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Month: November 2018

Lebanon must unite factions to withstand its economic situation

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It is more than six months since the Lebanese parliament was elected and the leadership of the caretaker government has faced many challenges in attempting to form a government. Made up of the 18 diverse religious sects — including Christians, Druze and Sunni and Shiite Muslims — the government, most analysts believe, cannot withstand much more inaction and quarreling among the factions without irreparably damaging the country’s future.

It is as if a house is burning and five fire trucks show up to put out the fire — but rather than working together to extinguish the blaze, they quarrel about in which part of the house the flames should be extinguished first, who should hold each truck’s hose, and who is in control of the hose in the first place. The fire rages out of control, maybe to the point of no return.

The World Bank in its Fall 2018 report has downgraded Lebanon’s gross national product growth to 1 percent, a devastating growth rate for a country in desperate need of a functioning economy.  Foreign receipts are down as well, which puts the Central Bank in the position of having to beef up “its stock of foreign exchange reserves, lengthening the maturity of deposits and limiting the liquidity available, thereby inhibiting speculation against the Lebanese pound,” which is an “unsustainable path,” according to the bank.

Lebanon has the third-largest debt to gross domestic product ratio in the world; poverty is expected to rise; and the fiscal deficit is expected to rise from 6.6 percent to 8.3 percent.

The international community has done all it can to help and it’s now time for the Lebanese to act. Three international donor conferences have been held this year. In March, some 40 countries participated in a meeting, along with United Nations Secretary General Antonio Guterres and Lebanese Prime Minister Saad Hariri, “to reaffirm their commitment to the stability, security, sovereignty and political independence of Lebanon, offering hundreds of million dollars in military and security aid.” This is in addition to the more than $100 million a year in U.S. aid to the Lebanese Armed Forces.

At the Friends of Syria donor conference in Brussels in May, donor countries pledged $4.4 billion in refugee humanitarian support to Lebanon, Syria and other neighboring refugee-hosting countries. Most importantly, Lebanon won aid pledges exceeding $11 billion in April at a Paris CEDRE conference aimed at rallying international support for an investment program to boost its economy. The CEDRE project, plus the privatization of some government entities, seems to be the only answer to Lebanon’s economic downturn.

Most of the aid, however, is conditioned on a new government instituting policies that deal with privatization and economic reforms in a transparent process, as well as other guarantees in line with international norms. When Africa Ferid Belhaj, the World Bank Group vice president for Middle East and North Africa, visited Lebanon recently, he warned that Lebanon “might lose the loans and grants promised during the CEDRE conference, should the cabinet formation get further delayed.” The message was clear: Your economy is in danger and the loans decided for Lebanon could be given to other states.

The struggle to form a government remains the same: Anti- and pro-Hezbollah elements struggle over the makeup that Hezbollah and its allies will end up with. The United States has warned clearly that U.S. aid could be in jeopardy if Hezbollah increases its influence in the government, particularly if it controls a service ministry such as the Health Ministry, where services and favors can be doled out at the local level, thus increasing its influence and popularity.

As the designated prime minister, Hariri is struggling with this latest stalemate engineered by Hezbollah to balance international aid agencies’ requirements with the need to form a government without creating a situation that could prompt another civil war among the factions.

All of this goes on while the “house of Lebanon” burns. It is up to the Lebanese people to demand their government take back its responsibility to govern, protect its sovereignty, and push back against elements inside the country who care more about sectarian interests than the national interests of Lebanon.

Edward Gabriel is president of the American Task Force for Lebanon and a former U.S. ambassador to Morocco (1997-2001).

Besides the Costs of Supporting Refugees, What Holds Back the Lebanese Economy?

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Although much of the rationale presented by Lebanon blames the Syria refugee crisis as the main factor in its economic decline, its infrastructure and deficiencies predate this crisis. Recognizing why Lebanon’s infrastructure is inadequate and how it has failed to exploit earlier support commitments are important for understanding what can be done to advance the likely success of the new agreement.

This blog, the second of two, reviews articles by The Lebanese Center for Policy Studies (LCPS) that survey how Lebanon’s budget process is unable to make badly needed capital investments in infrastructure and question the value of yet another donors conference in supporting Lebanon’s revival without a broader vision of Lebanon in the future.

A useful background is provided in an article that examines the weaknesses in Lebanon’s current fiscal regime that every Paris conference has pointed out: Lebanon’s government lacks resources to adequately invest in its own country given an oversized public sector that employs 35% of the workforce at low compensation and payment on the national debt (15% of GDP) that swallows up any potential investment funding. On the revenue side of the ledger, the tax system avoids taxing the wealthy and uses indirect taxation that falls largely on consumers in the middle and lower classes. As the report states, “The structural reasons for the poor quality of the country’s infrastructure, which predates the Syrian crisis: first, fiscal mismanagement has severely constrained fiscal space for capital expenditures, and second, the poor management of resources allocated to infrastructure projects has fostered inefficiency and corruption.”

Budget constraints due to inadequate revenue sources, rising expenditures, the lack of national budgets from 2005-2017, and “limited scrutiny over the effectiveness and efficiency of budget allocation,” are identified as key drivers of the government’s woes. Historically, it can be noted that until Lebanon’s civil war (1975-1990), Lebanon’s government was largely made up of technocrats that sustained a viable, credible, and functioning government. During the war, people had to rely on local political bosses and alliances for basic services, which enabled political warlords to create dependent constituents, politicizing government functions, and exacerbating a system of rewards based on sectarian affiliation.

Government jobs became an extension of this patronage system as its ranks swelled from 11% to 35% of the workforce.

Since the reconstruction period in the early 90s, less than 2% of GDP has been devoted to capital expenditures; Lebanon ranks next to last in capital investments compared to other countries in its classification. Currently, government expenditures, interest payments on treasury bills, wages for public employees, and transfers to support the power sector constitute around 80% of the state budget.

Lebanon defies fiscal normalcy. The lack of an approved budget between 2005 and 2017 meant that expenditures became a function of continually extending existing programs, preventing the reallocation of funds to capital investments. For example, “personnel costs increased at 8.4% per annum on average from 2008-2016,” since this was merely extending what already existed.

Ironically, the reports notes that “by increasing the share of tax revenue to GDP by the 2.8% needed to be at par with peer countries, Lebanon could raise an additional $1.25 billion per year in revenues, which is equivalent to pledges made by donors ($11 billion over 10 years)” with no concessionary financing terms.

It ends with an ominous note: “Given the high entrenchment of the political elite with the private sector, increasing taxation of high-income earners and large corporations is unlikely to occur by itself and requires pressure from both international donors and civil society.”

Lastly is an article highly critical of potential CEDRE benefits for Lebanon. “Assuming that the borrowing of money is warranted (and this is at best debatable), and that the accountability and transparency preconditions are secured (and this is frankly impossible), CEDRE’s ‘technical’ proposal in terms of project selection is unsound.” This is due, it says, to the lack of an overall integrated vision that links projects to economic and social development of the larger society. Currently, it is more of a list of projects than a vision for Lebanon.” One might say it is the Lebanese version of trickle-down economics, akin to “we build it and the rest takes care of itself.”

As the article states, “It is impossible to measure the impact of infrastructure investment on livability and economic development without a holistic, multi-sector analysis of the integrated vision these investments are supposed to realize.”

“They reduce infrastructure to a list of big-ticket items, and conflate the notion of ‘national development’ with the construction of individual highways, dams, sewage treatment plants, power plants, fiber optic networks, and air and sea ports. Infrastructure development cannot simply comprise a laundry list of individual capital intensive projects.”

These articles raise central questions about how to best benefit from the Paris IV/CEDRE conference so that development is inclusive, sustainable, credible, and impactful on the quality of life of the Lebanese people.

News Notes: Hezbollah Stalls Lebanon’s Government Formation; President Aoun Talks Economic Developme

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There is not much that can be said to explain Hezbollah’s latest efforts to torpedo PM Designate Saad Hariri’s by insisting, at the last minute, on a ministerial portfolio for their allied Sunni members in Parliament. Even President Aoun insists that the previous configuration, arrived at after almost six months of consultations, is the preferred outcome. Acting Foreign Minister Gebran Bassil suggested a solution in a meeting with the Prime Minister and Nabih Berri, Speaker of the Parliament, yet the outcome is still uncertain. Meanwhile, Lebanon continues its downward economic spiral and lags on enacting important legislation to deal with widespread unhappiness with the state of government services.

Insiders insist that Hezbollah is playing a long game to undermine the current government and even President Aoun by holding the government hostage and insisting on broadening its support at the expense of the president and the prime minister. Given Hassan Nasrallah’s recent speech in which he reiterated his insistence on an additional ministry, more deadlock seems inevitable.

President Michel Aoun, meanwhile, has been making his own efforts to keep Lebanon’s economy from further deterioration. After meeting with Charles Arbeed, the President of the Economic and Social Council (ECOSOC), Mohammad Choucair, President of the Lebanese Economic Authorities, and Bechara Asmar, President of the General Labor Confederation, he said, “The delicate and difficult economic situation that the country is going through as a result of accumulations of previous years and unexpected events in the Middle East and the world require an effort to find the necessary solutions. This will top the priorities’ list of the next government upon its formation, especially since the foundations of these solutions are clear and need the participation of all, officials as well as economic, social and labor forces.”

He reviewed with them the ECOSOC working paper that recommends 22 actions “[focused] on reducing public expenditure, reforming pension and delivery systems, regulating public administration and establishing new financial controls and policies,” according to Arbeed. He later met with a delegation of the Union of Importers and Exporters of Vegetables and Fruits as well as the President of the Union of Truck Owners who urged the president to continue his efforts to open up the border crossing critical to Lebanon’s exports to Jordan, the Gulf and Iraq, and work to reduce taxes and fees on agricultural transactions to enable Lebanese products to be more competitive.

Russia continues to build up its role as the regional go-to leader. In a series of meetings in Iran and Syria following the Istanbul summit, Russian officials made sure to let their allies know how their interests were served by Russia’s leadership. On topics such as the future of the conflict zone surrounding Idlib, dealing with Syria’s objections to the UN formulation of participation in the proposed constitutional committee, plans for refugee repatriation and Syria’s reconstruction, and the implications of the Istanbul summit, Russia made it obvious that its interests are aligned with Iran, Turkey, and Syria and in direct opposition to the US and UK.

However, the article concluded that despite its aggressive agenda, as one Syrian official put it, “Russia neither had a constructive agenda themselves nor significant influence on the ground [in Syria] to be able to push their decisions on us. It’s OK, they needed almost a year to understand it. Now all but the United States and the UK come around to work with us, we are open.”

National Interest posted a blog about future threats to regional stability as a result of Iran’s buildup of foreign militias to fight in Syria and elsewhere. It has become a hot topic in Western capitals as the larger conflict in Syria draws down and even Yemen may be on the cusp of at least discussions around a peace process. As Emily Burchfield, the author, points out, “Iran has spent decades building up these forces, and it will take more than an afterthought from the United States to counter them.”

This was one impetus behind the recent Hezbollah sanctions and expansion of sanctions against Hezbollah leaders in Iraq and Syria. She warns that “Given the Trump administration’s reticence to commit to Syria in terms of troops or funds, the stated goal of removing all Iranian presence and proxies from the country does not match the ways and means available. Rhetoric that promises such an end-state sets the United States up for failure and loss of legitimacy.”

As ATFL has argued in several articles, the absence of US leadership in the region regarding Syria, the refugees, and reconstruction has only strengthened Russia’s hand, and undercuts America’s shared interests with Lebanon and Jordan. The US appears muddled and inconsistent, without a comprehensive strategy for countering Iran in Syria and more broadly in the region. It will be intriguing to see if the US Ambassador-designate to Saudi Arabia, former General John AbiZaid, who is himself Lebanese-American, will bring a determined and credible US vision to the region.

Syria Ascending While Lebanon Flounders

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President Michel Aoun must be gnashing his teeth as his erstwhile partner, Hezbollah, has created yet another obstacle to the formation of the government, insisting on the allocation of a ministerial position to its Sunni allies in the March 8 bloc. After coming within sight of a deal before this latest roadblock, Prime Minister designate Saad Hariri decided it was better to stay in Paris after expending enormous energy placating all of the demands so that a list was almost assured. Almost – until Hezbollah decided that no government was better for its interests, once again giving critics the opportunity to challenge its participation in any government.

Syria wasted no time in building on its success at the Istanbul meeting of Russia, Germany, France, and Turkey to dismiss the UN’s formula for a constitutional conference and submit it/Russia’s formula for a “peace process” in the country. Not once, but twice, the final communique emphasized Syria’s territorial integrity and sovereignty, challenging the US and Israel in particular, which have very specific ideas about the country’s future. Although Syria and Iran were not specifically mentioned, it is clear that the outcome of the meeting was a plus for them and Russia.

With recent reports of its naval expansion in the eastern Mediterranean and control of its own airbase near Latakia, Russia shows that it has returned to the region for the long haul. Iran will continue to have influence in Syria both through its own forces and commercial activities, as well as through Assad’s reliance on Hezbollah. What is unclear is if Iran will have direct control over its drone and missile production facilities in Syria allegedly run by the IRG, or if these will be transitioned over to Syrian and Hezbollah forces.

Turkey has upped the ante by attacking YPG forces that are part of the US-led effort against ISIS in the Euphrates area, creating more problems for the US, UK, and French forces there. Additionally, there is some confusion as to how Syrian Kurds will participate in any peace formula given Turkey’s hardline towards their presence. Ironically, given the history of both Assad regimes being elected with more than 90% of votes cast, an article from the Carnegie Endowment site Diwan noted “It takes fierce optimism to believe Syrian elections can be held in compliance with the highest international standards of transparency and accountability,” as mentioned in the communique.

A related issue tackled on the Diwan site is how the Syrian regime will manage the many militias it supports as the war winds down. In the jargon of conflict resolution, the process is called DDR, or “disarmament, demobilization, and rehabilitation.” The effort is based on the assumption that there is a means to delineate between Syria’s regular and irregular forces, which may seem like an unnecessary exercise for the regime at this time. Usually, the challenge is returning opposition forces to a status that allows efforts at peace-building and reconstruction to proceed. In Syria, one cannot overlook the country’s need for “Sustaining a network of regime-affiliated personnel to neutralize domestic opponents, compensate for the shortcomings of the Syrian state and army, and prevent the regime’s collapse. In the post-conflict phase, these militias will not be easily dismantled because they have become an integral part of the power structure and will increasingly operate under the umbrella of the regular forces.”

If fact, the integration of militias and regular forces has been going on for some time as the Assad regime has sought to build local capabilities to support its goals. Those who have achieved success in the many areas of conflict in the country are already being integrated into the regular army. For others, the potential for lingering dissatisfaction and opposition would only fester, as was the case in Iraq.

As the article concludes, “Rather than risk such an outcome, the regime would prefer to continue to incorporate these militias and leaders into official structures while attempting to keep the system in balance by playing different power centers off against one another. Integrating the militias into the regular forces also gives the regime room to employ the state’s legitimacy to try to keep them in check.”

While the US has settled on a Syria strategy for this quarter, there are concerns that it lacks a strategic goal to guide its policymaking. As an article posted by the Atlantic Council’s Hariri Center points out, “The Trump administration’s professed strategy of using the American presence in Syria to force favorable concessions deemed to be in the US interest is too easily thwarted by rival players. There will be no winner and, instead, the game will continue to reset.”

The argument is made that if the US decides to stay in Syria, assuming Turkey and Russia will not pose threats to our presence there and costs will be contained, thus avoiding Congressional attention, the US has a workable strategy. But Russia, Iran, Turkey, and Syria are aware of the Administration’s thinking and will continue to challenge the US presence by attacking the YPG, making civilian overflights of US positions, putting pressure on transportation routes for supplies, and continued exclusion of the US from efforts to deliver a robust peace effort.

In the meantime, Russia and Iran are extending their logistics networks throughout the country, contracts for reconstruction are being signed, and overall it looks like a scenario ensures Russian interests and preeminence in the region. The core of the conundrum as described in the article is “The United States has conditioned a peace agreement on the removal of Iranian-commanded forces. This begs the question: What happens if the Syrian regime, even after an agreement is reached with Russia on some sort of governance changes, requests that the Iranian government stay in Syria, while demanding that the other external actors withdraw?”

Lebanon and Syria – As an End of Hostilities Nears, What’s Next for Their Economies?

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Iran seeks to consolidate its wartime investments into post-war business opportunities. With conflict areas winnowing down to pockets in the southwest, northeast, and northwest of Syria and its fortunes diminishing due to increased sanctions from the US and others, Iran is striving to claim rewards from a grateful Assad regime. It has signed several contracts over the past two years that give it a dominant role in the reconstruction of the power sector and other infrastructure sectors that may eventually put it in competition with Syria’s other benefactor, Russia.

As an article in Defense One puts it, beyond economic benefits, having a dominant role in Syria’s economy feeds into its strategy to become a powerful regional player and extends its strategic depth, making it less vulnerable to land-based interventions. It writes, “In bolstering Syrian leader Bashar al-Assad, the Islamic Republic has secured the future of one of its primary client states and afforded it an opening to shape Syria’s reconstruction. For Iran, a country whose ongoing economic struggles are likely to worsen under renewed sanctions, this is a much-needed opportunity.”

It mentions too that Iran needs to placate the foreign militias it has brought to Syria, many from Afghanistan with their families; but it is hard-pressed to do so without additional finances in light of the current and anticipated sanctions. So, the article points out, recognizing this vulnerability gives the US an opportunity to further ratchet up pressure on Iran in Syria and interventions elsewhere, perhaps forcing it to draw back from its extensive presence in many parts of the country.

The article argues for a new US containment policy in Syria vis-à-vis Iran to exacerbate Iran’s weakness, and notes that this will only succeed if it can bring Russia along, which may at times see Iran as a spoiler for the spoils of Syrian reconstruction. It notes, “The administration is rightly looking to leverage President Trump’s rapport with Russian President Vladimir Putin to influence Iran’s moves in Syria. But Russia’s ability to shape Tehran’s behavior is limited.” How that plays out in the coming months and years will have significant regional consequences as Turkey is also concerned with the continuing role of Iran in an Assad-lead Syria.

Iran has already signed key contracts to rebuild Syria’s electricity and telecoms sectors, so those opportunities may help mitigate the sanctions regimes. As Al-Monitor put it, “Iran is one of the most significant parties bidding and concluding agreements to reestablish the electricity sector and wants to take advantage of coming opportunities that also include mining and telecommunications.” On several of the proposed projects, Iran is in direct competition with Russia for contracts, for example, in rebuilding the electricity grid in Latakia where Russia has its largest presence.

At this point, with Western countries sitting out any projects in Syria unless a political settlement is within sight, Iran is rebuilding several sections of the electric power network to help Syria deal with its power shortages. One point that is not addressed is how Syria is financing these deals and how its indebtedness to Iran and Russia will influence its policies absent a political transition in the country. It is not clear if the Assad regime is even concerned about the debt burden on future generations as it must deal with the significant destruction of much of its infrastructure let alone the needs of the population for housing, health care, social services, and jobs.

Ironically, the amount of revenue Iran will derive from its reconstruction efforts in Syria is not significant considering the comparative sizes of the two economies. The article quotes Osama Kady, head of the Syrian Economic Task Force, who mentions that “Even though Iran is struggling financially, the Iranian GDP in 2016 amounted to $404.4 billion, while the Syrian GDP didn’t exceed $60.04 billion before the revolution in 2011. [Syria’s] GDP has now sunk to $11.9 billion. In other words, the return on Iranian projects in Syria is very marginal for the Iranian economy, but such projects serve as political and media messages used by Iranian decision-makers to achieve a better Iranian position in the world.”

He also noted the comparative advantage of Western companies in terms of quality may also play a part in reconstruction efforts if international financing becomes available. He notes that the question then arises as to “The efficiency, continuity, and environmental friendliness of the Iranian and Russian manufacturers, who can’t compete with German, US, or Canadian manufacturers.”

Lebanon’s economy continues to struggle without infusions from the CEDRE donors. It bears repeating for the leadership in Lebanon that its economy is in deep trouble. Even though there is a consensus on the need to promote economic growth through broad reforms, it remains to be seen if the alarms are sufficient to influence the upcoming government.

The Carnegie Endowment for International Peace recently published an article on its Sada website that provided the latest details on the failing economy. Annual growth is less than 1.5%, while debt is growing at 7.5% as of May 2018. If annual growth does not ratchet up significantly with a concurrent drop in the debt’s growth rate, “Lebanon will not be able to pay off this debt through economic growth alone.”

“Moreover, as Lebanon fails to pay down its public debt—which amounted to $81.5 billion as of February 2018—interest payments on the debt are rising and further widening the fiscal deficit, currently estimated to be over 8.5% of GDP.” Lebanon’s three most critical sectors: construction, tourism, and remittances, are slowing down dramatically, depriving the economy of their traditional vitality.

For example, newly registered building permits have dropped almost 24% compared to the same period in 2016. “Facing such pressures, Sayfco—one of the largest Lebanese real estate companies, with projects worth an estimated $2 billion—went bankrupt in May 2018.” Remittances from Lebanese working in the Gulf, which make up nearly 20% of Lebanon’s GDP, have fallen some 7% in 2017. Given that tourism from the Gulf, particularly Saudi Arabia and the UAE, the biggest regional component in that sector, has dropped by 21.1% and 32.2% respectively over the past year, that sector is also suffering.

The article concludes: “For now, the political elite appears to be more concerned with securing prominent appointments on the next cabinet, however long it takes, rather than speeding up the process so they can get to work fixing the economy.” Once the government is formed, it will be telling if it moves proactively or in its traditional souk approach to righting the economy.