Sunday, June 13, 2010

How To Narrow The Lebanese Annual Fiscal Deficit.

The world has barely escaped falling into a deep economic depression a couple of years ago as a result of the excessive leveraging and lack of risk aversion that became spread all over the world. Financial collapse has been avoided and a modicum amount of growth has been restored to the global community but only after governments stepped in with massive intervention programs. Such government interventions during periods of economic contraction and decreased government revenues are possible only through deficit finance. Governments, not only those of the PIIGS, but all across the EU, UK, North America and Japan ran huge fiscal deficits that have resulted in many cases in annual shortfall of income that is larger than 10%of the GDP.

Such tremendous fiscal deficits are unprecedented during peace and relative prosperity. That is at least one reason for the renewed global worry about a double dip and even a more severe economic meltdown than the one that the international community experienced two years ago. No less of an authority than Nassim Taleb, author of the Black Swan, is predicting openly that the global economy is in dire straights. Yet Lebanese officials carry on business as usual when in fact Lebanon is in a much weaker position to deal with such a fiscal challenge than most of the other names in the news. Most of the others are in a position to make some painful decisions to narrow their deficits that will be painful but not necessarily draconian. In Lebanon, I am afraid; it will not be so easy to reduce the annual deficit since the expenditures on most social and economic areas are elemental to start with. I wonder what is it that Lebanon can cut in the two crucially important areas of education and health care when expenditures on the two areas combined amounts to only 3% of the GDP anyway. What is there to cut short of eliminating the programs totally?

Yet things are not dire. There are a few measures that the Lebanese state can take in order to help itself and the Lebanese public sail through these tough economic currents.

(1) The single most important and the easiest fruit to pick is a reform of EDL that contributes over a $1.5 billion to the deficit annually. Fixing it should not be either lengthy or financially burdensome. No modern economy can prosper, especially a tourist one, without a reliable electric power supply. The power generation can be increased rather rapidly through a number of alternatives in short order provided the output is sold on a cost plus basis. To arrange for the required financing for the expansion should not prove to be difficult since such projects are self financing. Lebanese power is sold by the EDL at a tariff rate that starts at 2.3 cents per kWh and goes up to 13.3 cents per kWh. These rates appear to be low and might have to be adjusted upward but even if they are this does not mean a larger bill for the average Lebanese consumer who has to compensate for the governments inability to provide a reliable supply of power by setting up expensive back up systems. Such backup systems are financially expensive and are disastrous to the environment since they pollute more.

(2) Increase tax revenue collection but not through a higher VAT since VAT is regressive by definition. Other more sophisticated economies can compensate for the inequities of VAT through tax rebates in other areas but since Lebanon is highly dependent on VAT it should resist the temptation of closing the budget gap on the back of the poor. Alternative taxes to consider should be real estate taxes, inheritance taxes, financial taxes and a hefty tax on the imported fossil fuels. If Lebanon imports around 40 million barrels of oil a year then it should be able to generate upward of an additional half a billion dollars a year in revenues. The higher prices would act as a stimulus for the Lebanese to use more efficient modes of transportation

(3) Initiate serious studies to adopt an efficient tax collecting system that can generate every year around 28-30% of the GDP in government revenue.

(4) Restructure and renegotiate the debt in order to reduce the debt service ratio to half of what it is at the present.

The above is not intended to be more than rough guidelines about some areas that deserve to be investigated prior to others. This column is not arrogant enough as to make any suggestion that the above recommendations are all inclusive. Lebanon could and actually should also do whatever it takes to reduce government inefficiencies and bureaucratic bottlenecks in addition to start ASAP an auction of the relevant areas for gas and oil exploration off shore.


George said...

Keep on dreaming. Lebanon will never be proactive.

ghassan karam said...

Those who insist on reacting to events will have a more difficult time in meeting the challenges.


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