Proposed reforms would hurt country’s poor, say economists

While a proposed economic reform package may help cut the country’s massive debt burden, it would also make living conditions harder for ordinary people and fail to stem the so-called “brain drain” phenomenon, say economists. “In the short term, the programme will produce results in financing the public debt and showing foreign powers that we’re managing our finances,” said Professor Albert Dagher of the Lebanese University. “But in the long term, it will worsen our biggest national disaster – that is, emigration.” Hopes for debt relief The cabinet discussed the package last week and plans to present the agreed-on reforms at a donor conference, to be held soon in Beirut, in hopes of receiving foreign help in servicing the country’s vast national debt. At about US $36 billion, Lebanon’s national debt is one of the world’s highest in relation to its population. On Tuesday, Prime Minister Fouad al-Siniora and Finance Minister Jihad Azour are scheduled to head to Washington. There they are expected to discuss reforms and push for international support in meetings with World Bank and International Monetary Fund officials. Al-Siniora is also expected to meet US President George W. Bush. According to Sami Atallah, lead economist for the Lebanese Centre for Policy Studies, experts had not been able to read the draft, but had attended a government presentation highlighting its main points. The pillars of the plan include raising taxes, streamlining public spending and reducing wastage of public funds, partly through privatisation, Atallah said. Vague solutions Economists and media commentators, however, say the plan fails to indicate exactly how public efficiency will be improved, and only offers specific details about unpopular tax raises. Atallah said that proposed increases of Value-Added Tax (VAT) and taxes on bank deposits would mainly hurt low- to middle-income Lebanese because they were fixed taxes rather than taxes based on sliding income brackets. Atallah went on to note that raising taxes would be a difficult pill for the public to swallow while fiscal inefficiency and corruption were widespread and the procurement of government contracts remained opaque. “These leakages need to be closed,” he said. “That might save the government so much money that they wouldn’t need to raise taxes.” One economist at the Ministry of Finance, speaking anonymously, said the proposed tax raises consisted of a VAT tax raise from 10 to 12 percent and a savings-deposit tax increase from five to seven percent. He added that suggestions that the increases would hurt the poor were exaggerated. “Some 75 to 80 percent of the goods consumed by the poor are exempted from VAT, like food, items related to education and so on,” he said. “And the majority of people who have deposits in the bank aren’t poor. The move might affect the middle classes, but if you pay two percent more, that doesn’t have a major effect.” Privatisation not enough Finance ministry officials added that details of the plan would likely be unveiled when Siniora and Azour return from Washington early next week. As it stands, the reform package put to the cabinet remains vague on how it would tackle government wastage, but advocates the privatisation of five or six major industries, including telecoms and Electricite du Liban, Lebanon’s notoriously inefficient national electricity provider. According to Dagher, however, even privatisation would serve to increase the burden on ordinary citizens. “The privatisation suggested in the plan is a means to raise the price of services, like electricity,” he said. Dagher added that the plan, if passed, would result in significant cuts in state budgets for education, health and other public services. “The outcome of this programme would be to reduce the standard of living,” he said. Political wrangling Economists say that it remains to be seen whether Lebanon’s fractious, divided political leadership would be able to reach agreement on how to implement such a plan. The leaders of Lebanon’s main political factions are due to resume a “National Dialogue” on 28 April, aimed at resolving the political crisis that has plagued the country since last year’s assassination of former Prime Minister Rafik Hariri. Dagher said the plan did not devote enough attention to long-term growth by way of investment. “The plan can reduce state spending and augment revenue, but it doesn’t include any instruments for encouraging investment,” he said. Without the growth needed for job creation, he added, “there’s nothing keeping the Lebanese here for work”.