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Lebanon Embarks on Long-Delayed Reforms, Debt Problems Mount

Economic growth slowed to just over 1% a year from an average  of 8% before the Syrian war.Economic growth slowed to just over 1% a year from an average  of 8% before the Syrian war.

Lebanon has begun reforms to repair its fragile economy after years of paralysis in decision-making but is under pressure to do more to prevent its rising debt spinning out of control.

President Michel Aoun, elected last year after 29 months without a head of state, signed off last week on public sector pay rises and tax increases to cover their cost—part of a series of government moves that have prompted Moody’s rating agency to lift its outlook for Lebanon to stable from negative, Reuters reported.

But finance ministry estimates indicate the measures will have little impact on the fiscal balance or debt burden, the world’s third highest in terms of debt-to-GDP ratio and the main reason why Moody’s has also downgraded its credit rating.

Economists are calling for other reforms to boost revenue and stop the debt rising, including passing a budget, reforming the heavily subsidized electricity sector, raising fuel tax and tax collection and improving the investment environment.

“They’ve gotten government working again, they’ve gotten institutions moving again. The hope is they start tackling those major issues with the same seriousness and effectiveness,” said Wissam Harake, a World Bank economist based in Beirut.

Until Aoun was elected on Oct. 31 last year, Lebanon had gone nearly two-and-a-half years without a president because parliament was unable to agree on a candidate.

Since then, Prime Minister Saad Hariri’s government has taken steps to improve stability and boost the economy by agreeing legislation intended to kick-start the development of its oil and gas industry and passing an electoral law paving the way to a parliamentary election next year.

“The stable outlook reflects the return to a fully-functioning government, which will support reform momentum going forward,” Moody’s said.

Economic growth has been battered by six years of war in neighboring Syria and political divisions, slowing to just over 1% a year from an average of 8% before the Syrian war, officials have said.

Lebanon’s debt has also risen strongly since Syria’s civil war began in 2011. Moody’s says the debt-to-gross domestic product ratio, which indicates a country’s ability to pay back its debt, will reach almost 140% in 2018.

“Recent fiscal reforms are very unlikely to reduce the deficit in 2017 and 2018 ... further action will be needed to reverse the rising debt trajectory,” Moody’s said on Saturday, changing its rating to B3 from B2.

 

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