ExecutiveMagazine - 2/7/2020 4:18:53 PM - GMT (+2 )
- The implications of Lebanon’s current fiscal crisis are grave, but not fated to be devastating.
- Economic rescue plans circulating remain in the pro-private and neo-liberal economic modes of thought.
- As a result, there is a reassuring amount of overlap but little efforts to explore solutions outside these paradigms.
At the beginning of 2020, Lebanon’s socio-political landscape lay in mental chaos. Void as before the first day of a creation process. The most elusive sight was solid economic ground and a stable future. From the lira exchange rate in the parallel market and inflation of consumer prices to the vapid statements of political intent for government formation plus the correlated vain media speculations, everything looked unhappily fluid. Even the weather fell in line, with an overload of cold, drenching rain that extended over the New Year into the second week of January.
To add to it, the thawra (revolution)—by early January appearing increasingly amorphous to the observer—seemed to vacillate in wild contradictions between justified political outrage on one day, a destructionist approach to, admittedly easily criticized, political efforts the second, and violent rioting in apparently instigated attempts to smash civil peace on the third.
The most solid prospects at hand in the middle of all the shakiness curiously appear to have the substance of paper. More precisely, a hope of solidity for the country emerged in form of economic rescue plans. Such plans have been presented in the past weeks in the public debating square—and arguably the discussion of these papers has become the biggest opportunity for progress in rescuing the country.
This is because both the political camp and the protest camp—at least until the middle of the third week of the month—seemed to have only a universal failure to deliver working solutions for the economy in common, as long as the former kept playing the usual power distribution game and parts of the latter stayed enraptured in drumming out-of-the-world demands for the immediate change of everything.Careless or sincere?
Although many of the new proposals have been penned by impressive collectives of economists in collaboration with private sector stakeholders or by individuals with excellent credentials, questions necessarily arise about their content, approach, and compatibility. Being presented with a variety of action plans, emergency solutions, and salvation concepts for the political economy does, in this sense, constitute its own element of risky fluidity—there is a great need for assessment and comparison.
Assessing a wide variety of plans would be easy and enjoyable if it did not come with the backdrop of a serious and life-threatening affliction for Lebanon. These plans do not just speculate about an impending large recession in the way that economists everywhere do at least once each quarter by virtue of their trade. Before they offer their medicine for Lebanon’s economic resuscitation, the plans raise specters of an economic meltdown and even greater social disaster. The issue is not about personal taste, but about determining—to the best of stakeholders’ ability—which formula for economic salvation is the one with the best chances of working.
This need is made no less challenging by the realization that there is no room for trying out which rescue plan might be the perfect one. All would-be rescuers of the country’s economic and social state have only one desperate shot to find the remedy that delivers the best results.A matter of variables and approaches
The first large variation between the economic plans exists in the proportions to which analysis of “what went wrong” is juxtaposed with descriptions of impending threats and the proposed remedy. Some plans give very short shrift to the discussion of reasons for the crisis of 2019. A paper published on January 6 by 10 individual signatories under the umbrella of the Carnegie Middle East Foundation, for example, dedicates approximately 30 percent of its content to descriptions of the current problems and possible disastrous outcomes, over 60 percent to its remedy proposal, and less than 10 percent to its assessment of what led to the crisis.
As to the latter issue, the authors declare the crisis categorically to be “as its core, a governance crisis emanating from a dysfunctional sectarian system that hindered rational policymaking and permitted a culture of corruption and waste.” They proceed to say—in many ways accurately, but also in somewhat simplified manner—that Lebanon, “led by the public sector, lived beyond its means,” and they blame the economy’s high debt and “bloated banking sector” on this model having been pursued
Barely more elaborate on the deep background of current misery, the Lebanese International Financial Executives (LIFE) organization says in its economic rescue paper, published in October 2019, that “Lebanon appears to be heading towards an economic meltdown with severe consequences for Lebanese citizens of all walks of life.”
While emphasizing that it promoted approaches to solve the crisis for the past two years, LIFE highlights that current challenges to Lebanon “include a large and increasing debt load, spiraling fiscal and current account deficits, waning investment confidence, increasing political gridlock and external liquidity shortages,” but does not venture further into the history that led to their rise.
By contrast, presentations by some economists delve into financial detail of analysis concerning the debt buildup and the mechanics of the unconventional measures that were used at Banque du Liban (BDL), Lebanon’s central bank, in the past decade and specifically since 2016. Economist Freddie Baz, until earlier in 2019 the chief strategist of Bank Audi, outlined three scenarios in a presentation delivered on December 12 at the Université Saint Joseph. Firstly, an inflection point; reached in 2016 through divergence of monetary and financial policies resulting in erosion of foreign currency (FX) reserves. Secondly, a stalling point; incidents of market disruption and loss of investor confidence. Finally, a tipping point; when the foreign currency crisis scenario in September 2019 became meshed with a financial crisis and a liquidity crisis. Backing his views up with plenty of data references, Baz traces the problems of the Lebanese trajectory ultimately back to the 1990s. He notes the accumulation of financial distortions between 1992 and 2019, such as a cumulative trade deficit of $281 billion versus gross inflows of $290 billion and a cumulative public finance deficit of $82 billion over the period.
Marwan Mikhael, until end of last year heading economic research at Blominvest Bank, has provided two analyses (both first published in Executive in October and December of last year). In the second, he outlines his vision for a prudent economic course to overcome the current situation that he describes as “an economic recession combined with a liquidity drought that is unsustainable beyond the short term.”
Mikhael voiced his view on the genesis of the current crisis in his October contribution to Executive, where he observed that the partial dollarization of the bank deposits in Lebanon has a history that goes back to the 1960s. While governments in the past 30 years were unable to restore investor confidence to levels seen before the Lebanese Civil War, the increase of stress in financial markets in recent years and current crisis, according to Mikhael, can be understood as resulting from the extraordinary length of the problematic situation as an uninterrupted accumulation of multiple shocks, which began in 2011. This is juxtaposed to earlier shocks—in a country over-rich with shocks—as occurred in the 1990s, 2005, 2006, and 2008.
His narrative of successive overlapping shocks in the 2010s in the closer and wider region—from the Syrian conflict’s impact on Lebanese trade to the ISIS insurgence, the drying up of regional investments as result of weakened oil economy in the Gulf, and war pressure in Yemen, added to domestic confidence shocks through a long presidential vacancy and the prime ministerial resignation of 2017—portrays a rather convincing buildup to the 2019 situation without pointing to any alleged single cause.
Some opinion-makers, before prescribing any recipes for rescue, focus their search for reasons on the side of blame, seeking to name and shame financial actors for the debt handling patterns, dollar movements, and financial engineering numbers that have played a role in the crisis’ exacerbation. Nasser Saidi, a former vice-governor of BDL and economy minister in the late 1990s—and a signatory to Carnegie’s rescue plan—addressed the crisis in a number of op-ed newspaper columns. For him, a “Ponzi-like scheme” in the Lebanese financial sector was key to the problem.
Lebanese consultancy Triangle expounded on the topic to greater length in a study titled “Extend and Pretend: Lebanon’s Financial House of Cards,” which ominously states that dollar inflows to Lebanon have been “recycled for decades” by Lebanon’s fiscal, monetary, and banking players “to create a regulated Ponzi scheme, which has benefited the banking sector and left the Lebanese people to foot the bill.”
In Triangle’s analysis, this scheme involved the state (cabinet leadership and treasury), BDL, and commercial banks as core actors, and the resident population as the primary victims of the arrangement. Under this perspective, the study did entertain the question, however, of how much the resident population’s advantages of the past three decades—artificially heightened purchase power of the Lebanese lira and the state’s low collection rate of taxes from average incomes—were measuring in the bottom line against the distortional effects of regressive taxation, unmitigated inequality, lack of social safety networks, and the tax payers’ bill for debt financing interest paid by the state to BDL and, indirectly, commercial banks.
Contrasting through emphasis on wider political and regional contexts with the above mentioned purely financial or very brief general treatments of the roots and causes of Lebanon’s economic problems, a paper for its “LeadersClub” by Lebanon Opportunities asserts that the backstory of the economy’s highly troubled situation is rather complex. Whereas most analyses of the lead up to the crisis have emphasized on “past fiscal policies, a lack of economic vision, corruption, and ineffective public administration,” the paper admonishes that these views have either fully neglected or mostly ignored the “local and regional political dimensions” of the deterioration process.
Citing specifically the “Hezbollah component” for making the Lebanese crisis unique, the paper speculates that economists’ and other opinion leaders’ neglect might have been due to fear of repercussions, lack of political insights, or myopic preoccupation with blaming corruption for all problems in the Lebanese economy. The Lebanon Opportunities paper does not, however, venture into further analysis of the backstories behind the situation and merely asserts: “Whatever the reasons, the economy
Whereas some of the publicized economic rescue plans do not add new perspectives to the discussion of the crisis’ roots and genesis, a joint element across plans is the pronouncement of dire warnings to act quickly, and the alternative of economic and social catastrophe if the downward spiral is not brought under control.
The Carnegie paper lists several such consequences if the approach to the crisis is not improved. A deep recession in the economy, with continuing business closures, salary reductions in the private sector, and retrenching in the public sector, will translate into a double-digit drop in GDP in 2020, the authors predict. Other consequences will be serious depreciation in the lira value and subsequent price inflation, increasing controls of capital movements by banks, destruction of wealth and expansion of poverty, and possibilities of political unrest. All this will become a “lost decade,” meaning the paper prophesizes a 10-year long economic crisis for the Lebanese economy. The authors further argue that without deep reforms in Lebanon, international financial support will not be large enough to revive the economy.
Similar to Carnegie’s collaboratively produced doom alerts, the papers by LIFE members and by Lebanon Opportunities radiate with a certain intensity on the disastrous outlooks if there is no radical change to national policy. According to LIFE’s gloomy estimate, in addition to the country heading toward an “economic meltdown” with “severe consequences,” they are “concerned that failure to tackle current problems immediately and comprehensively could result in spiraling unemployment, uncontrollable inflation, more social unrest, civil strife and a severe deterioration in public health services and other basic resources.” Lebanon Opportunities’s “Economic Revolt” papers—which notably admits sole authorship of proposals, information, and opinions expressed in the study—predicts that “a worst-case scenario has become reality. Each pillar of the economic temple is toppling. It is too late for a rescue plan. What is needed is a ‘Revival Plan.’” Thankfully, the plan presented to the LeadersClub provides precisely the draft of a “Plan for Revival.”
Individually written plans appear to dedicate proportionally less effort on outlining details of economic and social pain if no new plan for treatment of the country’s malady is initiated promptly. Baz mentions three major macroeconomic challenges lying ahead, namely unsustainable public debt dynamics, unsustainable external debt dynamics, and erosion of FX reserves at BDL. While not explicitly advocating an economic rescue plan, he sees three possible courses of action in a self-made rescue attempt, a collaboration with a “club of friends” or a program under International Monetary Fund (IMF) tutelage. Whichever course is chosen, in his view, avoidance of hard landing of the economy will depend on the speed and magnitude of addressing public financial imbalances, the availability of $30 billion in urgent international financial assistance, regulatory capacity to quickly address banking sector issues, and the banks’ ability to again start attracting financial inflows. He cautions that any decisions on the rescue course will be difficult due to inter-linkage of the balance sheets of the government, BDL, and commercial banks and also due to the possibility of further social and political disruptions by popular protests.
Mikhael, who (writing prior to Diab’s government) notes that the crisis perception is prone to spark self-fulfilling prophecies of economic disruption in a vicious cycle with lost confidence as its starting point, says that unless a government is formed and reforms put on the way, restrictive policies—presumably by banks—will increase, and the parallel exchange market will see a larger depreciation of the Lebanese lira. The cash economy will flourish as depositors will avoid putting money at banks.
Whether highly elaborate or neutrally descriptive, all the narratives of threatening doom have their purpose that emerges when reading on into the core concern of each plan. The warnings, alarmist or not, serve to set the stage to make their readers receptive to the subsequent assurance that other, better approaches are within reach for a determined and united polity.
To start with the individually produced rescue concepts, the most important initial step toward rescue in Mikhael’s view, and also according to a brief comment by Saidi, is government formation. Writing in the first week of January, Saidi calls for immediate empowerment of a “credible and effective government” with abilities to implement unpopular reforms and approach the international community with requests for financial help as the first step in a six-point plan to “rebuild Lebanon’s economy.” Mikhael, in his “roadmap to recovery” published in December stipulates that “the first step before getting into any future economic plan is to form a government”—which was finally delivered on January 21 as a government of 20 ministers, but at the time of writing with an unfathomable outlook.
For Mikhael, the second urgent step prescribes restoration of investor confidence by measures that include debt restructuring by lengthening of maturities but under utmost avoidance of either a currency devaluation or a so-called haircut on deposits. The third key step would be acceleration of Lebanon’s recovery through an agreement with the IMF. For Saidi, the five other steps for the economy entail fiscal reform and cutting of subsidies (especially those to Electricité du Liban [EDL]), restructuring of public debt, reforming of commercial banks, scrapping of the dollar peg, and entry into an IMF program.
In Obegi’s view, like that of other bankers, a haircut or a compulsory conversion of foreign currency deposits to local currency should be excluded from any possible financial rescue package lest these measures be detrimental to future investor sentiments.
According to Baz, the rescue steps need to incorporate the implementation of structural reforms within one year or less, recalibration of banking and monetary policies to address solvency issues, setting of disciplined deficit and debt targets, formalization of capital controls, reduction of imports by about 40 percent, collaboration with the IMF to determine the real exchange rate, soft debt restructuring in line with short-term liquidity needs, and the provision of social buffers for the poor.
Referring to an August 2019 evaluation by the IMF, Baz further stipulates upside as well as downside risks and patterns that could influence the country’s situation. Upside risks include reconstruction of Syria and gradual return of refugees as well as a commercial discovery of oil/gas but are juxtaposed with downside risks of government failure to implement reforms, exacerbation of political and social tensions, and regional geopolitical deterioration besides accentuation of deficits and bubbles.
Also to be noted as part of the private initiatives to sketch out a better course for Lebanon are rescue ideas that their authors have spread out by putting their proposals into a series of newspaper and magazine comments. Riad Obegi, the chairman of Bank BEMO, made this effort with several partners, publishing together with Fouad Zmokhol, president of the Association of Lebanese Business People in the World, and on another occasion with consultants Myrna Sabbagh and Claude Khayat.
In Obegi’s view, like that of other bankers, a haircut or a compulsory conversion of foreign currency deposits to local currency should be excluded from any possible financial rescue package lest these measures be detrimental to future investor sentiments. He adds a perspective that Lebanon’s gold reserves, which are protected by law, should be authorized for renting out or use as collateral in obtaining a credit line of $10 billion.
For other measures, the articles propose a revision of Lebanon’s industrial policies and suggest to support 10 industrial activities through tax benefits, standard setting, and other pro-industry measures. The 10 sectors on the list of industries to be supported extend from information technology and finance, to design, education, healthcare, and various service specializations. Recommended in an article jointly produced by Obegi, Sabbagh, and Khayat are measures to monetize Lebanon’s publicly owned assets, from privatization of ports and airports to telecommunications, water, electricity, Middle East Airlines, and resource extraction of oil and gas.
As for the collaborative concepts, the rescue model of LIFE calls firstly for creation of fiscal space, meaning revenue and cost reduction measures (most prominently elimination of EDL subsidies with all their consequences), initiation of pension reform, and launch of privatization. Second on the LIFE list are measures to strengthen transparency and judicial independence; then a review of debt servicing and management that includes voluntary obligations by banks; enhancements of governmental communication and coordination; and, finally, no less than adoption of a new economic model that is not based on exported brains and import-fueled consumption, but places emphasis on growth potentials such as identified in the Lebanon Economic Vision (LEV), otherwise known as the McKinsey report.
The LeadersClub itemization of the road to revival similarly sets the first step at reduction of the fiscal deficit and production of a primary surplus. Numerous tools are suggested for achieving this aim, from a “large-scale transfer of public employees to the private sector” to “immediately stopping production of electricity” until the rehabilitation or privatization of power generation to debt renegotiations or cancellations (of state debt to BDL), and a “temporary” tax system adjustment that replaces direct taxes with value-added tax (VAT). Further proposed revival pillars address foreign exchange, monetary and banking policies, measures for stimulation of economic growth, implementation of CEDRE and McKinsey’s LEV, as well as confidence restoration with the help of a, presumably media, campaign.
The paper circulated under the Carnegie Middle East umbrella describes the first item on its 10-point priority list as designation of an “empowered economic emergency steering committee,” and other priorities consisting of formalized and centralized capital and banking controls, decisive action on public debt, credible fiscal reform, and plans to deal with private debt. The list of priorities includes repairing BDL’s balance sheet and restoring banking sector health as points six and seven; this leaves as concluding list items a focus on preservation of social peace, rethinking of FX/monetary policy mix, and finally seeking an international fund of about $25 billion—LIFE’s estimated need of Lebanon—which the plan discreetly calls “a multi-year Stabilization and Structural Reform Facility.”
The proposals in Mikhael’s December contribution similarly portray three reform pillars as crucial for rescuing the Lebanese economy. As his first pillar, he ascertains that macroeconomic stabilization in the state’s economic performance needs to entail the two fiscal sub-pillars: 1) revenue improvement through better tax collection and 2) a solution for the fiscal drainage by the electricity utility EDL. An additional sub-pillar in the macro context Mikhael names is a social one: the increase of state spending on the poorest Lebanese. Offering further overlap to the views of others—both individual economic thinkers and collectives—Mikhael’s second main reform pillar is induction of structural measures and the third lies in gaining access to new financing from the international community—implying most possibly an IMF program—that will give Lebanese reforms time to work.
The downside implications of Lebanon’s current political economy situation are grave but not fated by any historic power to be as devastating as they are painted in the exceedingly dystopian narratives that are in circulation in the public squares.
A read through the various reform plans thus reinforces a threefold impression: 1) the downside implications of Lebanon’s current political economy situation are grave but not fated by any historic power to be as devastating as they are painted in the exceedingly dystopian narratives that are in circulation in the public squares; 2) it should not be assumed that the economic rescue plans are independent from the generally pro-private and known economic approaches that have been dominant in Lebanon during the past three decades; and consequently, 3) the rationales of economic rescue concepts currently in circulation have a large amount of reassuring overlap with each other, but at the same time, somewhat concerningly, are not—even if sometimes asserting the opposite—exploring all heterodox economic approaches.
As the big unknowns of thumping through pages and pages of paper in physical or electronic form, the final and biggest note of concern, however, occurs to be if the respective powers of state—the new Council of Ministers—and newly recalcitrant society—Lebanon’s protesters of many diverse identities—will take it upon themselves to diligently research and commit to pursuit of an actionable economic rescue plan on the part of the government, and to abstain from empty rejectionist populism.
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