Month: July 2022

Protecting the assets of small depositors has become a battle cry among those fed up with the larceny ascribed to the banks’ handling of deposits under the “financial engineering” scheme of the Central Bank. Whether coerced by the BdL (Banque du Liban – The Central Bank), as some claim, or driven by the dream of “too good to be true,” the result is the same. Lebanon has a dysfunctional banking system and it is viewed as such by much of the public.

While it is important to avoid tarnishing all of the banks with the same brush of mismanagement and greed, the results speak for themselves: an overbanked sector, with too few banks having solid foundations that will pass a rigorous audit; and a lobbying group, the ABL, that routinely opposes greater transparency and legislation conflicting with the enshrined interests of their largest depositors and shareholders, often the same people.

Based on the findings of one poll after another running up to the elections, corruption was named as the greatest issue facing Lebanon. This has also held true in rankings looking at transparency and the overall business environment. This is partially due to the obfuscation of the bureaucracies that consider contracts as a legitimate means of supporting their community. Another reason is the lack of incentives for financial actors to do what is right – whether it relates to contracting, price controls, capital controls, or just doing their jobs transparently and dutifully. Of course, the lack of an independent judiciary looms in the background as a pall over the business environment as well – not being able to have recourse to the courts without bribes or favors dampens the enthusiasm of investors and businesses to put up the capital needed to get started or expand.

If you are a bigger fish, you can always do business elsewhere, or choose to play the payoff game to suppliers, contractors, officials, and others who salivate at the prospect of your business. But what about those small depositors whose pensions and salaries were supposedly tucked away in the commercial banks? Well, until now, they are the real socio-economic losers in Lebanon. Able to withdraw only a fraction of their money and at unfavorable exchange rates, the middle and lower classes have seen their assets impounded by informal capital controls which only favored those who can move their money abroad.

So what is the government prepared to do to help the small depositors recover their funds at an exchange rate that doesn’t make their situation more intolerable? The Institute of International Finance (IIF) in their latest report on Lebanon, stated that, “the government’s clear commitment to return deposits is essential to restoring confidence in the Lebanese economy and to the credibility of the economic recovery plan.”

Various proposals to repair relations with depositors share at least three components: qualification for relief below a certain level of deposits; a unified exchange rate; and a timeframe for accessing the funds. The minimum proposed has varied from accounts with under $100,000 USD to those of under $200,000 USD. The current caretaker government is at the lower end while the upper limit is favored by international institutions and lenders who note that this represents 95% of the total number of bank accounts. The IIF also points out that this should be done over a short period of time, although others have mentioned 10-15 years as the timeframe. More progressive analysts argue that access to the accounts in the short to medium term (one to three years) is critical to restarting the economy for consumers making daily purchases and for small businesses with respect to supplies, expansion, and procurement of goods and services.

There is also sentiment for excluding from the accessible funds the accumulated interest on foreign currency deposits above comparable US interest rates – i.e. those monies paid out under the financial engineering of the Central Bank, about $12 billion from 2015-2019. There is also a proposal to factor in those Lebanese deposits converted to US dollars as the economy imploded following the October 2019 demonstrations, estimated at some $10 billion.

The bottom line is that $22 billion can be deferred until the overall system is rebalanced and credibility gets restored to the system through the adoption of the IMF package of reforms that would ultimately restructure the banking system writ large, including the BdL itself. Once a unified exchange rate is set – and at a much lower value than the current array of market rates – the BdL could then rein in its printing of the Lebanese currency to allow banks to meet the demands of depositors for their funds, in Lira.

The other option for supporting the small depositors is some combination of access to accounts and issuing government securities based on various government assets that could be held for longer periods of time (5+ years) to pay interest to the bond-holders. Variations of this option have been proposed utilizing state entities that could be leased to the private sector to operate such as electricity, telecommunications, the airport, Middle East Airlines, and other entities owned by the government but lacking sufficient oversight. Another option is packaging the government’s broad real estate holdings to produce revenues for restitution and investment; and a similar fund for potential revenues from offshore oil and gas exploitation that could be held for future generations.

The other option for supporting the small depositors is some combination of greater access to accounts and issuing government securities based on various government assets that could be held for longer periods of time (5+ years) to pay interest to the bond-holders. Variations of this option have been proposed utilizing state entities that could be leased to the private sector on an operational level such as the electricity sector, telecommunications infrastructure, the airport, Middle East Airlines, and other entities that are owned by the government but with insufficient oversight. Another option is packaging the government’s broad real estate holdings to produce revenues for restitution and investment; and a similar fund for potential revenues from offshore oil and gas exploitation that could be held for future generations.

These are not fantasies, but feasible solutions requiring political will and serious management. While Lebanon has the skills and the talent to deliver these remedies to all depositors, the commitment to make it work transparently and equitably is lacking. Moving on the issue of restoring confidence in the banking system begins with honoring those small depositors who make up the bulk of those invested in the Lebanese banking system.

On a recent trip to Lebanon, I met with NGOs, civil society organizations, and individuals who are working to restore ‘the heart of Lebanon’, the rural and urban communities that host those most affected by the economic dislocation of the country. This profile features Beit el Baraka, one of the most prominent entities working on sustainable solutions. It has undertaken several sectors of activities to restore some normalcy to everyday life in Lebanon by creating opportunities for self-advancement, a sense of community and hope, especially for women and marginalized groups.

Beit el Baraka was founded by Maya Chams Ibrahimchah, a well-known philanthropist and entrepreneur, who sees enormous potential in the people of Lebanon. Their mission is, “to ensure dignity to hard working Lebanese citizens by assisting them in their struggle with the increasing cost of living. In a spirit of respect and support, we give them access to food, decent livelihood, medical services and education.” More broadly, their vision is, “a Lebanon where families can live a secure, valued, and respectable life with access to social security, education, and retirement pensions for all.”

Their programs include:

Forsa

A fundraising effort with MUREX to enable private schools to continue to operate through donations earmarked for students, teachers, and physical facilities. Over 20,000 students were impacted in the 2021-22 academic year.

Agricultural Renewal and Regeneration

Providing the means for extensive plots of organic farming in various regions of Lebanon, Beit el Baraka enables the growing and processing of ingredients for Lebanese foods, having created a supermarket for distributing imported products and locally produced items within Lebanon in addition to a product line of food products for overseas export, thus creating jobs for women and marginalized groups, and generating incomes to give hope during these times of growing poverty.

Reconstruction and Renovation

From local homes to the Sursock Museum, hundreds of homes and small businesses devastated by the Beirut Port explosion have been renovated through Beit el Baraka’s program to utilize local craftsmen and women to repair structures.

Beit Kanz

The bottom floor of the Museum is in turn made available to host Beit el Baraka’s gourmet shop and boutique that features products from local chefs and artists. The food selections are amazing and based on traditional Lebanese recipes. The boutique includes furnishings, pottery, embroidery, textiles, and other products reflecting the cultural traditions of Lebanon.

What is most important about the projects of Beit el Baraka is their emphasis on rebuilding Lebanon from the bottom-up. As noted in a recent policy brief from the Lebanese Center for Policy Studies on the role of entrepreneurial development in rural Lebanon, it is precisely these kinds of efforts that are essential to Lebanon’s recovery. “As a bottom-up approach, it can a) help reform and improve bureaucratic and regulatory frameworks to better design an efficient entrepreneurial ecosystem that encourages entrepreneurs to start new businesses. b) It can also reduce time and cost for the private sector to formalize businesses and have better access to resources and finances.”

This policy vision is in tune with Beit el Baraka’s emphasis on local initiatives scaled to achieve national outcomes. The policy brief goes on to say that, “Viable entrepreneurial cultures foster income creation and strengthen social, environmental, and economic sustainability in rural areas, as well as achieving a balanced territorial development of rural communities.”

By emphasizing improving the livelihoods of especially vulnerable people, and doing so by achieving sustainable results, Beit el Baraka is focused on making life in Lebanon more bearable, teaching people new skills, endorsing the role of women entrepreneurs, and bringing hope where there is now desperation. For more information about Beit el Baraka and how you can support its projects, visit its website here.

Although there is no current decentralization framework in place, it has been a topic of debate among politicians and analysts since it was first raised in the 1990 Taif Agreement that ended the civil war.  Since that time, this topic has become a staple among political voices seeking to protect their geographic hegemony rather than a more effective allocation of powers among various governing bodies.

Other than political rhetoric and political statements that are sometimes misleading, the most promising proposal was introduced in a 2014 plan by Ziyad Baroud. As then Minister of the Interior and Municipalities in a previous Mikati government, he presented it to Parliament in 2018, where it has remained in committee ever since. If implemented, it would provide a comprehensive and actionable strategy for enhancing local capacities for self-governance.

But what does decentralization mean, in the context of Lebanon?  There are three dimensions to consider: political, administrative, and fiscal. Each includes allocating functions in varying degrees depending on the power being transferred from a central government to subnational jurisdictions. In Lebanon, the goal is to incorporate all three types into a legal framework that assigns robust autonomy from the central government to other entities.

But, noted in the above cited report by the Freidrich Naumann Foundation for Freedom, there is no judicial independence to implement steps to eliminate opportunities for corruption, set out parameters for relationships among the 1,108 Lebanese municipalities and 8 regions, and set criteria for the role of the central government. Baroud addressed this issue by creating 33 sub-districts to consolidate the functions to be allocated locally.

Rather than dissecting Baroud’s proposed legislation, which itself is subject to debate and amendment, it may be more useful to develop an understanding of why decentralization, rather than cantonization or a federal system, offers the best opportunities for Lebanon’s political integrity and economic development.

As the Foundation report mentioned, “Decentralization is not an end in itself; it is a means of ensuring greater local participation, more accountability, and a more sustainable and enduring democracy. The current Lebanese crisis has created strong momentum for revisiting decentralization, particularly as the notion gains traction in Lebanese civil society.” But note the objectives – increased citizen input, greater accountability, and strengthening democracy. Are these characteristic of the current debates about governance? In spirit, possibly, but a concrete and viable framework is essential.

A key characteristic of decentralization is to establish locally-elected legal entities with specific responsibilities that are autonomous from the national government. If it is to succeed over time, these responsibilities must include fiscal and political autonomy from the national government, not simply allocate some administrative duties to centrally-appointed bureaucrats. This has been the weakness in decentralization as it now exists in Lebanon. Power is passed to administrators who are appointed by the central government. This is not autonomy.

In another paper written by Baroud and published by the Middle East Institute (MEI), he exposes the key weakness, “For all groups, however, decentralization is not neutral: it adversely affects the “sacred” political arena by shifting the balance of power from the central to the local government and hence limits the provision of resources that are vital to politicians’ interests. This goes some way toward explaining the willful failure to implement widespread administrative decentralization as a reform more than three decades after Taif.”

The current political leaders see decentralization as a threat to their political and economic hegemony over their fiefdoms. While it is true that Prime Minister Najib Mikati created the commission that prepared the draft law in 2012, his government, then, was unable to move it through Parliament, as is likely the case now. The MEI article concludes, “This draft law — the most recent of its kind — does not pretend to be perfect and is open to additions and further development, but it undoubtedly offers an integrated platform for decentralization. The draft had to wait until 2016 before reaching the Lebanese parliament. Five [six] years later, it is still “under discussion” in an ad hoc parliamentary committee, which says a lot about the pace of reform in Lebanon.”

What is the threat of greater local participation, accountability, and governance? With a ready-made formula for moving ahead, there should be no further delay to giving the Lebanese the tools and authority they require to reconstruct their societies. As Baroud opines, “The current Lebanese crisis has created strong momentum for revisiting decentralization, particularly as the notion gains traction in Lebanese civil society.”

Building on this momentum, decentralization can be implemented efficiently in the desired form, provided the government is open to change and to a new distribution of power. Given the paucity of resources and collective leadership at the top, perhaps the time has come to enable grassroots entities to seek alternative approaches to building a strong, more resilient governing structure for Lebanon.

Decentralization is a tool to maximize citizenship. In many countries, it is change at the municipal levels that creates the ferment that leads to significant change throughout the system. As the Naumann Foundation paper argues, “Furthermore, through institutionalized participation mechanisms the civic oversight at the local level could be enhanced and lastly promotion of Public – Private Partnership in local governance, the adoption of a gender quota in the electoral law, and a sustainable fiscal and financial system should be realized.”

This structural reform is not magic; nor will it happen quickly and spontaneously. It instead starts with making the central government more transparent and effective, and elevates the judicial system as an independent and co-equal branch of government. “Otherwise,’ as an article in the National notes, “decentralization could have the contrary effect and increase corruption as well as end up being more divisive than inclusive․ If a well – functioning central government is non–existent, the risk of shifting corruption on a local level would increase…”

There are no guaranteed solutions to Lebanon’s multiple crises. What is certain is that it cannot continue to be phlegmatic in its response to the needs of the people, sclerotic in its governing institutions, and lacking in the courage to make change happen, even in the hybrid mess of sectarian politics. Letting the people begin to rule themselves within local entities that maximize their potential will pay benefits throughout the society.