according to the Central of Administration Statistics. Moreover, the exchange rate stability witnessed in recent months is not secure or sustainable, as it lacks the confidence factor needed to maintain stability and mitigate inflation and exchange rate fluctuations. These factors could lead to an increase in poverty rates in challenging living conditions.
There are several risks to consider, including the potential disruption of operations at Rafik Hariri International Airport and ports, which could threaten government revenues as a substantial portion of imports, come through these ports, subject to various fees and taxes. In fact, 63% of these revenues come from these two sources.
Furthermore, the country faces security instability, which could result in a halt in domestic consumption and hesitant investments, hindering economic recovery and posing a threat to government revenues, especially those derived from consumption-related fees and taxes. In addition, a decline in government revenues, particularly during times of limited borrowing capacity, is a significant threat to the ability to continue funding public services or resorting to financing by the central bank, which had a significant cost on the economy.
As for the monetary side, managing these risks will inevitably deplete foreign currency reserves, especially to address the balance of payments deficit and the expected decline in remittances due to the halt in tourism activities. According to the International Monetary Fund’s June 2023 Article IV report, the foreign currency reserve at that time was approximately $9.5 billion, covering about five months of imports.
Confronting the crisis at the level of public finances:
This entails ensuring financial and monetary stability and continuous coordination with the monetary authority. The Ministry of Finance has been working since the beginning of the year to enable liquidity management in coordination with the monetary authority by enhancing revenues and collecting a portion of taxes and fees in cash, with the aim of controlling cash flow, which has somewhat contributed to stability in the exchange rate in recent months. Today, the Ministry of Finance continues on this path and continues to take necessary and supportive measures for liquidity management using available means to avoid any pressures on the exchange rate. Moreover, cash revenues in Lebanese pounds currently constitute approximately 52% of total revenues, allowing the Treasury to purchase foreign currencies from the local market to meet financing needs in coordination with the central bank, without exerting pressure on monetary stability.
Reassessing spending priorities within available resources is essential in confronting the crisis.
Therefore, the main focus is on prioritizing public infrastructure, paying public sector employees and retirees, ensuring the military has fuel, and meeting social spending needs. There is a suggestion to explore postponing certain payments, especially in foreign currencies, to protect reserves. Defaulting on payments could have negative consequences, such as interrupting loans from institutions like the World Bank. The Ministry of Finance has paid its dues to some international institutions to support the private sector financing program.
The Ministry of Finance has worked to enhance revenues, which had decreased due to inflation and exchange rate fluctuations:
Overall, the 2024 budget aims to complete the financial recovery process by rectifying taxes and fees affected by inflation, diversifying revenue sources, and reducing reliance on imports. Currently, imports make up around 51% of total revenues. Implementing the 2024 budget measures is expected to increase revenues to at least 17-18% of GDP in 2024. The treasury at present receives foreign currency (mainly fresh dollar) from fees at Rafic Hariri International Airport, public port fees, and is expected to earn some revenue from tobacco and alcohol excise fees in USD, in the amount of $20 M each month. However, one of the main challenges is securing enough dollars to cover financial needs due to the pressure on the market. As a result, Ministry of Finance has been coordinating with the central bank to identify essential foreign currency needs without draining foreign exchange reserves.
And, accordingly, the Ministry of Finance has proposed in the 2024 budget project to collect some taxes and fees in foreign currency, particularly those related to foreign currency earnings, to secure additional sources of dollars due to the economic crisis and to address financial risks. Approving the 2024 budget is a top priority to implement corrective measures and diversify revenue sources. This approval will provide flexibility in dealing with current situations and addressing challenges, as the current budget based on a lower exchange rate and credit ceiling hinders public service expenditure, which now relies on a higher exchange rate and requires more funds in 2023.