Lebanese lawmakers approved a 2020 budget plan with a crucial Eurobond payment weeks away, leaving it to the new government to decide on whether to pay creditors or save what’s left of the country’s reserves.
The fiscal program passed on Monday by a vote of 49 to 13, with eight abstentions. The legislature approved the budget that envisages a 6% deficit, a far cry from a goal set by Lebanon’s former government to bring it close to zero. It includes no new taxes.
The market is on edge before a $1.2 billion Eurobond that comes due on March 9 as Lebanon’s political struggles and the absence of external funding have sent its default risk soaring. Protests that brought down the government in October have in recent weeks turned violent, with hundreds injured in scuffles with security forces. Unrest erupted late last year after people accused the political class of corruption and neglecting living conditions.
The fiscal plan will likely do little to ease pressure on one of the world’s most indebted nations. A new government formed last week hasn’t yet won a vote of confidence from parliament.
Before the vote, soldiers were stationed along several roads leading to the center of the Lebanese capital, obstructing entrances and standing in the way of protesters who sought to block all roads leading to parliament to disrupt the session. Minor clashes have already occurred between army personnel and protesters.
Two parliamentary blocs, the Lebanese Forces and Kataeb, have said they would boycott the session, which they deem unconstitutional as the budget in question was submitted by a government that has since resigned.
State revenue slumped by nearly 50% toward the end of last year because of the economic and financial crisis, which saw banks rationing dollars and tightening restrictions on the movement of capital. The measures have stymied trade and lad to the rise of a black market exchange rate in a country heavily reliant on foreign goods.
The central bank said it would waive interest payments on local-currency-denominated debt this year. Authorities want to use the saved funds, amounting to about 2.9 trillion pounds ($1.9 billion), to reduce the budget deficit. A plan to impose a one-time tax on banks’ profit to generate $400 million fell through.
The budget includes a draft law that amends the limit covered by the National Institute for Bank Deposit Insurance to 75 million pounds from 5 million pounds, established under Lebanon’s monetary law. New measures allow businesses to postpone some of their debt payments for six months and foresees the formation of a supervisory body that oversees state loans and grants in a bid to limit corruption.
Budget numbers, however, depend on what the new government will do about such major expenses as the electricity subsidy and the cost of servicing debt, including the $1.2 billion Eurobond payment in March.
Some politicians have been lobbying against paying creditors this year, urging instead to use the reserves to support Lebanon’s currency peg and imports. Others have said that refraining from paying bondholders should be accompanied by an economic reform package supported by the International Monetray Fund.
“Lebanon’s economic deterioration has accelerated dramatically,” Garbis Iradian and Jonah Rosenthal, economists at the Institute of International Finance, said in a report. “We hope that the new cabinet will seek an IMF program to bring in additional financing, arrest economic deterioration, and boost the country’s liquid foreign currency reserves.”