Pot Calling the Kettle…How’s the Crusade Against Corruption Going?

In the midst of the daily convulsions that now characterize political life in Lebanon, it’s refreshing and somewhat disheartening to enjoy a bit of cynical comedy brought to you by leaders who are considered by many to be part of the problem. Take, for example, the notion of corruption and misuse of public funds. While many on the outside see the misappropriation of government money and sinecures as criminal, it is common practice among the political groups in Lebanon to count on a certain percentage of government jobs as literally legal tender for securing benefits for their constituencies. This dependency is part of the fabric these patriarchs are counting on to sap the revolution of its energy as people start to realize that their livelihoods are part of the system sustaining a corrupt and dysfunctional government.

As indictments are brought, fairly or not, against former ministers and officials in Lebanon, perhaps to settle scores or have show trials, or both, one benefit might be that the current system is exposed and its roots vulnerable to change. More likely scenarios are that mud-slinging will rise dramatically and politicians will jockey to protect theirs by damning the other sides with innuendo, leaked stories, rumored conspiracies, or physical violence as was common in the latter part of the last century. But will anything change for the better?

This week, the Speaker of Parliament, Nabih Berri, called for Parliament to review draft legislation on banking secrecy and returning stolen funds. Although Parliament has not met due to security concerns, maybe the demonstrators will relent and let them into the building, if there was a shred of hope that something worthwhile would be achieved.

Berri called for two parliamentary committees to hold a joint session on November 27 to discuss the draft laws, which echo demands of protesters who blame the country’s elite for rampant corruption and steering Lebanon deep into economic crisis. Parliament is slated to reelect members of various committees and discuss an amnesty law that would allow for the release of hundreds of prisoners, mostly demonstrators. Even this step is under question by the street who believe that it will be used to give immunity to members of the security services and party members who have used violence to counter or intimidate the demonstrators.

As currently proposed, many “ordinary” crimes are explicitly listed as not included for amnesty, but “a number of dangerous things are not mentioned, ” according to an article in Middle East Eye – among them environmental crimes, tax evasion, intimidation, and extortion, crimes which many Lebanese politicians stand accused of committing. Further mudding the concept is that there is a move by members of Parliament to have the judges appointed by the MPs, further diluting the notion of fairness.

The Lebanese Transparency Association (LTA) issued a list of anti-corruption measures that provide an agenda for realistically changing the current system, if Parliament needs a roadmap. It begins with implementing existing regulations and pending legislation that would include the “Right to Access to Information Law,” and the National Anti-Corruption Strategy, which has been in development for eight years. On the economic portfolio of reforms is immediate adoption of the Public Procurement Law for approval by Parliament, which would regulate how the government prepares and awards tenders; as well as the petroleum registry decree to transparently manage bids for the exploration of the gas and oil tracts.

Since the Parliament is vested with the key policy making role in the government, the LTA called on it to conduct relevant committee meetings recognized experts on a defined timetable to consider and pass critical legislation, much of it part of the agenda of the demonstrators. This would include regulations on:

  • Combating corruption in the public sector and creating a national authority against corruption;

  • Establishing a special court for the misappropriation of public funds;

  • Lifting banking secrecy on all present and former presidents, ministers, parliamentarians, and high ranking public officials;

  • Lifting immunity on the current and former ministers, parliamentarians and public officials who deal with public funds;

  • Illicit enrichment and asset disclosure;

  • Regularization of the Court of Accounts;

  • Amending the “Law on the Regularization of the Central Inspection Authority”;

  • Conflict of interests;

  • Asset recovery;

  • Strengthening the independence of the judiciary.

This agenda was reinforced by the international body, Transparency International, in its statement that “The Lebanese parliament must not move forward with proposed legislation that would grant amnesty for past corruption. This will only cause confusion and further outrage among citizens that have been protesting against corruption for the past month. Instead, the parliament must advance stalled anti-corruption legislation in accordance with international best practice and Lebanon’s domestic and international commitments.”

Key to these reforms is engaging professional and technical assistance, including those in the international community, with the expertise to provide model legislation and regulatory measures as well as representatives of civil society and academia who can provide input from the side of the Lebanese people. Of note, Transparency International ranked Lebanon 138 out of 175 countries in its 2018 corruption perceptions index, making the country one of the worst in the world.

Can Lebanon Become More Dysfunctional?

Some critics say that the country is already dysfunctional, fragile, and the government immobile. While the political chieftains dither over how to retain their prerogatives, international bodies, financial and political, are readying near-death announcements. This past week, Moody’s and S&P Global reflected on the demise of the financial engineering that had propped up the Lebanese pound and ranked the country and its banks to even lower levels of junk status. With payment coming due on about $1.5 billion worth of internationally-held bonds, the Central Bank, with no formal decree on capital controls, in fact allows private banks’ largest clients to continue to move their assets out of the country. So how long can Lebanon continue its financial fast shuffle that has now slowed to a geriatric hobble?

Moody’s Investor Services based its further downgrading into junk status on an increased likelihood that Lebanon’s external debt would have to be rescheduled or other measures such as a haircut in earnings or debt swap that are all defined as default, a word that the Central Bank refuses to utter. In addition, the country continues to be “under review” for additional potential downgrade. What this means is that Lebanon no longer can raise through bonds or other instruments the large amounts of financing needed to prop up its subsidization of the pound.

It said, “Widespread social protests, the resignation of the government, and loss of investor confidence have further undermined Lebanon’s traditional funding model based on capital inflows and bank deposit growth, threatening the viability of the peg and macroeconomic stability.” The next quarter is the critical assessment period measuring capital inflows, bank capital stability, and level of solvency of government institutions, that is, is it paying its bills?

Almost $3 billion has already left the country including $800 million since the demonstrations started a scant month ago. The resignation of Prime Minister Hariri and his rumored replacement by a former finance minister has not eased the pressures on the government as it continues to lack a program for implementing badly needed reforms that will reassure international funders.

The demonstrators are unsurprised by the lack of leadership to stop the hemorrhaging as the President and his allies in the government seem more intent on the survival of their prerogatives rather than that of the country. As Moody’s reflected, “In the absence of rapid and significant policy change, a rapidly deteriorating balance of payments, and deposit outflows will bring GDP growth to or below zero, further stoking social discontent, undermining debt sustainability and increasingly threatening the viability of [the Lebanese pound’s peg to the US dollar].” Moody’s downgrade puts further pressure on Lebanon’s ability to borrow as it has to offer very high yields to attract investors to invest in the country given its continued deterioration.

On the issue of the debt servicing, Moody’s estimates that the country has about $5-10 billion available to redeem existing bonds. It opined, “In the absence of new net inflows, these $5bn to 10bn will likely be consumed by the government’s forthcoming external debt service payments estimated at $6.5bn this year and next, including the $1.5bn November 28 maturity.”

While the bulk of Lebanon’s public debt is held by local banks and the financial system, a condition that enabled the country to attract large amounts of overseas capital inflows that sustained the currency peg, local institutions are facing challenges in balancing their books in light of the lack of continued investment to offset deficits.

S&P Global, in fact, has downgraded Bank Audi, Blom Bank, and BankMed to CCC from B-, reflecting their weak ledgers and capital reserves, and is maintaining a negative outlook on their prospects. The agency also maintained a negative outlook on the banks, stating that it will look for more clarity on deposit outflows and “reported restrictions on specific transfers and operations imposed by banks.” IT said, “We understand that the deposit erosion that started in first-half 2019 has recently intensified. This has happened because of recent political developments, protracted social unrest, prolonged bank shutdowns, and individual banks reportedly placing some restrictions on specific transfers and operations.”

S&P doesn’t believe that the banks will be able to meet their obligations to pay back investors who have been enjoying very high interest rates paid on their deposits. “We believe that large maturity mismatches on the banks’ balance sheets limit their flexibility to respond to major deposit outflows in times of liquidity stress,” was its comment. This attacks the core transaction in the Central Bank’s financial engineering in which “banks have typically used customers’ short-term deposits to invest in longer-dated term deposits and certificates of deposits from the country’s central bank, Banque du Liban.”

The Central Bank faces a dilemma. If it continues to provide liquidity to the banks to meet their depositors’ demands, it has less capital available to continue financing the operations and debt servicing of the government. There are no more simple solutions. As long as there are demonstrators in the street and the government has no credible program for economic reform, the financial system remains hobbled by this conundrum. As Capital Economics in London said, “We understand that at this stage banks have had limited recourse to this liquidity facility. [Global markets investors] are coming around to our long-held view that the government will have to resort to a restructuring of its large debt pile.” It further predicted that there is an 84% chance that Lebanon will default on its debt within the next five years given the high rates it will have to pay to extend its bond obligations, referred to as “credit default swaps.”

Just to make sure the message is clear, Gallup, the global survey firm, released some statistics on what the Lebanese think of the government’s performance. Its latest results show that 93% of all Lebanese adults say corruption is widespread throughout the government, noting that this perception hasn’t fallen below 90% since 2012. Similarly, less than 20% of those surveyed before the current crisis said that this is a good time to find a job. For complete methodology and specific survey dates, please review Gallup’s Country Data Set details.

For cogent and insightful assessments of understanding the ins and outs of the crisis, see the work of the Lebanese Center for Policy Studies, here and here.

Lebanon – Long in the making, a financial crisis has struck

Diagnosis – How Did we get Here

1. A steadily deteriorating balance of payments over the past years has drastically squeezed, if not largely depleted, Central bank reserves. As a result, the fixed exchange rate regime, prevailing since 1997, had de facto to be abandoned. On September 30th, 2019, a two-tier exchange rate system was ushered in under Central bank Circular number 530. The circular guarantees the availability of foreign exchange (at the official rate) exclusively for the imports of three strategic commodities: petroleum derivatives, wheat, and medicines. Hard currency for all other imports or services can hence only be procured on a “parallel” market through authorized money exchangers at rates reflecting supply/demand balances.

2. In essence, the insufficient foreign exchange “reserves” held by the Central Bank (BdL), and the waning outlook for their replenishment no longer allow BdL to maintain the peg regime, or in more precise terms, subsidize an overvalued Lebanese pound (LBP).

3. Serene economic analysis is not about shedding tears and agonizing over past misguided policies. It became however clear that the peg regime was at the end of its ropes in 2016, when BdL engaged in its so-called “financial engineering” schemes. These futile and costly attempts at rebuilding reserves aimed at prodding commercial banks into bringing home, and depositing at BdL, their dollar-denominated assets held at foreign financial institutions. These operations may have provided a three-year lifeline to the ill-fated, unstainable currency peg. In the process, the already high exposure of commercial banks to sovereign risk (Treasury and BdL) further increased, to reach two-thirds of total bank portfolios. In this perilous “Treasury – BdL – Commercial banks” entanglement, bank depositors have become pawns and hostages. Lending by commercial banks to the Treasury and BdL has largely funded runaway unproductive current expenditures of an excessive government apparatus, power sector subsidies, and graft – a lending with a low probability of recovery as there are hardly physical or productive assets to recoup*.

Foreign currency lent by banks to BdL kept feeding and replenishing the arsenal of reserves consumed in supporting the ruinous currency peg regime that fueled unsustainable trade deficits. To prevent a banking crisis, de facto capital controls are now in place, though not officially declared. This is a dramatic development that has dented Lebanon’s banking sector position and image as safe haven for external inflows. Now however that controls are in effect, they should be enacted through a legal fiat, and not left to the discretion of bankers who might then differentiate between clients. Bank balance sheets are further weakened by the poor quality of their private sector loan portfolio with a level of arrears well above 15%.


The precarious financial situation must be urgently addressed. Restoring basic budgetary equilibria should start by curbing the growth of the public debt in order to stabilize it over the medium-term. To do so requires a massive fiscal effort in slashing expenditures and boosting revenues to generate substantial primary surpluses (estimated at some 4 to 5% of GDP) in the next five years. Such a massive fiscal effort, if feasible, would have drastic social implications in a dollarized economy under considerable pressure, as well as the potential of a depreciating domestic currency that reduces the purchasing power of the bulk of the population whose income and savings are largely denominated in LBP, and whose liabilities (car loans, mortgages, etc.) might be in dollars. Thus, the primary condition of any adjustment program should be a considerable strengthening of the social safety nets. The program should move along three parallel tracks.

a) Fiscal adjustments – costs control and revenue generating measures

(i) – Pursue reform towards a more efficient and fair tax regime, while ensuring an adequate revenues stream. To be acceptable, the burden of adjustment must be distributed fairly on all segments of society with the more affluent bearing the largest share so as to limit its impact on the middle class and the poor.

(ii) – Enact in the 2020 budget law the “progressive tax on aggregated income” with marginal income tax rates from 5% to 45% which are well within the norms in many countries. Income below the minimum wage would be tax exempt. These rates could be for a transitional period over a number of years until specific targets have been reached.

(iii) – Restructure the public debt with due concern to the rights of depositors.

(iv) – Consider opportunistic sale of selected public assets – starting with idle assets, and excluding currently operating entities yielding returns to the Treasury.

(v) – Control and reduce public expenditures, with all new capital investments to be financed by private capital (or grants when available).

(vi) – Combat illegal customs transactions through immediate measures (scanners, private auditing agencies, etc.).

(vii) – Combat tax evasion and avoidance.

(viii) – Address, through an act of parliament, and settle the file of illegal occupation and use of public property.

(b) – Strengthening the social safety nets

(i) – Introduce programs targeting the poor and the disenfranchised, that entail cash transfers, food stamps, subsidized shelter, basis health coverage, heating, transport assistance, etc.

(ii) – Refrain from public sector layoffs or salary reduction which cannot be contemplated at this point, as the depreciating currency will de facto erode the real value of salaries, yet eliminate all excesses from cumulative salaries/pensions, and excessive compensations.

(iii) – Protect the value of the CNSS, the funds such as end of service indemnities and health coverage) that are invested in LBP-denominated Treasury instruments.

(iv) – Raise the ceiling on bank deposit guarantee (currently LBP 5 million).

(c) – The package of overdue institutional and regulatory reforms

(i) – Disband or merge some of the 94 public enterprises and boards, that have out- lived their usefulness (e.g. Ministry of Displaced, Fund for the displaced, Council for the Development of the South, and others) and redeploy their staff to public sector entities with open vacancies.

(ii) – Amend the laws of the regulatory agencies for Petroleum, Telecommunications, and Power, which should fall under the oversight of the council of ministers, and not of the sector ministry.

(iii) – Amend the Code of Credit and Money to subject the Central bank to Parliament’s oversight (Note that the US Federal Reserve is under the oversight of the US Congress).

(iv) – Transfer oversight of the Board of Accounts (ديوان المحاسبة) to Parliament

(Note that the General Accounting Office in the USA is under the oversight of the US Congress).

(v) – Amend law of Capital Markets Authority to shield it from the dominance of the banking sector – a competitor to the bond and equity markets – and subject it to Parliament’s oversight (Note that the US Securities and Exchange Commission is under the oversight of the US Congress).

(vi) – Assert through appropriate legal means the autonomy of the “Directorate of Procurements” (دائرة المناقصات) and its exclusive role in all public sector works tendering and awards.

(vii) – Ensure that all public and private projects in infrastructure, industry, agriculture, tourism, housing, etc., are in compliance with the “National Physical Master Plan for the Lebanese Territory” approved by the government in 2009.

(viii) – Ensure that all public sector recruitment is conducted exclusively through the Civil Service Board, with the Board submitting a short list of three candidates for recruiting managers to choose from.

Avoiding Economic Failure: Can Lebanon Do it?

The news is not good, and more than marginally bad…Lebanon’s financial engineering seems to have reached its limit in sustaining an artificial peg between the Lebanese pound/lira and the US dollar. The only short-term remedy is an immediate infusion of capital to support the lira. Otherwise, Lebanon simply does not have the reserves to protect the lira from devaluation that will strike the pocketbooks of the middle and lower classes hardest. And then the protestors will be really unhappy and likely take their displeasure more aggressively to the streets.

As Maha Yahya of the Carnegie Middle East Center in Beirut recently wrote, “Lebanon’s economic crisis has reached a breaking point. Public debt is estimated at 150 percent of GDP, economic growth is negative, the dollar peg for the Lebanese pound is wavering on the black market, and there are signs of inflation as the prices of some basic goods have increased between 15 and 30%.”

She goes on to point out that Lebanon ranks as the 138th most corrupt state globally, a condition which has resulted in a widespread lack of trust between the Lebanese people and Lebanon’s political leadership across the spectrum. She adds, “Protesters believe the country’s political and economic mismanagement by a sectarian political class has only benefited the elite. Living standards have declined for citizens from all sects, along with their future prospects.”

The protests have drawn people from all sects and regions of Lebanon, challenging the decades-old patronage system that places constituency favors over national interests. It is a crisis of epic proportions. As Yahha notes, “If there is an economic collapse and the Lebanese pound loses value, Lebanese citizens could see their incomes, pensions, and savings disappear, and half the population could fall into poverty. The fallout in terms of public anger could pale in comparison to what we’ve seen thus far.” This is not some far away threat. This is what the Lebanese are facing every day, and there is still no attempt to change the status quo despite multiple meetings among the three presidents: Aoun, Berri, and Hariri, and their ally Hezbollah.

No matter the solution, the people rather than the politicos will pay dearly for the misdeeds of their leaders. If the government tries to cut the growth of the public debt, as it has agreed to under the CEDRE reform package, the first to feel the effects will be the enormous cadre of government employees who will either lose their jobs or see their benefits slashed or more likely both. In this case, actions must be matched by efforts to increase revenues significantly, which means taxes, surtaxes, and restructuring current government debt. And who will willingly pay more taxes if they don’t see immediate improvements in their quality of life: better infrastructure, services, and transparency?

In any case, the lira will fall, the assets of the middle and lower classes, denominated in lira, will quickly erode, unless the taxes also go to providing a reliable social safety net.

The most difficult challenge is balancing short and medium term steps to rescue the economy. Every recommendation will have to be measured against when, how, and the sequence of actions so that the rich do not escape their responsibilities while others bear the burden of a reduction in their standard of living.

For example, an important component of new revenue is the privatization of public companies and assets that are non- or under-performing. This requires appropriate laws, an independent judiciary and regulatory agencies, transparent valuations of the assets, and professional management to implement. It will take from 12-18 months under expedited conditions for privatizations to move forward. Similarly, if the government wants to sell off excess land, buildings, or property to generate revenue, there must still be procedures in place to guarantee transparency, rule of law, and fair valuation. Investors will likely downgrade these assets as the government will be badly in need of revenue, which may create a fire sale situation.

The 2020 budget does have some provisions to combat tax evasion, underpayment of taxes, and other means of avoiding payments to the government including customs fees and duties. Transparency and oversight will require a level of technical proficiency and dedicated professionals that is now lacking. There are other measures as well that can either enhance revenue or decrease expenses but the key is to act in such a way as to protect the most vulnerable and have transparent and full communication with the public to build trust.

None of these steps will move forward without a government that is a technocratic, professional body that acts within the constitution and existing laws that provide for transparency and the rule of law in government contracting, purchasing, accounting, and appropriations. The people have so little trust in the government, political parties, and the status quo that it is hard to imagine that any of the existing leadership will narrow the trust gap that exists. The recent downgrade of Lebanon’s bonds to a lower than junk rating by Moody’s reflects the perception of the markets that Lebanon is now in the company of Argentina without the capacity to dig itself out of a hole thirty years in the making.

Maybe we should be praying for Lebanon but there is no savior on the horizon. The coming weeks will test the wills of the demonstrators and the politicians to see if the country emerges as a failed state or one committed to a responsible path to recovery that is inclusive, transparent, and fair to the people of Lebanon.

It is time to save Lebanon

This summary is provided by the Lebanese International Finance Executives (LIFE). For more information please click here.

As protestors take to the streets across the country, Lebanon appears to be heading towards an economic meltdown with severe consequences for Lebanese citizens of all walks of life. We 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.

The challenges include a large and increasing debt load, spiraling fiscal and current account deficits, waning investment confidence, increasing political gridlock and external liquidity shortages. While we remain resolutely apolitical and non-sectarian, based on our collective expertise and global experience, LIFE has warned repeatedly and explicitly over the last two years that the situation was becoming untenable and has provided specific recommendations to policy makers to address the worsening economic and financial situation.

Those warnings were captured in an economic paper (included herein by reference) distributed to key policy makers where we called for immediate action and mentioned that Lebanon’s famed “resilience” was at a breaking point. Although the gravity of the economic situation was apparent to most, the policy response has been insufficient to stop the country from sliding into a full-blown crisis.

This week’s announcement by Prime Minister Hariri does signal a willingness to accelerate some austerity measures but does not represent a realistic and sustainable fiscal consolidation plan. It also falls short of sufficient details and does not include the structural reforms required to put the country back on track. In particular, it fails to provide a comprehensive and detailed plan for the electricity sector enabling the government to fully eliminate subsidies. Furthermore, it continues to use the coffers of the Central Bank as well as the banking sector to fund government spending, this time in a form that is unsustainable and counterproductive. It is also unclear to us whether the Banque du Liban (“BdL”) fiscal “transfer” can even be considered as revenue for budget accounting.

We remain convinced that the country requires a broader set of urgent and more comprehensive steps to restore confidence. Before we lay these out, we thought we would first list some misconceptions which continue to circulate among policy makers even in this critical juncture which in our opinion need to be dispelled:

  • Lebanon’s economy is beyond easy solutions and the way out of a crisis will require substantial economic pain on most stakeholders. While this sounds harsh, the alternative is far harsher. As such, a new and clear political mandate based on political consensus and expert economic leadership will be required with all stakeholders expected to carry a share of the burden for Lebanon’s economic stabilization.

  • Lebanon’s fiscal consolidation needs to be front loaded and particularly focused on reducing the size of the public sector. Without comprehensive fiscal reforms, neither the one-time bank tax, nor the 1% annual fiscal adjustment target agreed during the CEDRE conference will restore confidence or put Lebanon on a sustainable debt trajectory. Empirical studies strongly suggest that a primary surplus of around 5% is needed to reduce Lebanon’s relative debt ratios and hence should be the target for 2020/2021.

  • Lebanon will not be able to grow its way out of its large debt burden. In other terms, no realistic growth trajectory allows Lebanon to deleverage as the race between economic growth and debt formation is already mathematically lost.

  • Lebanon’s crisis cannot be averted by relying on oil and gas reserves as these will take many years at best to exploit. Buying time hoping that future gas revenues will help Lebanon deleverage is therefore ill-advised.

  • Although Lebanon is in desperate need for infrastructure investment, CEDRE-related grants and concessionary loans can’t be used for budgetary purposes and will not solve the current economic crisis. It is also worth highlighting that, as we have seen over the last 18 months, financial assistance from friendly countries will provide only temporary relief.

  • Lebanon’s famed economic resilience and competitiveness based on services and remittances will no longer apply even in a fiscal consolidation scenario. In order to address the chronic current account deficit and leverage on the country’s relative advantages, a new economic model is required.

  • A front-loaded debt restructuring or Eurobond haircut will only serve to weaken the capital formation engine of the country and further delay the more important and sustainable fiscal austerity measures that are required.

  • We also believe that, although it may be inevitable, a currency devaluation at this juncture in Lebanon is not advisable as it will lead to potentially uncontrollable levels of inflation without sufficiently addressing the gaping current account deficit nor improving the debt service outlook.

Avoiding a worsening economic crisis and restoring confidence will require a well-orchestrated series of immediate and radical measures across five primary areas:

1. Create Fiscal Space

Lebanon’s public finances are dominated by the three-headed monster of (i) public wages and government transfers, (ii) persistent subsidies to Electricité du Liban (“EdL”) and (iii) the cost of servicing the ballooning sovereign debt. Simply put, progress needs to be made on all three fronts. The current strategy of soft fiscal consolidation, which essentially consists of incremental steps and hiding future deficits by accumulating arrears will not be successful.


Tangibly, on the expenditures front, subsidies to EdL need to cease. Given that power outages will increase dramatically and spending on alternative power sources will soar, this decision may seem politically unbearable. The reality is that Lebanon has run out of less drastic options. Cutting subsidies to EdL will reduce government expenditures dramatically, reduce hard currency outflows which are exacerbating Lebanon’s external vulnerabilities, and more importantly, force the immediate implementation of a credible electricity reform plan.

The size of Lebanon’s government, by most metrics, is large and in need of optimization. A first step to streamline the public sector is to conduct a thorough census of employees to determine the type and importance of the service they provide and address the problem of “ghost” employees as well as those who are unproductive. This seems to be ongoing and needs to be completed by the end of this year and implemented promptly. The next steps should include a re-assessment of the bloated number of government agencies, a freeze on some of the costly services and the widespread introduction of digital government services which will have the triple benefit of reducing corruption, enhancing the level service and lowering costs.


While a number of new taxes are being discussed, as tax evasion is rampant, the focus should be first and foremost on better tax administration and collection. We believe additional taxes will only serve to weigh on the sluggish economic growth and increase tax evasion rather than achieve the desired outcome of higher revenues. In other word, there’s no point in increasing taxes when the existing ones are not well collected.

Specifically, tax administration should be improved by focusing on improving efficiency and collection on VAT, personal and corporate income taxes, and especially customs duties. Here too, the government should increase the use of electronic services, by automating customs clearance and applying e-government services where appropriate. Another area to focus on is real estate taxes whereby property including land should be properly assessed and taxed accordingly.

Additional taxes can be considered provided that they are not overly regressive (such as VAT) and that they are applied in a targeted manner in line with an economic vision for Lebanon, which should include the improvement of public health and the preservation of the environment. As such, taxes on cigarettes and duties and activities that are harmful to the environment, such as seashore violations and quarries, can be increased significantly.

Pension Reform

The initiation of pension plan reform by the government is encouraging. To be clear, current and retired government workers who were hired and worked under a set of terms and conditions should have their rights respected. However, moving forward, government hiring should be more selective, based on a sustainable pension that also rewards employee role and performance rather than just simply years of “service”. In addition, the retirement age should be raised, benefits must be linked to price inflation, the rate of social contribution should be tiered and capped, and public pension investments should be diversified away from Lebanese sovereign bonds. Deeper reforms including a unified social security system should also be considered.


A comprehensive privatisation programme should be launched immediately. The substantial state assets, including the Rafic Hariri Beirut Airport, the Beirut maritime port, the National Lottery, the Middle East Airlines, the Casino du Liban, the Telecom operators and eventually EDL should all be considered for privatisation. This process should start with, as appropriate and required, corporatisation, setting up and activation of independent regulatory bodies as well as new management teams should be actioned. Enhancing governance, management and operational efficiency in line with the private sector would result in significant valuation gains and service improvements. Eventually, potential partial stock listing of those state assets and bonds issued should be used to bolster the local capital markets. In order to optimise valuation, full privatisation should be sequenced after confidence is restored by implementing the required reforms and reinforcing the rule of law discussed below in order to avoid any irregularities in the asset transfers as we have seen in other countries.

II. Reinstate Transparency and Reinforce the Rule of Law

Enforcing the rule of law will play an essential role in Lebanon’s economic revival and is a pre-condition to reinstating investor confidence. It is widespread knowledge that Lebanon suffers from widespread corruption and fiscal leakages at many levels. For instance, Lebanon’s Transparency International ranked Lebanon 138th out of 180 countries assessed. As such, the recent adoption of the Anti-Corruption National Strategy is a welcome development and the government’s seriousness in its enforcement will be of utmost importance. This can only happen if there is a programme in place which aims to reinforce the independence of the judiciary which has eroded over the last few years.

Such enforcement requires the introduction of mandatory asset disclosure for public officials, independent audits, formal procedures to recover embezzled public funds and steep penalties and fines to be applied regardless of political backing or seniority. Improving tax collection combined with enforcing a strict code of conduct can rapidly and meaningfully increase government revenues. This point is of particular importance in light of the ongoing oil and gas exploration and drilling contracts and related potentially lucrative windfalls. We would also encourage the establishment of a digital citizen grievance and feedback system on all aspects of government service delivery to enhance accountability and align motivations.

We also call for the establishment of an independent commission to implement a “Stolen Asset Recovery Initiative” in order to return the proceeds of corruption to the state. This should achieve the dual benefit of increasing government revenues as well as discouraging future corruption.

III. Review Debt Service and Implement Liability Management Plan

Debt servicing costs in Lebanon are among the highest in the world. While there have been discussions about debt restructuring, debt rescheduling or some form of liability management exercise, this debate needs to be handled with extreme care and should not be initiated before the implementation of the fiscal and reform measures described above. Any debt liability management needs to occur with a backdrop of sound economic leadership and serious austerity measures.

We do believe that the banking sector needs to contribute to Lebanon’s fiscal consolidation efforts. However, artificially and simplistically reducing the interest rate on the government’s debt will distort a market already heavily distorted by unconventional BdL monetary policies and will do little to put Lebanon’s public finances on a sustainable path. The banks’ reluctance to engage in this discussion at this stage is based on their legitimate desire to protect their commercial interests, as well as well as the principle that debt alleviation must not be offered when public management remains extremely poor and public finances continue to deteriorate. Past experience domestically and previous banking “packages” around the world substantiate that view.

Instead, Lebanon’s banks should play a key role in the debt management review plan. This can potentially include front loading some of the financial assistance to alleviate short term government budgetary pressures (as of 2020) including the possibility of a local “Brady” plan. Given that the banks and the sovereign are now joint at the hip, coordination is imperative and discussions should result, as required, in a voluntary debt service or debt re-profiling plan which, together with fiscal austerity measures and structural reforms will demonstrate a clear path to sustainable debt management.

On the monetary front, BdL has adopted a more interventionist stance to protect the country’s macro financial stability. This advanced form of monetary policy experimentation, which was deemed necessary initially, increases systemic risks longer term and reduces hard currency liquidity in the system. Besides burdening the BdL with a budget financing mandate it exacerbates the eroding confidence in the financial system. Following fiscal consolidation steps, we would like to see in due course an unwinding of these measures. The fact the recently announced measures include another such fiscal “transfer from the BdL is cause for concern.

IV. Enhance Communication and Strengthen Governmental Coordination

When confidence is eroding, policy makers need to communicate more frequently and more clearly in order to inject confidence among stakeholders that remedial actions are being taken. The key stakeholders include bond holders, local and international banks, credit rating agencies, the World Bank, the IMF, other multilateral agencies, research institutes and most importantly, the general public. For instance, taking more than seven months to ratify a budget should be a cause for consternation not celebration. Delayed disclosure of Ministry of Finance statements, including key figures such as the budget deficit, only increases nervousness.

Of equal importance is the need to address Lebanon’s persistent political stasis. The country is in desperate need for better coordination among all state branches and particularly within its executive arm to enable various government bodies to act in unison especially at a time of crisis where quick and often painful decisions are required. This will require a new governance framework to enable faster decision making while maintain checks and balances in place. Tangibly, the government needs to establish an economic management team, which meets frequently and discloses progress in a timely fashion. Having such sound communication plan also enhances discipline and accountability.

V. Adopt Structural Reform and a New Economic Model

On the structural reform front, as discussed in our paper of 2017, and as highlighted in the McKinsey report, Lebanon is in dire need of a new economic model. Lebanon’s current model is underpinned by the consumption-centered nature of its economy, with low domestic savings and persistent reliance on external resources to compensate for the country’s large trade deficit. More significantly, the Lebanese economy has traditionally been dominated by the public sector, construction, tourism, financial services and small retail-oriented trades. With the exception of financial services, those sectors operate with medium and low skilled workers, creating limited opportunities for the country’s traditionally skilled labour force thereby aggravating Lebanon’s competitiveness gap. Most of those sectors are also inward looking, endogenously contributing to persistent large trade deficits and the continuous need for hard currency inflows.

The fiscal consolidation plan needs to go hand in hand with a new economic vision for Lebanon which addresses its persistent current account deficit. Lebanon’s economic model, which essentially consists of exporting its most talented labour force, so that it can repatriate remittances and sustain this vicious balance of payment circle is deeply flawed.

The government-sponsored McKinsey report in 2018 identified a number of growth areas. Among those, the tourism sector, the business and outsourcing services, as well as a select number of high value add industrial (pharmaceuticals, wine, artisanal products, fashion and cosmetics) and agricultural (higher value crops, medicinal cannabis) segments deserve special attention. All of those growth measures have the triple benefits of stimulating growth, attracting inflows, and creating fiscal receipts.

This area has been well covered in our paper of 2017 and remains relevant specially to boost growth and reduce chronic current account deficits by boosting cross-border services receipts.

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While Lebanon’s challenges seem insurmountable and the corrective measures quite drastic, it is difficult to overestimate the existential threat a full-blown economic crisis represents. Lebanon’s economy will be revived only if strong political and economic leadership are re-established and substantial reforms and a comprehensive fiscal program are adopted and implemented. Such a backdrop will restore confidence, increase investment and lead to better growth prospects.

In the absence of such reforms, Lebanon’s famed resilience, its social fabric, its proud history and future are at risk:

It is time to save Lebanon.