2019 budget: Lebanon bets on oil and gas

Lebanon’s government has based its economic vision in the draft 2019 budget largely on the premise that the country will see large oil and gas revenues in the coming years, and will unlock billions of dollars of loans that are conditional on reform.

But the country’s track record of missed deadlines and delayed projects puts into serious question the government’s reliance on these factors as the basis for its financial planning.

The 2019 budget has still not been endorsed by Parliament seven months into 2019, following the Cabinet formation delay, and more than four months after Cabinet was formed. A draft version of the document endorsed by Cabinet and referred to Parliament begins by outlining the dire state of the country’s finances, which are in danger of sliding “into a bottleneck that would be difficult to get out of.”

To address this issue, the preamble states that the budget is an “exceptional budget for exceptional circumstances,” that aims to set Lebanon on a corrective course. 

It is based on “realistic elements of confidence in [Lebanon’s] ability to overcome the current crisis.”

These realistic factors, according to the budget, include the $11 billion in soft loans pledged by the international community at the CEDRE conference in 2018, and “the wealth that is stored in the Lebanese sea, which points to a promising future for Lebanon’s entry into the club of oil and gas producers.”

It also notes the “size of bank deposits compared to the size of the Lebanese economy,” which the budget said reflects “the confidence of private investors in Lebanon.”

These three factors are the ”solid ground on which the 2019 draft budget can rely on to build a starting point,” for addressing the country’s finances over the next three years. In that time, Lebanon will have received “promised positive results,” including “the funds to be pumped,” by CEDRE donors and the “promising Lebanese wealth in oil and gas.”

With such dependence on oil and gas wealth as an economic savior, Lebanon is in danger of falling into what is known as the “pre-source curse,” whereby nations with large potential hydrocarbon finds set high expectations which, if not met, can have resoundingly negative economic and financial consequences. 

“Building your budget and finances on a sector that doesn’t really exist yet is very dangerous, especially in a country that’s in Lebanon’s situation,” Laury Haytayan, MENA Director at the National Resource Governance Institute, told LOGI. 

Haytayan pointed to the example of Ghana, where major offshore oil discoveries about a decade ago led to a period of heavy borrowing and spending, based on the premise that the oil revenues would cover the costs later. 

But Ghana only garnered a relatively small amount of oil revenue when compared to the loans it took out, and the country entered a period of slow economic growth and debt crisis.

Lebanon has not yet made any large discoveries, and it’s economy has so far grown at zero percent this year.  

Officials argue the $11 billion in loans will jump-start the economy.

But Jad Shaaban, associate professor of economics at the American University of Beirut, said the government was “betting” on CEDRE funds and revenues from oil and gas, while realistically, projects from the former would not be implemented until four or five years from now. Oil, and gas revenues, meanwhile, could take about a decade to materialize.

“It defies common sense,” he told LOGI. “We’re basing our existence on conditional loans that it seems we want to repay with revenues we can’t yet forecast.”

Indeed, one needs only to look at a 2013 oil and gas timeline set out by the Energy Ministry,  which expected production to begin between 2017 and 2018. 

While the country is now further along the process, it goes without saying that those deadlines have been entirely missed.

At the same time, even if deadlines are followed, Lebanon could drill several wells without making a find. The likelihood of hitting a commercial discovery on the first exploratory well is about one in three.

Policy-makers should take these factors into consideration, especially when it comes to crafting the financial policy of a nation burdened with the third highest debt-GDP ratio in the world.

“We have to be careful,” Diana Kaissy, Executive Director of LOGI, said, adding that the government should better manage expectations about the sector. Mismanagement of large inflows of capital (mostly based on remittances) over the three last decades has already led the country into a vicious circle of unemployment and low competitiveness, Lebanon should not repeat the same mistake with the still-uncertain proceeds from oil and gas.


Photo taken from: Executive Magazine website. 

Leave a Comment
#economic vision #financial planning #parliament #soft loans #CEDRE #international community #economy #private investors #pre-source curse #high expectations #Laury Haytayan #NRGI