UNIFIL and the Lebanese Army Prove Once Again to be a Worthwhile Investment

UNIFIL forces stationed in Southern Lebanon were able to position themselves on April 15th between the Lebanese Armed Forces (LAF) and Israeli troops to intervene before tensions broke out. Lebanon charged Israel with crossing the “Blue Line,” the controversial demarcated border between the two countries established in 2000. A “high alert” went out as Lebanese troops faced off with the Israeli soldiers, but UNIFIL intervened before things got out of hand. UNIFIL later stated that there were no infractions over the border.

During a visit in June of 2019, an ATFL delegation visited the LAF Southern headquarters and the Blue Line and were encouraged by what we saw. One critical task was bringing together Israeli and Lebanese military for a meeting every six weeks to discuss infractions and disagreements on the demarcation of the Blue Line, creating an atmosphere of dialogue rather than friction.

In our meetings we learned that UNIFIL conducts an average of 460 operations per day, including 75 with the LAF, to monitor infractions and enable the LAF to extend its operations in the south. We were informed that the LAF is capably carrying out its mandate, limiting infractions from Lebanon to a few minor incidents each month, mostly shepherds crossing the Blue Line. The Israelis are violating Lebanese airspace with more than 100 illegal monthly overflights of planes and drones as well as illegal incursions over the Blue Line for “security” purposes. The LAF requires more support to extend its reach more strongly in the south on land and in the Mediterranean Sea to better conduct operations to keep Hezbollah forces out of the area in line with recent UN resolutions and expectations.

By intervening to prevent an incident that could leader to “unintended consequences,” UNFIL demonstrated that it is a cost effective investment for the US, and that US support for the LAF has resulted in a capable, professional, competent, and American trained force when addressing its issues on the Lebanon’s borders.

Assessing the Recently Publicized Reform Plan from the Government of Lebanon

In early April, details of proposed economic reforms by the Lebanese government headed by PR Hassan Diab were leaked to the media. If approved by the Council of Ministers and the Parliament, it is supposed to provide a framework for negotiations with the International Monetary Fund (IMF) and international donors. While it has some helpful details about dealing with the budget deficits, restructuring the banking sector, providing support for the Lebanese currency, and efforts to crackdown on corruption and retrieve monies from capital flight.

ATFL asked its economic consultant, Samir El Daher, who served at the World Bank and has a career of advising public officials, for his assessment of what is public knowledge about the plan.

His response:

In a document released in early April, the Lebanese government finally “unveiled” its program of reform. With no understatements, the document describes the sorry state of the economy, untenable fiscal stance, and failing financial system. The diagnosis, neither novel nor exhaustive, is nonetheless striking in disclosing the level of losses incurred, and the magnitude of the fiscal and monetary adjustments required for the nation to emerge from the depth of the abyss.

Proposed remedies regarding taxation, exchange rate, public debt restructuring, and banking sector overhaul are broadly in line with conventional approaches for crisis resolution, although burden sharing formulas are yet to be defined in terms of loss distribution, and modes of potential compensation for those who will assume them. In any case, at this level of economic and financial system dislocation, there’s no myriad of solutions beyond fiscal consolidation, i.e. containing public outlays and increasing revenues, while restoring the rule of law to overhaul the system of governance and eradicate corruption that reached the level of state capture. Far reaching social protection measures must be an integral component at the forefront of any reform program.

The document addresses, although briefly, the critical agenda of structural, institutional, legal, and regulatory reforms debated ad nauseam in Lebanon over the years. What is required at this stage are tangible proofs of the government’s determination to proceed speedily with the reform agenda, freed from the shackles of crippling partisanship. Self-described as “made in Lebanon” – to assuage a segment of the national constituency wary of any foreign role in the reform process – the document “import content” [of expert opinion from outside Lebanon] is nonetheless conspicuous. Nothing wrong in that!

Given the staggering level of economic and financial losses, a criticism that can be levelled at this document is the absence of immediate corrective measures commensurate with the irresponsible, unbridled conduct of the nation’s financial sector policies for more than two decades. The extent of financial system disruption, measured by losses that will be incurred by the Central Bank of Lebanon and commercial banks, seems surreal for a small, US$50 billion GDP economy.

The Central Bank has accumulated losses of US$63 billion, with no one suspecting, preventing, denouncing, or sanctioning such losses. Far from it, this wild ride happened under the gaze and awe of a grateful nation, regardless of the opaque and discretionary way this institution was managed for a quarter of a century! It is a singular example of good governance, when the authorities, of a bankrupt state at that, express their lack of trust in the data disclosed by their own central bank and, in a telling act, “task internationally recognized professionals to conduct a full audit of central bank accounts …. and a full review of its financial operations over the last 5 years.”

Commercial banks, “the flagship, anchor, and pillar of the national economy,” with around US$20 billion in shareholders’ equity, have accumulated losses of US$ 83 billion – half the total value of their deposits. Losses are essentially the result of reckless exposure to sovereign risk (held by the Treasury and Central Bank) where 70% of bank assets have been dumped under the indolent watch of a complacent banking control commission – de facto an intrinsic arm of the Central Bank. In this bloodletting, the savings of the Lebanese people have evaporated or been confiscated, the reputation of the banking sector has been tarnished, and its future prospects all but compromised.

In parallel to its focus on the financial system and need to rebuild its failed architecture, the proposed program outlines the major fiscal consolidation effort required – 8% of GDP annually for 5 years – to restore basic budgetary equilibria. Lacking access to credit and battered by fiscal austerity, the economy would undergo a contraction of 40%, declining from US$49 billion in 2019, to US$30 billion in 2024. Such a bleak outlook calls for public policy measures and tools to slow the economy’s descent over the precipice, which however are largely wanting in the program.

The Lebanese Pound, the country’s mighty lira – invulnerable and immutable as per the central bank’s perpetual assertions – suddenly sheds half of its value. It is not difficult to measure the dire implications of such sharp economic downturn, and no less brutal devaluation, on the welfare and standards of living of the overwhelming majority of Lebanese. In this regard, the social safety net envisaged for the most vulnerable groups under the program, seems quite meager given the potential volume of claims [against the system’s assets] and the magnitude of needs.

UNIFIL and the Lebanese Army Prove Once Again to be a Worthwhile Investment

UNIFIL forces stationed in Southern Lebanon were able to position themselves on April 15th between the Lebanese Armed Forces (LAF) and Israeli troops to intervene before tensions broke out. Lebanon charged Israel with crossing the “Blue Line,” the controversial demarcated border between the two countries established in 2000. A “high alert” went out as Lebanese troops faced off with the Israeli soldiers, but UNIFIL intervened before things got out of hand. UNIFIL later stated that there were no infractions over the border.

During a visit in June of 2019, an ATFL delegation visited the LAF Southern headquarters and the Blue Line and were encouraged by what we saw. One critical task was bringing together Israeli and Lebanese military for a meeting every six weeks to discuss infractions and disagreements on the demarcation of the Blue Line, creating an atmosphere of dialogue rather than friction.

In our meetings we learned that UNIFIL conducts an average of 460 operations per day, including 75 with the LAF, to monitor infractions and enable the LAF to extend its operations in the south. We were informed that the LAF is capably carrying out its mandate, limiting infractions from Lebanon to a few minor incidents each month, mostly shepherds crossing the Blue Line. The Israelis are violating Lebanese airspace with more than 100 illegal monthly overflights of planes and drones as well as illegal incursions over the Blue Line for “security” purposes. The LAF requires more support to extend its reach more strongly in the south on land and in the Mediterranean Sea to better conduct operations to keep Hezbollah forces out of the area in line with recent UN resolutions and expectations.

By intervening to prevent an incident that could leader to “unintended consequences,” UNFIL demonstrated that it is a cost effective investment for the US, and that US support for the LAF has resulted in a capable, professional, competent, and American trained force when addressing its issues on the Lebanon’s borders.

Lebanon in the Age of Coronavirus

The pandemic is affecting Lebanon deeply, as it is globally, and its impact is being felt in three related circles: the health toll of the virus, the stress on the local economy from the lockdown, and the larger impact on the failing financial system. While it has not reached the level of other countries in the region, as of April 13, there were 630 confirmed cases, 80 have recovered, and 20 have died. Some have pointed out that this may be an under count due to uncounted visitors from Iran being cared for by Hezbollah. Reporting from the Palestinian and refugee camps has been inadequate to date but the Ministries of Health and Social Affairs have pledged to work with UN agencies and NGOs to coordinate efforts to combat the pandemic among the refugee populations.

A lockdown was initiated on March 15, with enforcement by the LAF and security forces in urban areas. It has significantly reduced business activity expect for purveyors of food, pharmaceuticals, fuel and energy, and other essential items. However, since the economy depends on US dollars for its external transactions, and without sufficient dollars in the banks, importers are unable to buy supplies. This has left some 200,000 Lebanese who have been furloughed from their jobs with little or no income. They are furthered punished by the devaluation of the currency (lira) and the spikes in prices for basic food and health supplies. Recent assessments from the World Bank and Human Rights Watch are that “more than half the population may not be able to afford food and basic necessities.” This scarcity is compounded by the fact that the government has yet to enact a formal policy with regard to access to lira and dollar accounts besides allowing Lebanese depositors to exchange up to $3000 for lira at a fixed rate that is still nearly 30% less than the fixed exchange rate.

The Lebanese government pledged to give needy families a one-time payment of 400,000 lira, about $150. How this and other support measures are to be implemented have not yet been publicized. The Social Affairs Ministry has allocated around $12m to provide food and medicine for 100,000 vulnerable families. While the Lebanese army has distributed aid packages in various locations, remote areas still have not received support and there is a lack of details on how distribution of future support packages will work. Given the lack of discretionary funds in the budget, the Ministry of Economy admitted that this aid would only support about a quarter of needy families.

Another step the government has taken is to freeze utility bills and other payments for a specific period. However, this has been met with pushback from NGOs that maintain that after months of unemployment and marginal subsistence, people who return to work will be unable to pay the suspended payments as well as mortgages, loans, and other bills. They are recommending that these payments be forgiven along with a policy to halt evictions for non-payment of rent.

In the health sector, the lockdown has been credited for avoiding a catastrophe to date in terms of number of infections. Hamad Hassan, the health minister, said the country has 1,250 ventilators across the country for all illnesses and just 700 ICU beds prepped for coronavirus patients. This includes both the public and private hospitals. Lebanese engineers and health officials at AUB have built their own ventilators using locally available components. However, sufficient production to meet projected needs requires more funding.

The only public hospital equipped to treat the virus is the Rafik Hariri Hospital. A source at the hospital said that while they have received donations from the UN and other agencies, they needed additional support and were literally operating donation to donation. Sadly, the Lebanese government is in arrears in its payments to the Hariri Hospital and all of the other public health agencies that provide services to retirees, government employees, needy communities, and others. It owes the hospital millions of dollars in dues for 2019.

This past week, news was leaked of a draft economic plan for reviving the economy, introducing fiscal reforms, and reducing Lebanon’s extraordinary deficit. I suppose one might measure its seriousness by the amount of opposition from political elites. Every major sectarian leader condemned the plan, mostly because it calls for “a phased restructuring of commercial bank balance sheets [that] would include a full bail-in of existing shareholders estimated at $20.8 billion in capital write-offs, with the remaining $62.4 billion covered by the ‘transitory exceptional contribution from large depositors.’ A special fund would compensate depositors’ losses, with the proceeds coming from a program that will track and recover ill-gotten assets.”

Experts disagree with the politicians and believe that the plan is moving in the right direction and would garner support from the IMF, which is critical for credibility with international funding sources. Steffen Reichold, portfolio manager at Stone Harbor Investment Partners, described the plan as a “serious blueprint.” “With a plan like this you could get the IMF onboard,” he said. “Putting the debt on a sustainable path, restructuring all key institutions, wiping out all the capital of the banks, introducing a flexible exchange rate, reforming the electricity company – this is all the stuff that would be on the IMF’s likely list of requirements.”

What upsets the politicians, from their remarks, is asking large depositors, who profited from the financial engineering by the Central Bank, to remit some of their gains. This would be supported by a haircut (reduction in the value of the asset) on the principal on Eurobonds and domestic debt.

The darkest days for Lebanon are ahead. The economic plan has yet to be sent by the Cabinet to the Parliament for debate and approval. Lebanese citizens and the refugees continue to get sick, and the health services are stretched to capacity. There are many good news stories of communities coming together to support those in need and calibrated social actions (respecting distancing guidelines) that create hope in the face of the disasters people are experiencing. But much more is needed and it begins with the politicians making the country’s multiple crises their first order of business, not their partisan constituencies.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of the American Task Force on Lebanon, a non-profit, nonpartisan leadership organization of Lebanese-Americans.