Government must rein in public debt

The Lebanese government should ratify a five-year strategic budgeting plan to lower the debt-to-GDP ratio or risk economic collapse, a top official in the industrial sector said Tuesday. Nemat Frem, head of the Lebanese Industrialists Association, told The Daily Star that the government had to focus on cutting short the rising public debt in the 2012 draft budget. “The government should work on two fronts: increase revenues to cut short the rising public debt and to boost growth to lower the GDP-to-debt ratio. Otherwise, it would speed up the country’s economic collapse,” he said when asked about the 2012 draft budget. The Finance Ministry forecasts the GDP-to-debt ratio at 134.8 percent in 2012 based on a projected 3.5 percent growth compared to 135.1 percent in 2011based on a 5.2 percent GDP growth. Economists have doubted the 2011 official growth figure, which significantly differs from figures released by the International Monetary Fund, World Bank and the Economist Intelligence Units that estimated Lebanon’s 2011 growth levels at around 1.5 percent. While some economists have also doubted the 2012 projected 3.5 percent growth, Frem said such a growth rate could be achieved if the 2012 average oil price stands below $110. The Institute of International Finance forecasts $114 average oil price in 2012. While some argue that the negative impact of high oil prices on the Lebanese economy is offset by a flow of remittances from Lebanese expatriates in the Gulf, foreign direct investment and an increase in the number of Gulf visitors to Lebanon, Frem said public finances would be largely harmed. As the price of oil in the international market moves up or down, the annual deficit of the state-run Electricite du Liban fluctuates. The government has failed miserably to end or at least reduce the massive losses in the electricity sector, which stood close to $1.8 billion at the end of 2011. Frem said the government should consider key reforms as part of a long-term strategic budgeting plan that starts with securing cheaper alternatives to fuel oil such as liquefied natural gas or coal. Another top priority reform is the ratification of a Private Public Partnership law, according to Frem, who added that the government should provide incentives for foreign direct investments in a bid to create more than 25,000 needed job opportunities on an annual basis. While members of the private sector voiced concerns over the government’s intent to raise taxes, Frem said a hike in VAT tax was acceptable but added that he was in favor of having it broken down into two categories comprising luxury products and basic items. Frem said the government should improve its tax collection system and crackdown on smuggled products, which are valued at 10 to 20 percent of their real total value, rendering the collected VAT tax negligible. The Finance Ministry’s 2012 budget draft includes a new 15-percent tax on profits made through real estate transactions and a 2-percent hike on both VAT and interest-revenue taxes. Central Bank Governor Riad Salameh recently warned that any tax hikes should be coupled with structural reforms and development projects in partnership with the private sector to boost economic activity and offset inflation. from the daily star.