The 2025 Draft Budget and Banque du Liban's Reserves
At the end of last April, the Lebanese finance minister sent a circular to public administrations to prepare the 2025 draft budget, stipulating that its expenditures remain within the limits of the 2024 budget. By contrast, the acting governor of Banque du Liban was announcing that the bank had achieved an increase in foreign currency reserves while continuing to pay public sector salaries in US dollars and maintain exchange rate stability. This shows fiscal policies treading water within the confines of the crisis, while monetary policies achieve tangible results.
The finance minister's circular sets out the considerations to be observed when preparing the new draft budget. It calls on all institutions and administrations that receive financial contributions listed in the general budget to submit their draft budgets to the Ministry of Finance before the end of this May, stressing the role of these administrations in preparing a realistic draft budget as part of a future plan that meets needs and takes into account the state's financial capacities, and pledging to submit the new year's budget within its constitutional deadline.
The circular also calls for adopting a policy of fiscal discipline and not exceeding the budget ceiling for whatever reason, an indispensable measure to put an end to the excesses of officials authorised to commit expenditures, particularly ministers. In the same vein, the circular calls for refraining from any additional spending unless it is backed by funding from a known source. Meanwhile, the circular's call to focus on productive capital spending contradicts what is stated in the very same circular regarding operating expenditures absorbing 90% of budget spending.
The essence of the minister's circular can be summed up as refraining from burdening the new draft budget with any additional loads beyond the 2024 budget that exceed the Treasury's capacity to bear them. Indeed, the objective of the 2025 draft budget is to remain within the state's financial capacities and incur no deficit in order to ensure fiscal and monetary stability. Yet the irony in the aforementioned circular lies in its urging the relevant administrations, when preparing their budgets, to seek off-budget funding sources, and even grants to finance their expenditures, which amounts to an explicit invitation to beg.
It should be noted that the expenditures included in the 2024 budget were kept within the limits of projected revenues from taxes and fees that had been raised between 10 times and 60 times over. Consequently, replicating the appropriations of the 2024 budget in the 2025 draft budget demonstrates that the Ministry of Finance, and behind it the caretaker government, lacks a fiscal and economic vision articulated through a budget capable of contributing to the country's recovery.
By contrast, it makes no sense to continue cutting expenditures on the pretext of insufficient revenues at a time when many revenue-generating public utilities and agencies remain almost completely paralysed. Restoring these facilities to proper operation would generate multiplied revenues for the Treasury, especially since the disruption began with the coronavirus pandemic and persisted through the financial and economic crisis. Even fiscal stamps have become unavailable except to monopolists, adding to the obstacles facing citizens and multiplying the cost of completing their official paperwork.
What is needed today is for the upcoming draft budget to embody an approach that takes into account the pivotal role of the general budget in the country's economic recovery. The financial and economic crisis in which Lebanon has been mired since early 2020 requires rationalising spending and putting revenues to good use to build financial reserves that allow the state to honour its obligations, given that omitting the state's financial obligations from the 2024 budget does not absolve it of them.
Just as public administrations and institutions must limit themselves to necessary expenditures, equal and perhaps greater effort must go into reactivating their operations, which boosts state revenues and helps clear citizens' backlogged transactions. Addressing the financial and economic crisis cannot be achieved by choking off spending, rather, it requires halting unproductive expenditure and channelling resources into areas that encourage new investment and stimulate the national economy.
Even though Israeli attacks on southern Lebanon are causing a contraction in economic activity and a drop in state revenues from fees and taxes, citizens still need to complete their pending paperwork, whether at the land registry offices, the vehicle registration authority, or other public administrations, notably the civil status departments. Instead of using his circular to urge officials to look for foreign grants, the finance minister would have done better to work on reopening public administrations and institutions to process citizens' paperwork and collect the state's dues in fees and taxes.
Insisting on cutting expenditures and keeping them from exceeding total revenues in order to preserve fiscal balance is the flip side of spending through borrowing and accumulating loans and interest without the ability to repay them. Both saddle the national economy with burdens that impede its growth and distort its development. Moreover, spending cuts come at the expense of military and civilian public sector employees, whose incomes have fallen to less than 10% of what they earned before the crisis, while the circular stipulates that salaries entered under the payroll line item must not exceed 7 times the basic salary.
By contrast, Banque du Liban has managed to maintain exchange rate stability, achieve a $1.7 billion increase in its reserves to reach $9.6 billion, and reduce the money supply in Lebanese pounds to its lowest level since last August, to roughly 53.4 trillion, or below 600 million. These achievements come despite the continuing presidential vacancy, Israeli attacks, and the failure of the caretaker government to draw up a plan to address the economic crisis and its repercussions.
True, the increase in US dollar reserves achieved by Banque du Liban remains modest compared with the financial gap of nearly $73 billion US dollars according to the June 2023 Alvarez & Marsal report. What matters, however, is that Banque du Liban adopted realistic approaches that enabled it to maintain exchange rate stability and increase its reserves at the same time, an approach also required of the Ministry of Finance to revitalise revenue collection and rationalise spending, rather than settling for austerity budgets that deepen the crisis instead of solving it.
Translated from Arabic with AI. Read it in Arabic