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.
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.