Lebanese Prime Minister Saad Hariri said his government would aim to cut the budget deficit to seven percent of the gross domestic product (GDP) next year as part of reforms to bring public finances under control and rein in public debt.
Lebanon also plans to keep the local currency peg to the dollar, which was crucial to move ahead with long-stalled reforms, Hariri told CNBC in an interview.
Lebanon faces another credit rating downgrade and a potential test of its currency peg if the depletion of its limited foreign exchange reserves accelerates, S&P Global warned on Wednesday.
Hariri said the challenge was to prevent a further deterioration in Lebanon’s public debt burden, which is one of the heaviest in the world at about 150 percent of GDP.
“Our strategy is to stabilise the problem that we have. Most important thing is not to deteriorate more, right?” he said.
With Lebanon suffering from years of low economic growth, long-stalled reforms are seen as more pressing than ever to put the state finances on a sustainable path.
On Monday, Lebanon declared a “state of economic emergency”, with Hariri saying the government would take emergency measures to speed up economic reforms to help overcome a worsening crisis.
Hariri said after a gathering of senior politicians and minister that accelerating reforms would avoid a scenario similar to Greece, which fell into a debt crisis nine years ago and had to adopt tough austerity measures under tight supervision by foreign creditors.
Economists and politicians say the big budget deficits over the years have been rooted in waste, corruption and sectarian politics.
“So what we are doing is, fixing our debt to GDP, our deficit and the budget to 7.6 percent this year, we want to go down to seven percent next year, or maybe a little bit less,” he said in the interview aired on Wednesday.
In July, the International Monetary Fund (IMF) said the deficit in 2019 would likely be well above the government’s target of 7.6 percent of national output.
Fitch – one of the Big Three credit rating’s agencies – downgraded Lebanon’s credit rating to CCC on debt-servicing concerns last month.
Maintain pound peg to dollar
Hariri also said that “keeping the Lebanese pound at 1,500” is the only stable way to proceed with the government’s reforms.
The Lebanese pound has been pegged against the US dollar at its current level for more than 20 years and is seen as a cornerstone of the country’s financial stability.
Hariri said his country would not consider an IMF programme since it would leave market forces to decide the pricing of the country’s currency.
“I think the IMF has certain criteria that we do not, especially when it comes to the Lebanese pound. This is something we feel extremely sensitive about.”
Hariri said divergent views on exchange rate policy was the only difference the government had with the IMF. The government had been in consultations with the IMF over tackling the country’s economic and fiscal woes.
Lebanon had no need to enter any programme with the IMF since it already had an ambitious structural reform plan with donors that will help bring investments and spur growth, Hariri said.
Foreign governments and donor institutions last year pledged $11bn in financing to Lebanon for a 12-year infrastructure investment programme at a conference in Paris, on condition that it carries out reforms.