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.