Citi urges need
for governance

Report questions salary hikes in unsteady economy

Governance issues will continue to hamper the economy for the foreseeable future, according to a report by Citi.

The report addressed its concerns about the proposed salary scale increase. At a time when the fiscal deficit has widened to almost ten percent of the Gross Domestic Product (GDP) and public debt has reversed its falling trend. Citi considers that the timing of a wage hike will send a negative message regarding the government’s efforts to maintain fiscal discipline.

Revenue-raising measures such as tax increase risks are applying the brakes on an economy that is barely growing, the report said.

The willingness of the government to contemplate structural reforms in parallel to the salary pay increase is virtually non-existent, reflecting a weak policy-making environment, according to the report.

“All discussion of public sector reforms, including the civil service, the burdensome Electricité du Liban and privatization, to name a few, is currently not taking place and is unlikely to do so in the current political climate,” Citi said. “Lebanon’s structural weaknesses are unlikely to be resolved any time in the foreseeable future.”

The lack of structural reform means that Lebanon’s fiscal dynamics remain hostage to the country’s growth prospects, Citi said.

Between 2007 and 2010, real GDP growth averaged over nine percent per annum, against fewer than two percent, per annum in the past four years. Combined with the fiscal slippage that began in 2012, the effect has been a steady rise in the debt-to-GDP ratio, Citi said.

In the absence of structural reforms, GDP growth has to revert to pre-2011 levels which, in the current political and security environment both domestically and regionally, would appear very difficult to achieve, according to Citi.

The report is optimistic about the stability of Lebanon’s sovereign risk profile, due to the robustness of the banking sector and its ability to continue funding the government.

Overall deposit growth was seven percent year-on-year in February, with non-resident deposit growth stood at 11 percent.

The dollarization ratio remained stable at under 60 percent, and the risk premium on lira deposits has likewise hardly moved in recent months.

Citi said that the banking sector remains sound and liquid and retains significant capacity to continue financing the Lebanese sovereign through the purchase of government securities. “This keeps sovereign risk in check, despite an evidently deteriorating country risk profile.”