May 2020 - ATFL

Without meaningful reforms Lebanon and its people face certain catastrophe. The lira will continue to plummet, poverty will affect more than 60% of the people as basic needs become even more expensive, and any semblance of a sustainable economy will evaporate. The government will not have money to support basic food, fuel, and water subsidies, and the Lebanese will feel like refugees in their own country.

As Michael Young, editor of Diwan, recently wrote in the National, “There are two paths open for Lebanon today. There is the path of going to the International Monetary Fund and accepting a reform plan that permits the institution to disburse funds to Lebanon. Or, barring that, there is the path of bankruptcy, state collapse, chaos, possibly famine, and mass emigration.”

Why is his prognosis so dire? In many ways, the Lebanese themselves helped sustain a culture of corruption as they became dependent on the political elites for their jobs, material needs, and social services since the late 70s. The warlords and their allies were re-elected time and again reinforcing the clientelism system that awarded loyalty over competence. Now facing near financial ruin and tired of corruption, the people want to change the system, and the traditional leaders are resisting despite the terrible costs to the people.

So now the IMF has been invited in to negotiate with many of these same oligarchs a way forward out of the economic horror show that is Lebanon’s economy. It will require that Lebanon adopt tough measures to clean up its house, many of which will require austerity, making life even more difficult for the people. And the battle lines are already being drawn. The initial Economic Plan adopted by the Council of Ministers raised the hackles of the banking community and the Central Bank because it targets their resources as fair game for fiscal restructuring. People who benefited from the “financial engineering” that enabled the country to stay afloat despite a huge debt are reluctant to share the burden of restructuring the financial sector.

Many claim the political class is incapable of reforming, thus dooming adoption of a viable IMF plan. But, as Young writes, “Lebanon’s political actors are also focused on their own survival,” which may make reform rather than devastation a necessary choice.

The IMF negotiations have started. The assumption is that it will take at least two months to reach an agreement, and then the external funding may begin…and that’s the optimistic scenario. Early indications are that Lebanon is asking for an immediate infusion of $900 million as part of a $10 billion dollar package. But Lebanon doesn’t have to wait. There are a number of reform bills either passed by or sitting on Parliament’s agenda that would be positive steps. A critical step is reform of the electricity sector which includes creating an independent oversight regulatory body, reducing the role of vested interests in fuel and generator suppliers, and rate.

Which brings us to the hostile environment surrounding the negotiations. For 12 years, the electricity sector was the purview of Free Patriotic Movement party under Gebran Bassil, who has been the target of much criticism for his role. He has now conveniently turned into a reform advocate and is criticizing others for allowing the country’s economy to deteriorate. The bankers do not want to see their profitability become a target of debt restructuring affecting their biggest clients and their own balance sheets. So they and the Central Bank are submitting their own plan to the IMF for restructuring the banking sector. Unfortunately, these are only the early tests of the capability of the Diab government to forge the consensus needed to enact a reform and recovery agenda.

There are at least two other sources of criticism of the Economic Plan that merit attention. The first is the avoidance of tough decisions about government expenditures in terms of the public sector. Government jobs have long been a plum for leaders to award loyalty. As Reuters noted, “Sources familiar with the IMF talks say the plan fails to set out a clear roadmap of reforms for a patronage-ridden public sector, looted for decades by the sectarian power-brokers and former warlords who dominate Lebanon’s confessionally-based politics and have run its state onto the rocks.” It quotes Nasser Saidi, a former economy minister and vice-governor of the central bank, saying “They are trying to present a plan that the IMF will buy into, and that the international community and creditors will buy into, without really addressing the deeper problems in the country: reforms.”

The other critique is that “It is missing a central component: an economic and social protection response inevitably intertwined with the former that is human-centered, inclusive, and aims to realize greater equity.” Both this analysis and a paper produced by the Lebanese Center for Policy Studies lament that the majority of Lebanese do not have minimal social security protections, health insurance, pensions, worker compensation, and other services that are the hallmark of socio-economic rights. Many worry that “The pivotal discussions and compromises made at the table this week will have ripple effects for the years to come, and could render the Lebanese Government’s Financial Recovery Plan either a step forward in the right direction or just another plan that will lead to a deeper social and economic crisis.”

The next two months, or longer, will cast a harsh light on willingness of the political elites to enable the Diab government to navigate through their competing interests and press adoption of a plan approved by President Aoun, Speaker of Parliament Nabih Berri, and the members of parliament. The government does not have to wait until the ink is dry on an IMF agreement. There is much it can do to build trust with the people by reforming the electricity sector, reinforcing an independent judiciary, implementing legislation to reform government procurement procedures, and prosecuting corruption. Any of these steps would be a clear indication of the government’s intentions and its willingness to take on vested interests so that it can begin to rebuild Lebanon.

Previously, I compared Tunisia and Algeria with Lebanon to look at key factors that might influence the outcomes of popular demonstrations in the countries. I noted that “The core issues in Lebanon, Algeria, and Tunisia center on the economy, inequality, corruption, and lack of institutional coherence and government integrity.” Of course, that could be said about most of the MENA region, my point being that despite macro-level differences, these states are not immune to their people expressing discontent with the status quo, even after major shakeups as in Tunisia.

Iraq and Lebanon also have much in common. In fact, it was the Lebanese model of governance that was imposed on Iraq during the disastrous occupation of that country by the US in its attempt to democratize institutions and processes in the country. The “Lebanonization” of Iraq has led to the same quagmire against which Lebanese are now demonstrating: poor governance, a faltering and moribund economy, and lack of respect for rule of law.

I am quite aware of the differences in population (Iraq 39 million vs 6 million), literacy (Lebanon 95% vs 50%), and life expectancy (+9 in Lebanon). But they have similar 2019 per capita incomes (~$19,000), obesity rates (30%), and massive youth unemployment (>30%), and the governments are struggling to find their futures with new, largely technocratic governments and a focus on economic and political reforms. A deeper look is instructive.

Most of the new Iraqi Prime Minister Mustafa al-Kadhimi’s Cabinet members are technocrats with long histories of working in their areas of expertise, with no or little affiliation with political parties. While this is only partially true in the new Lebanese Prime Minister Hassan Diab’s government, they did manage to agree on inviting the IMF in to help engineer the country’s economic and social recovery and adopted a rather robust series of reform intentions.

Iraq’s cabinet also adopted a very proactive reform agenda which includes holding free and fair elections under a new electoral law, containing the pandemic and building a stronger nationwide health system, restricting weapons to state and military institutions, developing a comprehensive economic reform agenda, launching a national dialogue inclusive of all sectors of the society, protecting the country’s security and sovereignty, fighting corruption, promoting the values of a common citizenship, and caring for refugees and IDPs.

Point by point, and there is much more detail in the linked article, this could also be Lebanon’s blueprint as it struggles with challenges, from controlling Hezbollah’s armed forces and political influence, to reaching out to demonstrators, protecting the country’s borders, developing a national rather than sectarian identity, and managing the refugee crisis.

A major structural difference between Iraq and Lebanon is that despite Iraq’s early attempts in the 1930s to build democratic institutions, subsequent revolutions, coups, and dictatorships made that impossible. In Lebanon, at least older generations can recall, pre-civil war, a functioning bureaucracy and government organizations that served some of the people most of the time. Since then it has held elections from time to time, parliaments came and mostly stayed, and the courts functioned in a fashion such that the notion of government institutions endured.

In both countries, youth hold political elites responsible for the poor governance, corruption, and weakened sovereignty that affects all dimensions of society. This is another similarity, as the Al-Monitor article linked above notes, “And while the young may be in the lead, the diversity and inclusivity of the demonstrators is a trait shared with those calling for change in Lebanon and elsewhere in the region and beyond, including Hong Kong.” It goes on to note that Iran’s Supreme Leader Ayatollah Ali Khamenei said that the priority for the Iraqi and Lebanese governments is “to cure insecurity.”

In assessing how the US can be helpful, another common position becomes clear. “Former US diplomat Edward Djerejian told Al-Monitor that he would advise US policy-makers to ‘do no harm’ in Iraq. ‘Do not get directly involved,’ he said. ‘Promote our values, but without any false hopes that we’re going to be the instrument of change in any way in these countries.’” This is reflected in this administration’s stance which, as Secretary of State Mike Pompeo has done, supports the rights of the demonstrators, deplores public violence, and threatens sanctions against those stealing the national wealth and “killing and wounding peaceful protestors.”

Lebanon’s “model” is also evident in that the new Iraqi Prime Minister’s partnerships with Iraqi President Barham Salih and parliament Speaker Mohammed al-Halbusi are referred to as the “three presidents,” and it appears that PM Kadhimi’s relations are very cordial with the others.

Two other useful key points of comparison are the role of the US military and engaging international financial institutions. The US has been central to bolstering, training, and professionalizing the Iraqi and Lebanese militaries. In both countries, the relationship is solid, a source of national stability, and highly regarded by the US Defense Department. The US can be instrumental in engaging with the IMF, the World Bank, and other sources of technical and monetary assistance to support the reform process in both countries.

Finally, of paramount importance is that both countries have contracted another virus called Iran. Neither wants to be a battleground between the US and its friends and Iran and its proxies. Both countries seem to have strong movements towards building non-sectarian national identifies which are critical to supporting values of sovereignty and independence.

It will be more than interesting to assess how these two countries, one that was once the intellectual center of the Levant, the other the industrial leader of the region, move forward in the coming months and years to achieve their visions of security, stability, prosperity, and unity.

Month: May 2020

Iraq and Lebanon Struggle for a Higher Ground