Chinese Pearls Circling Lebanon – Will the Government Answer the Siren Song?

Much has been made of Hezbollah’s call to look east to China rather than deal with the IMF and the West which they believe pose an existential threat to their hold on power in Lebanon. Analysts seem to understand that the debt diplomacy perfected by China in Asia and Africa can pose a real threat to Lebanese financial independence, but don’t know how that could be any worse than the current situation. What hasn’t been discussed in any great detail is why China wants to help Lebanon in the first place, given its financial and political instability, especially since there is no oil available as collateral.

For that perspective, one needs to zoom out for a broader perspective and consider the goals of China’s Belt and Road Initiative (BRI), its proposed global highway and waterway to open up new markets, secure global supply chains, and maintain Chinese access to demand and supply mechanisms that ensure its economic growth for generations, thus contributing to domestic stability.

As reported on by the Begin-Sadat Center, “The initiative has both land-based and maritime components. The different sub-branches of the Silk Road Economic Belt (a series of land-based infrastructure projects including roads, railways, and pipelines) and the 21st-century Maritime Silk Road (made up of ports and coastal development) would create a multinational network connecting China to Europe and Africa via the Middle East. This will facilitate trade, improve access to foreign energy resources, and give China access to new markets. The two schemes are inseparable, and they are meant to be implemented in parallel.”

With Chinese investments in the Middle East approaching some $100 billion in 2020, it has become a significant player for both the energy suppliers and the not so wealthy states that need to undertake large-scale infrastructure projects. Lebanon is a prime example of a target-rich country for Chinese companies – poor credit risk, critical infrastructure needs that require external financing, and a government that does not want to change its corrupt ways of doing business.

Ports and industrial parks are key links in the BRI, creating an economic chain linking China to Mediterranean via projects in Pakistan, Oman’s Dukum Port, UAE’s Khalifa Port, Saudi Arabia’s Jizan Port, Djibouti, Port Said in Egypt, Israel’s Ashdod and Haifa ports, and similar facilities in Syria, Greece, Turkey, Baku, and potentially Libya. This network positions Chinese companies to play a significant role in reconstruction projects in Iraq, Syria, Lebanon, and Yemen.

As an article in Asia Times indicates, “But there are other dangers for countries in the Middle East that might consider taking on too much Chinese debt. Chinese loans are often collateralized against infrastructure projects, and when the loans sour those projects are at risk of appropriation.” This has been the case in Myanmar and Zambia, for example. It adds, “For Middle East countries considering ways in which to rebound from the Covid-19 pandemic, or just maintain lines of credit and funding following years of poor growth and/or excessive borrowing, Chinese debt may seem an appealing option. It comes with no conditions, and little pressure for governance reforms.”

China is well known for providing funding for projects with doubtful commercial viability in order to become entrenched with the political leadership. However, seldom is debt forgiven, but renegotiated to maintain dependency that benefits China. Lebanon is not immune to the lure of Chinese interest in, for example, carving out a space in the port of Tripoli where it already is providing deep water excavation equipment to deepen the port facility. It has also expressed interest in the electricity sector, waste management, and a north-south railway that would then connect to Syria, which would run afoul of the Caesar sanctions regime.

Foreign Policy put it succinctly, “China, although it has little historic political presence in the region, is waiting in the wings, prepared to replace the United States as the country’s dominant outside actor.” With the IMF negotiations on hiatus and barely the slightest movement by the Lebanese government towards critical reforms, the dire situation in the country deepens, as it faces catastrophe in the coming months. The promise of an easing brought about by turning to China may seem appealing to some as an interim solution but certainly one that does not bode well for Lebanon’s security and independence.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.

Looking to the Past for a New Formula for Coexistence

As a broad array of analysts bemoan the current situation in Lebanon, a moral authority raised his voice to plead for the country’s return to one of its principle guideposts, neutrality in foreign affairs, especially regional politics. Maronite Patriarch Bechara Boutros Rai has dedicated two recent sermons and several interviews on the issue, and won quick endorsement from politicians outside of the ruling troika.

Cast as “disassociation” in the Baabda Declaration by the government of President Michel Suleiman and Prime Minister Najib Mikati in 2012, it was approved by all parties in the government including Hezbollah, which had begun fighting in Syria in support of the Assad regime by that time.

On July 16, another former Prime Minister, Saad Hariri, said its meaning is to disassociate the Lebanese from Syria, Iran, and all the problems that surround Lebanon. Again on July 21, his Future Party called on everyone to deal positively with the Patriarch’s proposal in the hope that it will constitute a road map to get out of the crises that the country is witnessing.

After a discussion with the Kataeb Party, the Patriarch mentioned that he hope that all Lebanese will be united on his call for neutrality. “We hope all Lebanese will show a unified stance in order to reach a resolution from the Security Council and the UN stipulating that Lebanon has an active neutral system that should be respected by all countries.” He further commented that “When we engaged in alliances, parties, and military acts we became fully isolated from Arabs and the West.”

An article in the Arab News elaborated further, noting that “the country’s leading Christian cleric accused Hezbollah of sidelining the Lebanese state, and said there is a ‘sort of control from Hezbollah on the Lebanese government and the country’s policies.’ He added: ‘Lebanon does not want this.’” Lines of opposition and support were quickly drawn.

In the article, Lebanese businessman Bahaa Hariri, the eldest son of former Prime Minister Rafic Hariri, said that Lebanon must be freed from the crisis it is facing and regain its sovereignty. Referring to the patriarch’s comments, Hariri said: “His voice resonates in all of Lebanon. The country has to maintain its balance. It can either survive and prosper, or collapse and fall.” He elaborated, saying, “Lebanon is a country of homogeneity, pluralism, and coexistence. Today, our country is isolated from the whole world but this is not who we are. Our identity consists of constructive and positive neutrality, and a refusal to engage in (violent) conflict.” He further called out President Michel Aoun for appealing to the Patriarch on behalf of Hezbollah to moderate his statements.

Hezbollah has repeatedly criticized Rai’s stance, sending a number of delegations to him saying that neutrality only serves the interests of Israel and the US. These included President Aoun, the Iranian Ambassador, current PM Hassan Diab, and Aoun’s son-in-law MP Gebran Bassil. The Patriarch has not budged from his initial call.

Lebanese Forces leader Samir Geagea, Future Movement leader, and former PM Saad Hariri, Progressive Socialist leader Walid Jumblatt, Phalange party leader Sami Gemayel, and other leaders declared their support for Lebanon’s neutrality as central to its recovery and survival, despite Hezbollah’s insistence that Lebanon needs an alternative to the IMF-led recovery strategy. Neither Iran nor China, which Hezbollah has proffered as alternatives, could fill this roll. Cash-strapped Iran is in no position to bail out the country and China has not shown any inclination to take on the massive effort required, preferring to select infrastructure investments that support its Belt and Road Initiative.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.

Headlines Tell the Story of Lebanon’s Economic Decline

A review of the headlines in the latest Byblos Bank report produced by its Economic Research & Analysis Department provides a quick overview of the erosion in Lebanon’s economy. For example, the quality of living index for select Arab cities measured this past month puts Lebanon in front of only Cairo and Casablanca, third from the bottom, having dropped 14.2% in the past two years. In cost of living, on the other hand, Beirut ranks second highest among Arab cities. While some may think that the fact that the currency in circulation is up 67% is good news, it only reflects the lack of dollars in the system as the Central Bank prints more liras while their value has diminished upwards of 80%. So it’s a smoke and mirrors of more is less.

Revenues through the port of Beirut are down 41% in the first four months of 2020, and the Central Bank (BDL) is preparing to support some 300 essential imported items by making dollars available for their purchase. Hotel room yields, that is, the profitability based on occupancy, is down some 86% in the first five months of this year, and real estate transactions, considered a safeguard against the falling lira, are up 24% in the first half of 2020.

These numbers and many more paint a picture of deterioration that complicates the steps needed for recovery. Remedies based on credible reforms are part of an interlocking web of increased revenues, decreased expenditures, accessible cash flow, sustainable credit lines, and institutional creditworthiness that is extremely difficult to prioritize, not to mention reducing corruption, increased transparency, and an independent judiciary!

Two areas of consensus are injecting more capital liquidity into the banking sector to help depositors and enable reliable transactions; and generating more funds for poverty relief and an adequate social safety net including reasonably priced and available foodstuffs and consumer items, funded in the short term through international donors. This would also include strategies to boost private sector growth to generate jobs.

In another sign of the times, the Syndicate of Private Hospital Owners are preparing to sue the government to receive the roughly $300 million in back payments approved by the Parliament three months ago. These reflect services provided to the Ministry of Public Health, the LAF, and ISF for 2019. Given the rising costs over the past year, the current rate does not cover the costs of hospitalization and the vanishing supplies of medicines and equipment which are 60-70% higher that the prices established by the rate-setting bodies. According to the owners, the current rate for an overnight stay including the room, food, and basic medicines and supplies is around $10 at today’s currency value. Given that most suppliers are only dealing in dollars, many of the supplies have been added to the CBL support list for critical imports. The Ministry of Finance gave the go-ahead for another $6 million in arrears to be paid to additional 2019 dues.

On the heels of a claim that bankers permitted upwards of $6 billion to leave the country since the demonstrations began in October while simultaneously refusing withdrawals by small and medium depositors, Bank of America critiqued the current state of the financial sector. It noted that fiscal revenues had decreased some 9.1% annually in the first four months of 2020 while spending was largely unchanged. It also estimated that the budget deficit would be some $800 million larger than that projected by the government. There is a mixed blessing expected from the opening of Beirut International Airport…more dollars into Lebanon with expats returning home, and emigration out for those who have alternatives outside of the country.

Finally, it is instructive to check the trade tally for the first five months of 2020. Almost all of Lebanon’s exports were down, except for a 20% rise in the exports of gold and jewelry, and a 37% rise in shipments of agricultural products. Switzerland took 92% of the exports of gold while Egypt absorbed 16.8%. Most of the agricultural exports went to the Gulf States.

So let’s look at these numbers through the eyes of the rapidly disappearing middle class Lebanese. People with large deposits in the banks are able to get their money out of the country since there are no formal restrictions at this time. Meanwhile, those with a middle class income can no longer withdraw funds to pay for their children’s schooling, their parents medications, or necessary consumer items. Gold is leaving the country legally. Agricultural goods are exported while Lebanese are going hungry. Now now that the lira is so cheap, the costs of vegetables and fruits are very attractive to overseas buyers who can pay more than the local consumers.

A very hot summer indeed.