Lebanon Pledges Bank Tax as Part of Sweeping Drive to End Unrest
(Bloomberg) -- Lebanese officials promised to tax banks and slash their own pay as they unveiled an unprecedented package of measures to avert a financial meltdown and appease tens of thousands of protesters demanding they leave power.
The emergency plan, announced Monday by Prime Minister Saad Hariri, includes the approval of a 2020 budget targeting a deficit of 0.6% of economic output with no other taxes or borrowing and more aid to poorer families.
“Your movement is what led to these decisions today,” Hariri said in a powerful televised address, saying people had the right to keep protesting. “The demands are many and justified and varies but the clear demand that everyone united around was for dignity and respect and for them and their voice.
The vision was met with skepticism by economists, not least because Lebanon’s budget deficit stood at just under 12% of gross domestic product in 2018. And while the plans appear to meet demands for change that have gone answered for decades -- including an end to electricity blackouts -- they did little to calm tempers in the street.
Demonstrators gathered for a fifth day said they would remain -- settling for nothing less than a wholesale change to a political system based on sectarian power-sharing and the removal of a political elite they say has lined its pockets by exploiting poverty and differences.
The stakes are high for Lebanon, which straddles the region’s geopolitical fault-lines and has often been a proxy battleground for the Middle East’s broader conflicts. The 15-year civil war ended in 1990 but still haunts a country where the warlords became the rulers and have remained in power ever since. It’s that class that protesters say has plundered the state, leaving it unable to provide basic services and close to bankruptcy.
Highlighting the depth of public anger, the revolt for the first time cut across sectarian and political lines, with demonstrators taking aim at both local lawmakers and senior politicians in a way that was, until recently, unimaginable.
“The problem is there is no trust in them, all of them. I don’t trust a single one,” said Elie Sleiman, a young businessman, who was carrying a large Lebanese flag. “We need a technocratic government, a new election law that is not sectarian and new elections. That would be a good start.”
Time isn’t on Lebanon’s side. One of the most indebted countries in the world, it needs to find fresh sources of funding as the foreign inflows on which it has traditionally relied have dried up.
Even after Hariri’s speech, the yield on Lebanon’s Eurobonds due in 2021 was up more than 300 basis points on Monday to almost 24%, a record.
“The deficit target is both unrealistic and unnecessary,” said Ziad Daoud, Dubai-based Chief Middle East Economist, Bloomberg Economics. “It’s just short of fantasy to expect it to go from near double digits to zero in one year. Fiscal sustainability requires a reduction of the deficit, but not necessarily to this extent. The goal was likely chosen for theatrics.”
Hariri, a Sunni Muslim, has traditionally been backed by Saudi Arabia, but the kingdom has withheld support as the influence of Iranian-backed Hezbollah over the government has grown. It has ignored Hariri’s pleas for financial aid to avert a looming debt crisis.
Meanwhile, Hezbollah, a Shi’ite Muslim armed group with a powerful political wing, has seen its own income dwindle as the U.S. sanctions some of its members as well as its main backer, Iran. With financial pressures rising, Hezbollah and its allies have opposed Hariri’s push to impose taxes and take other measures they fear will harm low income families that form a large section of their support base.
The reform package promises to impose a one-off tax on bank revenues and cut ministers’ salaries by 50%. It also promises to implement the much-delayed restructuring of an electricity sector that loses $2 billion a year and to look at the possibility of selling off part of the telecoms sector, where a lack of competition has lead to some of the highest costs in the region.
The government also pledged to meet the conditions required to unlock about $11 billion in international aid pledges made at a donor conference in Paris 18 months ago -- key to reviving a moribund economy and averting a debt crunch.
The International Monetary Fund projects Lebanon’s current-account deficit will reach almost 30% of GDP by the end of this year. It predicts that economic growth, stagnant at 0.3% in 2018, would continue to be weak. Public debt is projected to increase to 155% of GDP by the end of 2019.
“None of this satisifies the protesters’ core demands: removal of a deeply corrupt, sectarian and inept oligarchy whose systemic function is to divide, exploit, and profit off of a subjected society,” said Paul Salem, president of the Middle East Institute in Washington DC. “They’ve had enough; they want fundamental change: this is not it.”
No More Trust
Against this backdrop, banks, schools and the stock market were shut on Monday, as were many businesses. Protesters blocked roads around the country as protesters filled the streets waving the flag.
The financial crisis has been years in the making. For months, sporadic protests and strikes have erupted as a shortage of dollars squeezes businesses and threatens a currency peg in place for more than two decades.
Four ministers loyal to the Lebanese Forces, a major Christian party allied to Hariri, resigned from the government on Satruday night, saying they had lost their confidence in the government’s ability to change. Other ministers have stayed on, saying they feared a vacuum would hasten the moment of financial reckoning.
In downtown Beirut, crowds stayed on as night fell, waving the red and white flag and dancing to blaring music in a festive atmosphere.
“We want 24-hour electricity, 24-hour water, free hospitals for the poor, free good schools. We pay taxes and we get nothing and they want to increase them as well?” said Iman, who runs a snack bar in Beirut, declining to give her full name for privacy. “We want a new generation, not the old faces. Get rid of the sectarian system. Let Lebanese just be a Lebanese and not have to beg a sectarian leader for help securing their most basic needs.”
©2019 Bloomberg L.P.