Exclusive: Lebanon Vows to Implement Quick Reforms Despite Heavy Debt

By Laila Bassam and Tom Perry

BEIRUT – Lebanon has expressed a commitment to implementing swift and effective reforms that could be "difficult and painful" in order to prevent a deterioration of its economic, financial, and social conditions, according to a draft government policy statement obtained by Reuters.

The statement outlines the key objectives for the national unity government led by Prime Minister Saad al-Hariri, which was recently established after nine months of negotiations over cabinet roles.

Lebanon, which faces one of the highest public debt levels globally, plans to undertake long-delayed reforms that are now deemed essential to achieving sustainable public finances.

The draft commits to reducing the debt-to-GDP ratio by enhancing economic growth and minimizing the budget deficit. In line with a promise made by Hariri at a previous donor conference, the government aims for a "financial correction" equivalent to at least one percent of GDP annually over the next five years, starting with the 2019 budget.

Achieving this involves increasing revenues and cutting expenditures, particularly by reducing transfers to the state-operated electricity provider, which has been described as a severe burden on public finances by international financial institutions.

Additionally, the draft statement indicates that the government will impose a hiring freeze across all state sectors for 2019. For the subsequent four years, state hiring will be limited to half the number of retirees, contingent on meeting deficit reduction targets.

Information Minister Jamal al-Jarrah confirmed to reporters that tax increases are not under consideration. He also noted that there were no significant disagreements regarding the draft statement, which is expected to receive government approval soon, including support from the Iran-affiliated group Hezbollah.

International donors and foreign governments are insisting on the implementation of reforms before disbursing approximately $11 billion in financial aid pledged at a prior conference. Hariri intends to utilize these funds, primarily in the form of soft loans, for a capital investment program aimed at stimulating sluggish growth. The Lebanese economy has suffered due to several factors, including prolonged regional instability and the ongoing conflict in Syria.

The draft policy statement emphasizes maintaining the stability of the exchange rate, which is viewed as crucial for both social and economic stability. The Lebanese pound has been pegged to the dollar at a fixed rate for over twenty years.

The government also plans to issue licenses for additional offshore energy blocks by the end of 2019, as part of its strategy for economic development. Exploration efforts for the initial block commenced last year by a consortium that includes firms from France, Italy, and Russia.

Despite facing some of the worst debt and balance-of-payments ratios in the world, Lebanon has managed to stave off financial disaster, even as critics have warned of potential defaults and currency collapse. The country’s financial system largely relies on remittances and deposits from its diaspora, although concerns regarding the sustainability of this model have risen amid a decline in these inflows.

President Michel Aoun has remarked that the financial situation is positively changing, adding that interest rates on bank deposits are expected to decline soon.

Financial experts have noted that without addressing fundamental vulnerabilities, particularly in the electricity sector—which heavily drains public resources—Lebanon’s financial narrative may continue to appear unsustainable in the medium term.