The following report reviews the proposed 1997 budget and uses it as a vehicle to analyze key issues in Lebanon's public finances. The purpose of the report is to stimulate informed public discussion and awareness of fiscal conditions. The report comes in the middle of the parliamentary review of the 1997 budget. It also comes at a time when the government is facing difficult economic choices and as Lebanon's public finances are coming under closer scrutiny by foreign governments and international financial analysts.
Lebanon is at a crossroads in the rehabilitation of its public finances. This is a complex and challenging process which requires rebuilding the country's revenue base, establishing spending priorities, avoiding unnecessary expenditure, mobilizing domestic and foreign resources for investment in Lebanon, and managing the public debt in a responsible way. Much progress has been made along this path, yet a great deal more needs to be done to secure a sustainable fiscal performance and to protect the macro-economic gains achieved. This report outlines some of the most important alternatives which Lebanon faces today. Decisions on these issues are difficult to make and implement because of their complexity and their political ramifications.
The 1997 budget proposal submitted to parliament recently represents a determined effort to improve the country's fiscal situation. Aggregate expenditures are below their nominal 1996 level. It is estimated that aggregate revenues will grow by 10% from their estimated level in 1996. If the budget is implemented effectively and if the actual figures turn out to be the same as the budgeted ones, or very close to them, 1997 may be a turning point in Lebanon's public finances.
A few figures: the deficit to GDP ratio will, it is estimated, fall sharply, perhaps to less than 10% compared with 16-20% in 1994-1996. There will be a small primary surplus in the budget, in other words excluding debt service payments, the budget will have a surplus. Finally, the debt to GDP ratio is expected to stabilize - at about 85% if gross debt estimates are used or 73% for net debt estimates. These ambitious targets require a determined effort to resist adding expenditure allocations to the budget during the course of the fiscal year, unless they are matched by new revenues. It may be remembered, however, that the budget plan in 1996 started with similar ambitions which will probably not be realized.
Another important decision has to do with how public spending - and the deficits which may arise - will be financed. Foreign aid on a grant or near-grant basis is needed. Lebanon has a clear case for such aid which, if secured, would greatly relieve the country's difficult fiscal conditions. However, considering the tight budgetary constraints faced by donor countries, expectations of substantial assistance have to be tempered. Moreover, considering Lebanon's debt situation at present, the terms of aid from donors will be more important than the quantity of aid.
It would be prudent for Lebanon, therefore, to think essentially in terms of self-reliance. In such circumstances, public spending (and the resulting deficits) must be financed in one of three ways, or a combination thereof: either by the efforts of the current generation, by running down the assets accumulated by previous generations, or by borrowing, which will shift the burden of reimbursement on future generations.
It is important to reduce the budget deficit in the coming years to a sustainable level. This requires strict fiscal policy which the current generation will have to bear through a combination of tight spending and increased taxation. On the expenditure side, reforms need to be contemplated. These could include centralizing government-funded expenditures in a consolidated state budget. The absence of a comprehensive state budget which includes spending by autonomous public entities not currently included in the budget - such as the Council for Development and Reconstruction - restricts the possibility of expenditures prioritization. In addition, it would improve financial control and review and help to reduce waste and corruption.
Revenue enhancement also needs to be considered. This includes stricter enforcement of laws, and possibly higher tax rates and new indirect taxes. The burden of taxation in Lebanon is lower than in neighboring countries, by about the equivalent of 10% of GDP as compared with Jordan and Egypt. It would be useful for the public to be informed of the prospective course of public finance. An indicative exercise developed by the authorities to examine the sustainability of the budget in the medium term, including the policies underpinning it as well as expectations - or forecasts - for economic performance, would be helpful in this regard.
Interest payments have became a major burden on public finances. Lower interest rates would help in lightening this burden. Consideration might be given to reducing the outstanding debt by drawing on assets accumulated by past generations. The Lebanese state owns substantial real and financial assets which could be used to retire part of the debt. Gold reserves have so far been considered untouchable because of the strong political consensus against using them. Other assets, however, could be used, but only if the objective is to secure a permanent reduction in the level of debt. Privatization of some public utilities may also be considered, but only after the creation of regulatory bodies. The rationale for privatization should be economic- to have a more efficient market- and not purely fiscal, aiming to create more revenues for the state.
While the main responsibility falls on the efforts of the present generation, the assets accumulated in the past could be helpful. It is vital to consider how much of the burden could be passed on to future generations, and at what point the debt will pose a risk to financial stability. Traditionally, Lebanon was a debt-free country, but the war changed this. However, it would be important to maintain a manageable debt level, and if necessary to err on the conservative side.
This report was a collective work, and was carried out under LCPS sponsorship with the financial assistance of the Economic Development Institute of the World Bank, the Center for International Private Enterprise, and the International Center for Economic Growth. The authors wish to thank these institutions for their help. They would also like to thank those who supported the enterprise, especially those who took time to meet with them. The opinions and information presented in the report are solely the responsibility of the authors.
This report is only the beginning of a long-term project in public finance. LCPS will continue to monitor the performance of public finances throughout the fiscal year. By the time the 1998 budget is presented and discussed, LCPS hopes to have a comprehensive database on public finance which it will make available to all those who are interested in participating in an informed public .
Kamal Shehadi
Budgetary Politics in Lebanon:
A Memorandum for Public Discussion
Lebanon enjoyed a prosperous economy and stable financial conditions prior to the outbreak of the war in 1975. Private-sector activity and investments stimulated economic expansion, and the economic system was open and free of restrictions. Monetary and fiscal policies were conservative, and inflation rates were low. The balance of payments was in surplus and the Lebanese pound exchange rate tended towards appreciation. The size of the fiscal sector in the economy was relatively modest: in 1974 and 1975 it accounted for less than one-fifth of GDP on the revenue side, and somewhat lower than that on the expenditure side. On the eve of the outbreak of the Lebanese conflict budgets had been recording significant surpluses.
The impact of the conflict on public finances, and on Lebanon's financial conditions in general, was very profound. With the erosion of the authority of the central government, revenue receipts dropped sharply. Government expenditures were sustained, however, which led to the emergence of a substantial fiscal deficit financed largely by the Banque du Liban (central bank). This resulted in liquidity injections into the economy which put pressures on the price level and the exchange rate. It also caused interest payments to grow rapidly as deficits continued to be incurred.
There are some estimates showing the fiscal deficit peaking during the war years at a level equivalent to one-third of GDP, or almost 90% of expenditures. However, there are several reasons why it would be more prudent to describe public finance in this period qualitatively rather than quantitatively. Aside from the lack of reliable statistics, for example pertaining to GDP estimates and price data, there is a broader question relating to coverage. To a significant extent the fractured central government was replaced during the war by illegal militias that acted as de facto alternative sources of authority. The various regions were administered in a parallel fashion, with those in charge conducting fiscal operations as they saw fit. The militias collected -some would say extorted -taxes, duties, and fees from the public and performed expenditure functions as well.
With these abnormal circumstances in mind, it is difficult to draw overall conclusions on trends in public finances during the war period. The very limited fiscal data available relates only to the central government and suggests that the Lebanese public was taxed lightly. In fact, the public may have been overburdened by the multiplicity of taxes - some of them illegal, but perhaps more efficiently collected. Moreover, given that incomes dropped steeply, it is quite conceivable that the tax burden as a proportion of GDP rose during the war period. Once peace was restored, the authorities had not only to reassert control over revenue sources and rebuild the tax system, but they also had to secure the compliance of a public which had grown more cynical because of its experiences during the war years.
Expenditures were also affected by the abnormal situation that prevailed during the war period. The government continued to pay wages and salaries to employees of a public administration that essentially was not functioning. Administrative efficiency, whatever its level before the war, eroded considerably as less work was done and as salaries declined through the double impact of inflation and the depreciation of the Lebanese pound. Post-war governments had to confront the challenge of administrative reform.
In 1989, at Ta'if in Saudi Arabia, an agreement was reached putting an end to the Lebanese conflict. The agreement provided a structure for a new political order. In terms of economic and financial policy, however, Ta'if offered nothing new. This meant implicit acceptance of the economic status quo ante. Between 1989 and 1992, Lebanon went through a period of transition: economic growth picked up; the government reasserted its authority over sources of revenue, particularly customs; and receipts increased by some 5-6% points of GDP, to an average of 12% of GDP in 1991-92.
This improvement, in conjunction with expenditure restraints, resulted in a sharp reduction in the overall deficit. In 1991, the deficit was cut in half relative to its level in 1989-90; and by a further 25% in 1992, which brought it down to about 12% of GDP. Part of the expenditure squeeze was achieved by keeping the growth in nominal expenditures below the rate of inflation. In nominal terms, budget expenditures increased by 86% in 1992, while the rate of inflation approached 120%. To some extent, the relative strengthening of public finances resulted from delays and unavoidable lags in initiating the reconstruction effort, returning the displaced, and compensating private property owners. The delays in implementation would be overcome in 1994-95.
The growth in the public-sector deficit was among the main developments in public finance during this period. The public deficit increased from the equivalent of 38.5% of total expenditures in 1993 to 57% and 48.2% in 1994 and 1995, respectively. To some extent this reflected the unusual conditions that prevailed in 1993. This was the first year of the post-war period that could be considered normal, and this normalcy provoked a one-time jump in revenue collection. On the expenditures side, however, the situation did not yet allow for planned levels of spending. This combination resulted in a substantial contraction of the fiscal deficit to less than 10% of GDP (see Table 1). With an enhanced expenditure capacity, government expenditures increased between 1993 and 1995 by 94%. The biggest jump occurred in 1994 when expenditures increased by 72%, but leveled off somewhat in 1995, registering around a 13% increase.
Meanwhile, between 1994 and 1995, government revenues increased by 64% as a result of better collection methods and the 1993 tax reform. Most of the revenue increases came from a rise in direct stamp duties and fees, taxes on built-up property, and customs duties.
Public wages and salaries as a share of total expenditures decreased between 1993 and 1995. They constituted 43% of total expenditures in 1993, but decreased to 33% and 32% in 1994 and 1995, respectively (see Table 2). Capital expenditures in Lebanese pounds that were included in the budget increased from 13% of total outlays in 1993 to 24% and 21% in 1994 and 1995, respectively. In addition, the Council for Development and Reconstruction (CDR) invested L£52bn in 1993, L£175bn in 1994 and L£486bn in 1995, which were financed through foreign loans. Interest payments as a percentage of total outlays have grown steadily since 1993. Their share in total spending increased from 25% in 1993 to 28% and 30% in 1994 and 1995, respectively. The revenue to GDP ratio increased from 14.4% in 1993 to 17.1% in 1995. The expenditures to GDP ratio increased from 23.4% in 1993 to 33% in 1995. As a result the deficit to GDP ratio increased from 9% in 1993 to 15.9% in 1995.
The approved 1996 budget called for a 33% increase in revenues and 21% growth in current expenditures. Expenditure growth was curtailed by the government's decision to hold the line on increases in wages and salaries. On the ohand,interest payments have continued to mount. With regard to capital expendit, those measured in Lebanese pounds and included in the budget were estimated at L£870bn, representing a 29% decrease compared to 1995.
Preliminary indications of fiscal performance in 1996 suggest that the government will be unable to meet its budget targets for both revenues and expenditures. Rough estimates for the first ten months of the year show revenue collection approximating 68% of budget estimates, with expenditures having already reached 93% of total budgeted allocations. The estimated overall deficit of L£3.3trn in the first ten months of 1996 is 36% higher than the budget's target of L£2.5trn for the entire year. Meanwhile, interest payments until October have already come close the budget target for the year as a whole.
Additional budgetary costs were incurred due to Israel's Grapes of Wrath operation of April 1996, which also adversely affected revenue collection. Based on these indications, revenues for 1996 might reach L£3.7trn and expenditures about L£7.2trn, leading to an overall deficit for the year of L£3.5trn. Such a deficit, if realized, would be equivalent to 17% of GDP, higher than its ratio in 1995 but still less than in 1994.
The debt dilemma
Budgetary performances in the years 1993-96, while they may appear weak relative to normal conditions, can be seen as the first steps of a country emerging from a devastating conflict. A strong start to the reconstruction effort was visible in 1994-95: the rate of inflation was brought under control and the appreciation of the pound became a stable feature of the economy. Macro-economic improvements generated confidence and stimulated economic activity, particularly in the construction sector.
Lebanon has so far made considerable progress in reconstructing its economy. In this regard it might be instructive to look at the experience of other countries. The shattered economies of France, West Germany, the United Kingdom, and Italy did not recover their full strength until the latter part of the 1950s, a full decade after the end of World War II. Moreover, they received massive and sustained aid grants from the United States to help pay for reconstruction. They also conducted their reconstruction programs in the context of controls, rationing, and inconvertible currencies.
Lebanon, in contrast, has had to rely mainly on domestic and borrowed resources to finance its reconstruction. Foreign aid has not been substantial. Throughout the war years, and after during the reconstruction period, Lebanon maintained an open economy and full currency convertibility, both on the current and capital accounts. Moreover, it has had to absorb an uncontrolled currency depreciation-inflation spiral, while facing, virtually on an annual basis, security breakdowns in the southern part of the country. Indeed, it is remarkable that the Lebanese economy has managed to make so much progress at all. This, however, was achieved at a price: a substantial debt. It is estimated that the total gross debt to GDP ratio, which was less than 50% in 1993, will approximate 85% in 1996.
As a result of persistent government deficits, both the internal and external public debts grew tremendously during 1993-1996. The total gross debt which was estimated in 1993 at L£6.4trn grew to L£16.4trn as of July 1996, a 157% increase (see Table 3). The growth in the debt, however, decelerated from 66% in 1994 to 33% in 1995. The external debt increased from $327m in 1993 to $1.53bn in July 1996. However, it still forms only about 15% of total debt. The gross debt to GDP ratio increased from 49.5% in 1993 to 70.4% and 79% in 1994 and 1995, respectively. Table 3 shows the figures for net debt - gross debt minus the amount of public sector deposits: in terms of net debt, the ratios of debt to GDP would have been 38% in 1993, 52% in 1994, and 64% in 1995.
An important element of debt is its distribution among subscribers to treasury bills (see Table 4). Commercial banks have systematically been the main subscribers to T-bills, in the order of some 70%, followed by the public. This pattern persisted during the period 1993-1996. The central bank, which was initially a minor subscriber to T-bills in 1993, withdrew from the T-bill market by 1995. Financial institutions and public administrations increased their subscription rates but they held only a small portion of the market, amounting to some 7% as of June 1996.
As regards the distribution of T-bills across maturity periods, some 80% of total T-bills in circulation in July 1996 were 12-month and 24-month bills (see Table 5). However, between 1993 and June 1996 the share of 24-month bills decreased from 42% to 33%, while that of 12-month bills during the same period rose from 29% to 48%. Overall, the debt maturity structure in Lebanon remains heavily concentrated in the short term. While the available data shows that the domestic portion of debt - the portion denominated in Lebanese pounds - constitutes the largest part of total debt, an unquantifiable portion is held by non-residents, and in effect has become a quasi-foreign debt. To a certain extent then, the foreign debt component is that much larger.
The proposed budget for 1997 reflects a determined effort to tighten Lebanon's fiscal stance and reduce the deficit to GDP ratio. The key objective in the draft budget is to hold nominal aggregate expenditures below their 1996 level, both in terms of budgeted and actual figures. Within this framework, capital expenditures are to be cut by 40% to make room for a projected increase in interest payments. Revenue estimates for 1997 appear to be conservative when compared to the estimates for the 1996 budget. However, given an expected shortfall in revenue collection for 1996, the 1997 budget estimates imply revenue growth of over 10%.
If the budget proposal is implemented - it remains to be approved by parliament - the government will have to make a determined effort to hold the line on expenditures. More specifically, it will have to resist adding expenditure allocations during the course of the year, unless they are matched by additional revenues. Presumably, the tight fiscal policies it pursues will stem from the need to protect the macro-economic gains achieved over the past few years. If this is the case, the government would be best served by articulating its macro-economic objectives to induce public acceptance of the spending cuts that are at the core of the budget proposals.
The Ministry of Finance budget proposal for 1997 was initially estimated at L£6.37trn, which is L£83bn less than the 1996 budget. The figure was later revised to L£6.4trn after the shares of some ministries were increased. The revenue side of the budget was estimated at L£4.1trn, creating a deficit of L£2.3trn, which represents around 36% of total expenditures.
The structure of budget expenditures can be sub-divided either by functions or types of spending. Spending by type takes theform of budgetary allocations to wages and salaof government employees, goods and services, subsidies and transfer payments, and interest payments on government debt. Spending by functions, in contrast, sub-divides spending on such activities as defense, public sand order, , health, welfare, housing, culture, fuel and energy, , mining and manufacturing, and transportation and communications.
In the 1997 Lebanese draft budget, the main components of expenditure by type were sub-divided as follows:
Expenditure on wages, salaries, and indemnities accounted for around 35% of expenditures. Added to this is an item for transfer payments, including expenditure on end-of-service indemnities and retirements amounting to L£313bn, or 5.8% of the budget.
Debt service was estimated at around 42% of total budget expenditures.
Expenditure on goods and services totaled L£227bn, sub-divided into L£130bn for goods and L£97bn for services. This represented 3.5% of expenditure.
Government subsidies were estimated at L£215bn - or 3.4% of total spending - out of which L£200bn was allocated to subsidizing electricity and L£15bn to supporting the Office of Grains and Sugar.
Investments expenditure in Lebanese pounds totaled L£475bn - or 7.4% of spending: L£355bn was allocated to infrastructure and other projects; L£54bn went to equipment and supplies; L£46bn to maintenance; and L£20bn to miscellaneous expenditures. Additional items accounted for 2.4% of total expenditures while a reserve item absorbed 1% of spending.
The 1997 budget is the first in which expenditures are sub-divided by function. The breakdown of 1997 expenditures by function are compared to 1996 figures in Table 6.
On the receipt side, budget revenues from taxation are estimated at L£3.15trn, an increase of 3% over the budgeted figure for 1996 (see Table 7). Non-tax revenues are forecast to reach L£708bn in 1997, reflecting a 4% decline compared to the 1996 budget. Other sources of revenue are expected to bring in L£240bn, a 4% increase over 1996. The total revenue figure shows a slight increase of 2% over 1996 budget estimates.
A more detailed analysis of tax revenue reveals the following:
Revenue from income and profit taxes is estimated at L£375bn, representing 12% of total tax revenue.
Revenue from property taxes is estimated at L£405bn, representing 13% of total tax revenue.
Revenue from indirect taxes on commodities is estimated at L£292bn, or 9% of total tax revenue.
The major source of revenue stems from taxes imposed on international trade, estimated at L£1.8trn and constituting 57% of tax revenues, or 44% of total revenues. The figure is not estimated to increase in 1997 from the level budgeted in 1996.
Taxes from other sources stand at L£280bn, which represents 9% of total tax revenue.
Four aspects of the 1997 budget proposals merit special attention:
(1) The targeted reduction in the deficit to GDP ratio is at its lowest level since 1993.
(2) The cut in investment spending in Lebanese pounds is at about 60% of its level in the 1996 budget.
(3) There is a small primary surplus in the budget, excluding debt service payments.
(4) The budget forecasts a stabilization of the debt to GDP ratio, after an increase in the ratio over the past years.
Taken together, these features suggest that strong emphasis is being placed on protecting macro-economic gains, even if this is achieved at the expense of investment.
Some highlights of Lebanon's fiscal situation are reviewed below. Some of them are procedural, designed to strengthen budgetary planning and implementation, while others touch on more substantive issues. In all cases, the purpose is to explore the issues and not to advocate particular measures.
a - Budget flexibility
The 1997 budget is very tight. This is illustrated by the fact that it predicates any adjustment in public-sector salaries and wages on finding non-inflationary resources to finance it. This is a sign that the government wishes to prevent an expansion in the projected deficit and that it finds it difficult to identify budget items that can be reduced. Indeed, there is virtually no room for flexibility in the budget. Mandatory or contractual expenditures dictate this: interest payments and salaries and wages constitute 84% of total current expenditures. Since the substitution of expenditures does not appear feasible, raising additional tax resources becomes inevitable.
b - Waste
It is often believed that waste and corruption in the government is extensive, and that if both are eliminated, or at least reduced substantially, legitimate spending can be increased with no need for additional taxation. Naturally, waste and corruption should be eliminated and there are official bodies in charge of pursuing these tasks. However, additional spending cannot be authorized simply on the assumption that waste and corruption will be eliminated. Instead, the savings resulting from a vigorous effort in this domain would constitute a welcome contribution to strengthening Lebanon's fiscal position.
c - Prioritizing expenditure
By linking increased expenditures to the availability of non-inflationary financing, the government can make the public more aware of the tradeoffs inherent in the budgetary process. However, it might be useful to contemplate a more rigorous approach to establishing expenditure priorities. The essence of the process would aim to evaluate every expenditure proposal not only in terms of its own merits, but also in terms of its importance relative to other proposed expenditures. There remains the possibility that during the course of the fiscal year, situations might arise requiring the authorization of additional spending, perhaps at a level exceeding available resources. An ideal situation would be to centralize all resources and expenditures in the budget. This would facilitate the comprehensive prioritization of expenditures in order to enhance both the control and review of expenditures. Similarly, all revenue receipts, as well as loan proceeds and borrowings, would be best centralized under the control of the Ministry of Finance.
d - Comprehensive budgeting
Comprehensive budgeting can be usefully combined with medium-term budgeting. A surplus or deficit in a given year, say 1997, is not fully meaningful by itself. It needs to be seen against the background of past performance and must be related to anticipated future developments. It also needs to be consistent with the macro-economic objectives set for the economy. While the 1997 budget targets may well be the best possible under the present circumstances, the case for their appropriateness needs to be better established. While precise multi-year budgeting would be difficult under Lebanon's current circumstances, it would be useful to conduct an exercise to determine the sustainability of the fiscal stance over the medium term. This would not merely be a numerical exercise, it would also enunciate the principles underpinning budgetary policy, including expectations for economic performance and intended inion revenues and expenditures. Within such a frama judgment on the feasibility of the current fiscal stance could then be made. It is only the government which has both the capability to describe such a scenario and implement it. A clear vas to where the counis heading in fiscal terms would help gepublic support for difficult decisions, whether in terms of spending or revenues.
e - Foreign aid
Foreign grants or partial grants provide some relief from tight fiscal conditions. The Lebanese government is now pursuing this avenue and it is hoped that such assistance will be forthcoming in significant amounts and on appropriate terms. However, foreign grants cannot be taken as a given as they rely on domestic political considerations in the donor countries.
f - Taxation
In order to reduce budget deficits, Lebanon ought to consider raising revenues through more efficient taxation. Like many developing countries, Lebanon's revenue system is largely characterized by inefficient tax collection. Tax enforcement laws are weak and are often not respected; tax revenues are low; and there is a lag in the period tax payments are received. In such an environment, tax evasion is widespread.
The potential for improvement in the tax system, both in collecting direct and indirect taxes, can be examined in order to develop a fair and responsive system which generates sufficient resources to cover government expenditures. Lebanon has adopted tax rates of between zero and 10% on income and profits, which are very low compared to other developing countries. Higher and graduated tax rates may be considered.
In the short run, it is likely that indirect taxes on expenditures can be more effective in raising additional tax revenue. The Lebanese government has raised this type of tax and has levied additional indirect taxes on goods and services. In addition, Lebanon could consider the adoption of a sales tax or a value-added tax. Taxes on expenditures, however, tend to be regressive. At present the Lebanese are not over taxed. Compared to countries such as Egypt and Jordan, the Lebanese pay lower taxes in the order of 10% of GDP.
g - Privatization
Another avenue that could be explored is increasing the share of private-sector participation in the reconstruction effort. Private-sector resources in Lebanon and abroad are believed to be considerable, and private enterprise has a long tradition in the country. Privatization, which is considered controversial by some, may have some advantages and could, if properly applied, cut costs. Public enterprises that, in principle, are expected to operate on a commercial basis, but for various reasons do not, could well benefit from transferring them to the private sector. For the moment, the private sector is primarily being enticed by high interest rates on government paper. A wider range of investment opportunities can be offered.
h - Interest rates
Interest charges have become a heavy, and growing, burden on the budget, and need to be reduced. A substantial reduction in the deficit would obviously help in this regard, and this constitutes another major reason for strengthening Lebanon's fiscal stance. Equally important, however, and with more immediate effect, is the need to restructure the country's interest rate policy in order to bring rates down from their current high level. Interest rate policy is complex and cannot be considered solely in relation to the fiscal situation. It also has an impact on banking activities, in particular loans and deposits in Lebanese pounds, the flow of funds between Lebanon and abroad, and, indirectly, the level of official reserves and support for the exchange rate.
A key question in this area is whether the so-called exchange risk premium paid through relatively high interest rates is commensurate with the risks perceived in the market place. With the Lebanese pound stable in the foreign exchange markets - indeed it is appreciating against the U.S. dollar - the present high interest rates on Lebanese pounds would appear to be advantageous. These rates provide very high returns on virtual dollar assets, and occasionally a small bonus in the form of an appreciation against the dollar. In the long run, the Lebanese pound's exchange value is better protected by lower deficits than by inflows attracted through high interest rates. Consequently, careful thought has to be given as to whether lower interest rates, smaller budget deficits, and less or no accumulation of foreign reserves, are more advantageous to Lebanon.
i - Asset utilization
The Lebanese state owns substantial real assets and has accumulated considerable financial assets over the years. These assets were protected during the darkest days of the crisis in Lebanon and so far there is a political consensus that the country's gold holdings are untouchable. However, for several decades the total gross position and net worth of the state were virtually identical: the debt was virtually non-existent.
This was changed by the war and Lebanon's urgent need to rebuild. In this case, it is worth asking whether it is better for Lebanon to hold on to its assets while the debt accumulates, or whether the assets should be used to reduce the stock of debt. The use of accumulated assets should not be contemplated lightly, and would have to be fully and publicly justified. Moreover, it should have as its objective the permanent reduction in the debt level. This would necessarily mean that assets use should be preceded by measures designed to ensure a strong and appropriate fiscal performance on a continual basis. It would also need to be supplemented by restructuring the debt to spread it over longer maturities than exist presently.
j - Debt standards
It is often asked what debt level is appropriate for a given country? Considering all the elements that need to be taken into account, an answer is difficult. However, regional experiences may provide some guidance. The European Union (EU) has adopted the Maastricht standards as a major step towards economic integration. These standards impose convergence for members at a debt ratio equivalent to 60% of GDP and a fiscal deficit ratio amounting to 3% of GDP. It is believed that this will facilitate monetary union in Europe.
The Arab states provide another relevant regional experience. Most of the Arab countries which do not produce oil, and even a few which do, have had serious difficulties servicing their debts when their debt to GDP ratios fell within a range of 100-120%. These difficulties led the states to delay servicing their external debts and forced them to reschedule their debt with the Paris Club. In some cases, the debts were written off outright.
In Lebanon the major part of the debt is denominated in Lebanese pounds. This means that the risk to macro-economic stability is greater than Lebanon's not meeting its foreign obligations. Nevertheless, it might be useful to ask whether the regional experiences outlined above are relevant to the situation in Lebanon.
Conclusion
This report was completed in early December 1996, before the discussion in parliament on the budget proposals for 1997. It does not offer a solution to Lebanon's fiscal difficulties, nor does it advocate a particularseries of measures. Instead, it invites reflection on a number of issues and options presented for the consideration of policy makers and the public at large. In the end, the actual choof economic instruments - ocombination of instruments - ttackle the fiscal situation will require defining specific political, social, and economic priorities.