Avoiding Economic Failure: Can Lebanon Do it?

Friday, November 8, 2019
Opinion by Jean AbiNader

The news is not good, and more than marginally bad…Lebanon’s financial engineering seems to have reached its limit in sustaining an artificial peg between the Lebanese pound/lira and the US dollar. The only short-term remedy is an immediate infusion of capital to support the lira. Otherwise, Lebanon simply does not have the reserves to protect the lira from devaluation that will strike the pocketbooks of the middle and lower classes hardest. And then the protestors will be really unhappy and likely take their displeasure more aggressively to the streets.

As Maha Yahya of the Carnegie Middle East Center in Beirut recently wrote, “Lebanon’s economic crisis has reached a breaking point. Public debt is estimated at 150 percent of GDP, economic growth is negative, the dollar peg for the Lebanese pound is wavering on the black market, and there are signs of inflation as the prices of some basic goods have increased between 15 and 30%.”

She goes on to point out that Lebanon ranks as the 138th most corrupt state globally, a condition which has resulted in a widespread lack of trust between the Lebanese people and Lebanon’s political leadership across the spectrum. She adds, “Protesters believe the country’s political and economic mismanagement by a sectarian political class has only benefited the elite. Living standards have declined for citizens from all sects, along with their future prospects.”

The protests have drawn people from all sects and regions of Lebanon, challenging the decades-old patronage system that places constituency favors over national interests. It is a crisis of epic proportions. As Yahha notes, “If there is an economic collapse and the Lebanese pound loses value, Lebanese citizens could see their incomes, pensions, and savings disappear, and half the population could fall into poverty. The fallout in terms of public anger could pale in comparison to what we’ve seen thus far.” This is not some far away threat. This is what the Lebanese are facing every day, and there is still no attempt to change the status quo despite multiple meetings among the three presidents: Aoun, Berri, and Hariri, and their ally Hezbollah.

No matter the solution, the people rather than the politicos will pay dearly for the misdeeds of their leaders. If the government tries to cut the growth of the public debt, as it has agreed to under the CEDRE reform package, the first to feel the effects will be the enormous cadre of government employees who will either lose their jobs or see their benefits slashed or more likely both. In this case, actions must be matched by efforts to increase revenues significantly, which means taxes, surtaxes, and restructuring current government debt. And who will willingly pay more taxes if they don’t see immediate improvements in their quality of life: better infrastructure, services, and transparency?

In any case, the lira will fall, the assets of the middle and lower classes, denominated in lira, will quickly erode, unless the taxes also go to providing a reliable social safety net.

The most difficult challenge is balancing short and medium term steps to rescue the economy. Every recommendation will have to be measured against when, how, and the sequence of actions so that the rich do not escape their responsibilities while others bear the burden of a reduction in their standard of living.

For example, an important component of new revenue is the privatization of public companies and assets that are non- or under-performing. This requires appropriate laws, an independent judiciary and regulatory agencies, transparent valuations of the assets, and professional management to implement. It will take from 12-18 months under expedited conditions for privatizations to move forward. Similarly, if the government wants to sell off excess land, buildings, or property to generate revenue, there must still be procedures in place to guarantee transparency, rule of law, and fair valuation. Investors will likely downgrade these assets as the government will be badly in need of revenue, which may create a fire sale situation.

The 2020 budget does have some provisions to combat tax evasion, underpayment of taxes, and other means of avoiding payments to the government including customs fees and duties. Transparency and oversight will require a level of technical proficiency and dedicated professionals that is now lacking. There are other measures as well that can either enhance revenue or decrease expenses but the key is to act in such a way as to protect the most vulnerable and have transparent and full communication with the public to build trust.

None of these steps will move forward without a government that is a technocratic, professional body that acts within the constitution and existing laws that provide for transparency and the rule of law in government contracting, purchasing, accounting, and appropriations. The people have so little trust in the government, political parties, and the status quo that it is hard to imagine that any of the existing leadership will narrow the trust gap that exists. The recent downgrade of Lebanon’s bonds to a lower than junk rating by Moody’s reflects the perception of the markets that Lebanon is now in the company of Argentina without the capacity to dig itself out of a hole thirty years in the making.

Maybe we should be praying for Lebanon but there is no savior on the horizon. The coming weeks will test the wills of the demonstrators and the politicians to see if the country emerges as a failed state or one committed to a responsible path to recovery that is inclusive, transparent, and fair to the people of Lebanon.