Lebanon skyline
Beirut, Lebanon. For illustrative purposes only Image Credit: Agency


The Lebanese government is deferring payments to contractors and public entities, improving the budget numbers but endangering a lifeline for businesses.

Delayed payments for this year alone have exceeded $900 million, pushing the outstanding total to over $2 billion, according to a person familiar with the matter. The government owes contractors about $300 million, half of which was incurred in 2019, said Maroun Helo, head of the Lebanese Contractors Syndicate of Public Works and Buildings.

Contractors are defaulting on debt, he said. “This is creating a very big crisis.”

The government of one of the world’s most indebted nations has pulled out all the stops to push through a budget touted as the most austere in the country’s history in the hope of appeasing investors, donors and rating companies. But the build-up of arrears that lies behind the turnaround is masking fiscal risks that could snowball later.

At stake is progress in Lebanon’s efforts to slash its budget deficit to a little less than 7.5 per cent of gross domestic product for 2019, from just over 11 per cent in 2018. Finance Minister Ali Hasan Khalil said arrears are paid gradually as liquidity becomes available.

“There is no link between the deficit reduction and not paying dues,” he said in emailed remarks.

Under the 2019 budget recently ratified by parliament but not yet made public, a deferral of payments and postponement of ministerial projects make up almost half the total reduction in spending, according to the Lebanese Centre for Policy Studies, a Beirut-based think tank, which used numbers published in the draft submitted by the government.

The full budget hasn’t yet been published in the official gazette due to a dispute over a hiring freeze in the public sector.

Dim prospects

Lebanon’s average economic expansion hasn’t exceeded 1 per cent in the past five years and is projected at 1.2 per cent in 2019, according to the finance minister. Central bank Governor Riad Salameh has put growth at zero so far this year.

The government’s plan for this year is just to cover public-sector salaries, debt-servicing costs and annual transfers for the electricity company, said the person, who asked not to be identified because the information isn’t public. While it has allocated $1.18 billion for capital expenditure, a little less than $200 million has been spent in the first four months, according to the person.

Since the new budget includes measures such as new taxes, its approval is bound to inject cash that will allow the government to make payments, a Lebanese official said. Authorities are also offering a grace period in the coming months for people to file late taxes and pay state fees, according to the official.

Uncertainty remains

The International Monetary Fund warned earlier this month that the budget shortfall could overshoot the government’s target by a large margin this year. It also said there remains “uncertainty about the stock of outstanding payment orders and the process for their clearance which will affect the cash deficit for 2019.”

The latest Finance Ministry data showed the cash deficit down to 2.1 trillion pounds ($1.4 billion) in the first four months, which Morgan Stanley estimates as less than 7.5 per cent of GDP annualised.

“The consolidation is expenditure-led rather than revenue-led, which we would have ideally liked to see,” Morgan Stanley strategist Jaiparan Khurana said in a report. “Nonetheless, the expenditure restraint should provide markets with increased confidence around the 2019 budget execution.”

The accumulation of arrears may be an effort to manage tightening liquidity, making the budget look better after years of fiscal overreach. In the past two fiscal years, the government has missed its own targets and 2019 could prove no different, lawmaker Elias Hankache said.

The push for higher taxes, coupled with low prospects for economic growth in 2019, could end up hurting revenue, said Sami Nader, head of the Beirut-based Levant Institute. Taxes collected up until April are about $100 million less than Lebanon raised during the same period a year earlier.

“Instead of offering stimulus, they went in the opposite direction,” he said. “In this year’s budget, chances are high they will witness less revenues.”