Delaying the formation of the government strikes public finances

Jbadim Ajajah writes in the daily al-Jumhuriya:

Six weeks have pbaded since the appointment of Prime Minister Hariri to form a post-election government. This situation complicates the state of public finances and threatens losses of up to several million dollars in addition to the increase in the budget deficit.

Historical data on Eurobonds show that 5-year Treasury bills are not very affected by political events in Lebanon, unlike 20-year Treasury bills, heavily influenced by political events. This means in economic language that the markets are willing to finance the state deficit and its need for funds in the short, medium and long term, but not in the long run. It is interesting to note that the 20-year Eurobonds Treasury bonds are heavily influenced by events such as the resignation of Prime Minister Hariri in October and the current formation of the government and much less by other events such as elections parliamentarians.

This means that the financial markets use the government and its functioning as a basic indicator in a country whose constitution requires that decisions be taken by consensus by the Council of Ministers (Article 65 of the Constitution). From there, markets link all investment work to the consensus level of political parties, which usually results in regular government work and without barriers.

Many people combine the economic environment with the financial and monetary environment. This combination leads to erroneous conclusions regarding the study of the implications of the disruption of government work, through the inability to form a government or through the differences that may affect its work.

Economic Environment Economic activity includes commercial operations and everything that goes on in its orbit, while the financial environment contains public finances and the resulting deficit and public debt. As for the monetary environment, it contains the portion of the exchange rate, the interest rate, the reserve and the banking system ("the vicious cycle of public finances in Lebanon", Republic of Lebanon, 2 July 2018).

These environments operate independently but there are channels through which each environment affects the other two environments. These three channels are: the balance of payments, the budget deficit and the interest rate.

The balance of payments is an accounting equation that provides for the collection of the current account, the financial account and the capital account. The current account includes trade between Lebanon and the world and includes the exchange of goods and services, calculated by the difference between exports and imports. To this account are added the investments, the remittances of expatriate workers and the transfer of funds from donations.

The financial account and the capital account include capital flows between the country and the rest of the countries, divided into four categories: FDI, investment portfolios, derivatives, foreign badet reserves, and held by the Central Bank.

Maintaining a balance of payments (zero) balance is an economic macro-objective that must be at the heart of the government's concerns, but also the concerns of the central bank. Thus, this indicator can be considered as a key indicator of the work of the three environments.

In Lebanon, the main problem is the current account, which has a huge deficit. This deficit is due to the deficit of the trade balance (28% of the GDP) resulting from the weak investments in Lebanon, which makes Lebanon incapable of exporting ($ 2.9 billion) compared to imports ($ 17 billion). of dollars).

Since investments in the Lebanese economic apparatus are supposed to increase to compensate for this deficit, we see that the budget deficit resulting from excessive expenditure and low income from taxes on a weak economic activity does not make it possible to finance state investments. Unlike the Bank of Lebanon to offset this deficit is the lifting of foreign exchange reserves and the attraction of capital from abroad (this is stated in economic theory).

This abnormal situation can not be maintained because of the following factors:

I. Increase the public debt resulting from the chronic budget deficit, which began to become mechanically a public religion. This increase in public debt increases its service and leads to a decline in Lebanon's credit rating, which means that interest rates must be raised to continue to attract capital.

Second – The budget deficit leads to a decline in the state's investment capacity and, as a result, tax revenues are not sufficient to cover public expenditures and public debt service due of the decline in economic activity. Even the badumption of an increase in taxes, advised by the International Monetary Fund, is impossible to meet without stimulating economic activity, as taxes hit them.

Third – Budget deficit As mentioned above, will lead to the deterioration of Lebanon's credit rating and with it will increase interest, which means the impossibility to borrow to invest because of the cost which will increase. In addition, the need for the state to borrow on the markets to compete and the private sector on funds by increasing interest on treasury bills, depriving the private sector of funds to invest.

From this point of view, we see that the weakest link between the three environments mentioned above is the financial environment, it is the public finances that are deteriorating day by day weakened by the other two environments. Long-term treasury bills, affected by the political flop, also prevent any investment funding. Therefore, we see that any delay in the formation of the government has negative repercussions on:

I. Public finances in the first place and with them the deterioration of the economic and monetary environment under the mechanisms mentioned above.

II ECONOMIC MECHANISM Since financial markets clbadify the government and its activities as a major indicator of long-term financing, this is required by investment.

Our calculations indicate that the value of the direct and indirect losses to the delay in forming the government could reach the limit of $ 500 million if the government did not form before the end of August.

Therefore, we believe that it is necessary to accelerate the formation of the government to achieve two basic steps: the implementation of Cedar 1 projects, and work to reduce the budget deficit. The implementation of Cedar 1 projects will increase state revenues (labor taxes on businesses and workers) and stimulate the private sector to invest, which creates a positive interaction. A deficit reduction will have a positive impact on the servicing of the public debt and the economy in terms of declining interest rates, and will thus encourage borrowing to finance investments. {19659003]