The Same Old Song in Lebanon – Who’s Left to Trust?

It is dispiriting to have to write AGAIN that while the people of Lebanon increasingly suffer from multiple crises, or as US Ambassador Dorothy Shea said, “They are now beyond that, they are catastrophes,” the powers-that-be continue to drive the country into failure. The most recent indication of their disregard for the welfare of the people is the handling of the investigation at the Port of Beirut.

The FBI has already submitted an inconclusive report, and details are not yet public from the French investigation. But as was noted previously, both investigations were stymied by the government which limited their scope and depth by excluding senior officials and putting the focus on the blast itself and not the security or political conditions that allowed the situation to occur in the first place. Concerns about corruption, unanswered questions about the owners of the shipment, the details of the origination and destination of the ammonium nitrate, and whether or not the entire contents were at the Port or if some had been siphoned off over time, are left unanswered.

Of course, there has been no formal follow up of the various theories as to what the combustible material was doing there in the first place: if it was feedstock for bomb-making, if there was complicity or at least willful ignorance on the part of officials from the security agencies and LAF that have facilities at the Port, if it was ignited by some external foreign or domestic party, or any of the many conspiracies that linger around the disaster story.

Two stories this week bring up the latest missteps in ongoing investigations. The first concerns the classified report from Lebanon’s elite Information Branch intelligence agency, which is a branch of the Internal Security Forces (ISF). It found many state officials and security agencies responsible for the August 4th explosion that killed almost 200 people, injured more than 6,500, left more than 300,000 homeless, and caused damages reported to exceed $8 million to repair. The 350-page report was prepared by the Information Branch, military police, and investigators from the judiciary.

The report allegedly blames the Beirut Port Authority and Customs for leaving the ammonium nitrate in unsafe conditions for almost seven years. Badri Daher and Shafik Merhi, current and former heads of customs, are particularly named since they could have acted on their own to remove the chemical, a charge they are contesting. Others under scrutiny are the Cases Authority which represents the government, the directorate of land and maritime transport at the Ministry of Public Works which oversees the port, and Army Intelligence and the State Security agency, both of which have offices at the port.

While some 25 low- and mid-level administrative and security officials have been detained in connection with the explosion, current and former ministers and security chiefs were questioned as “witnesses” rather than as suspects. This was the decision of the lead investigator Judge Fadi Sawan despite the claim that many top officials – including ministers of finance, public works, and justice and Lebanon’s president and prime minister – knew of the presence of the volatile materials.

This was the same procedure followed in the Information Branch report which did not hold any current or former ministers responsible. The judge claims that they are out of his reach due to the immunity from prosecution enjoyed by top officials. Despite the deaths and damage, those who have been detained are charged with willful neglect, punishable by a maximum five-year prison sentence. To add to the confusing nature of the investigation, Judge Sawan took issue with the conclusions in the Information Branch report that assigned responsibilities for the explosion, which he considered his prerogative as lead investigator. The expectation is that the French report will also be limited to lower level officials.

It was noted by the media that Sawan was the third choice for lead investigator into the explosion. “The council of judges that picked him was majority-appointed by Lebanon’s executive branch. They rejected the justice minister’s initial proposal to have a judge known for his independence lead the investigation.”

Meanwhile, many survivors of the explosion and the families of victims have called for some form of an international investigation into the explosion, as have groups such as Human Rights Watch, Amnesty International, Legal Action Worldwide (LAW), and the Beirut Bar Association. They said an international probe is the only way to ensure accountability, given the politically exposed nature of Lebanon’s courts.

Not to be settled anytime soon

The investigation into the Central Bank is also running into obstacles, according to a Naharnet.com article. Prosecutor Ghada Aoun took the Special Investigation Commission at the Central Bank of Lebanon to task for impeding her investigation. “The Special Investigation Commission is being exploited. It has not responded to my request a year ago for a statement of account,” said Aoun in telephone remarks. She asked the SIC for a statement of account disclosing the banking secrecy of fuel importing companies and a number of persons involved in the case of the fuel import fraud. “The Commission is the most important body to detect corruption and theft of public funds but it fails to attend to its responsibilities,” she said, accusing it of “procrastination on this issue.” So, sadly, there is nothing new in Lebanon as winter approaches and poverty and despair are on the increase.

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

Managing Resources – Policy Challenges in Lebanon

One of the subtexts in concerns of the demonstrators in Lebanon is the exploitation of public lands and general disregard for environmental protections. Despite decades of warnings by various NGOs and international organizations, Lebanon’s leadership continues to allow wide-spread illegal use of public lands, especially beachfront property. They allegedly profit from awarding licenses that contravene existing land-use statutes and take shares in companies that are ruining coastlines, highways, mountains, valleys, and waterways throughout the country.

This environmental degradation and misuse, as well as the lack of investment in water management including recycling and treatment, has left the Lebanese people with an age-old solution – purchase drinking water from retailers and wholesalers at high prices, now almost unreachable due to the fall in the value of the lira. A study from the Issam Fares Institute at the American University of Beirut (AUB), noted that “Gaps in the public sector have allowed the rapid growth of private water providers: 75% of water expenditures by citizens, or $300 million, goes towards feeding the private sector [suppliers].”

The explosions at Beirut Port only exacerbated an already deteriorating situation. According to a UN press statement, “Jihan Seoud, Energy and Environment Program Manager at the UN Development Program’s (UNDP) Lebanon office, described the impact of the explosion as a major concern, particularly as Beirut’s environment was already ‘in a dismal state’ before the disaster.” She went on to point out that “The destruction of the Port of Beirut has created up to 800,000 tons of construction and demolition waste in the city, and it is likely to contain hazardous chemicals, given the types of material known to be normally stored there, such as pesticides, pharmaceutical products, industrial chemicals, lead from vehicles, and various types of heavy metals.”

So in addition to the destruction of foodstuffs, medicines, and agricultural supplies, the blasts have wrought environmental havoc that will continue to affect public health for a decade. And it is not only groundwater and the seafront that is under duress. “Beirut’s waste management systems are now at breaking point, with one of the two plants serving the city severely damaged in the blast, as more goes directly to landfill sites, one of which is nearly full. Ms. Seoud told reporters that the city could be facing another municipal solid waste crisis soon if this issue is not resolved,” according to the UN statement.

Even before the extensive damage in the port area, urban planners and environmental professionals have been producing studies on the need for infrastructure rehabilitation and reconstruction that takes into consideration a holistic approach to urban design. Experts are recommending that Beirut and other municipalities are rebuilt in a transparent, inclusive, and accountable manner that balances needed investments in sustainable quality living standards as well as commercial and transportation priorities.

The recommendations include being mindful of the environment by taking into consideration elements such as solar power, energy efficiency measures, and climate-resilient building designs. These proposals dovetail with a recent study by the International Renewable Energy Agency (IRENA) showing that Lebanon has the potential to produce 10 times the amount of energy it’s currently producing. The study estimates that Lebanon has the ability to generate around 30% of its total energy needs by making use of its available renewable energy sources. Not only is Lebanon’s energy sector in its current state very uneconomical and ineffective, but its heavy reliance on private generators is also exacerbating a serious air pollution problem.

As is commonplace in Lebanon, there are existing studies going back more than 10 years that promote investments in renewable energy. “However, even though local studies confirmed that Lebanon has plenty of alternative energy sources that can be used to effectively produce 12% of basic local needs by 2020 – and 30% by 2030 – not much progress has been made in that regard,” according to the same study.

The 2018 CEDRE donors’ conference included approximately 250 projects in the electricity, water, and waste management sectors requiring an investment of some $16 billion over the next 12 years. They are awaiting the outcome of forming a new government to make the reforms needed to tap into IMF and CEDRE funding.

Current projects are also stymied by the lack of transparent governance. The most recent case is the World Bank withdrawing funding for the Bisri Dam project southwest of Beirut. First approved for a $617 million loan from the World Bank in 2014, it was planned to provide reliable water to over 1.6 million people in the Greater Beirut/Mount Lebanon area. Although supported by the political elites, it was vociferously opposed by environmentalists and local residents fearing irreversible damage to the region’s rich ecosystem.

Saroj Kumar Jha, World Bank Mashreq regional director, said that “Given strong stakeholder concerns about the [Bisri Dam] Project, the World Bank has requested the Government of Lebanon to launch an open and transparent public dialogue to address the concerns raised by citizens and civil society groups.” He also announced the re-channeling of $45.5m from two other projects’ funding to help with Lebanon’s efforts to combat the coronavirus outbreak which – compounded by the ongoing economic crisis – has trapped the country in an “unprecedented crisis.”

Without a government committed to widespread and serious reforms including transparency and an independent judiciary, it will become more challenging to secure any international support to remedy Lebanon’s economic and environmental disaster. For a country once called the Paris of the Middle East, it is truly a setback of massive proportions.

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

Contentious Path for Lebanon’s Forensic Audit

Lebanon built its reputation as a regional financial center on its weakly-regulated, well-run banking system, flows of capital from international investors and expatriates, and secrecy laws which have been both beneficial and a source of controversy. Over the past decade, Lebanon rushed headlong into becoming the third-worst indebted country in the world, importing more than 80% of its consumption and using “financial engineering” to prop up the currency. A collapse was inevitable. Maintaining an artificial exchange rate value of approximately 1500 lira, the local currency, to the dollar, as capital inflows decreased and wealthy bank depositors started transferring funds abroad, the once vaunted financial system eroded and became bankrupt.

The demands for widespread economic, financial, political, and social reforms are an intrinsic part of any international rescue effort, along with accountability for public sector spending and the outflow of capital. Whether the demand is coming from the International Monetary Fund (IMF) or international donors grouped under the 2018 CEDRE program including the International Support Group, the list of mandatory steps for external fiscal support include two key provisions: a forensic audit of the Central Bank by an external firm to track funds within the system and those that have been allowed to leave; and a restructuring of the banking system to show credible balance sheets, adequate capital liquidity, and protection of all deposits.

Despite many promises made by the government, it has been challenging to move forward with banking reform and the forensic audit. First, the Ministry of Finance put a number of restrictions on the scope of the audit to exempt transactions allegedly tied to influential individuals and institutions. Then the Central Bank, the target of the audit, sought to further restrict the investigation by limiting the types of transactions it would submit for review. This latest move so upset the Caretaker Prime Minister Hassan Diab, who had resigned along with his government because of systematic blocking of reform measures by the oligarchy, that he called out the Central Bank in a public statement.

“I warn against trying to overthrow the forensic audit to prevent the Lebanese from knowing the truth about the reasons behind the disappearance of their deposits, the causes of the financial collapse, and the deliberate manipulation of the national currency,” Diab said. “Any attempt to obstruct the forensic audit constitutes a shared responsibility for the suffering of the Lebanese people on the financial, economic, and living levels,” he added.

Diab pointed out that the Central Bank of Lebanon (BDL) has only delivered 42% of the documents requested by the auditing firm Alvarez & Marsal. The BDL responded that it could not submit the documents and that function should be done by the government, which signed the contract to conduct forensic auditing of the accounts of the Central Bank to determine whether there were clear violations or financial irregularities. Diab noted that “that the forensic auditing contract signed by the Lebanese state is consistent with the provisions of Banking Secrecy Law and the Monetary and Credit Law. Any reform that does not start with a forensic audit of BDL is a sham reform to cover up the continuation of the approach that led to the current financial collapse,” Diab added.

Resistance to banking reform is also evident in attempts to restructure the banking sector. Although the government has mandated a number of steps to clear up balance sheets, protect deposits, limit capital flight through implementation of capital control regulations, and pushing for individual banks to prepare to implement restructuring plans, most of these directives have been ignored.

The latest circular by the Banking Control Commission dealt with the recapitalization of banks, which has been a very controversial subject. It requires banks to specify how they will abide by the minimal capital ratio of equity required to do business. As explained by Byblos Bank Economic Research and Analysis Department, the requirement for recapitalization of the sector includes several factors: a five-year business plan to strengthen the bank financial position and profitability; a clear demonstration of how the bank will make provisions for its holdings of government debt including loans to the government; provisions for private sector loans; and that “each bank clearly specifies the options it has to increase its stock of capital, such as transferring profits to the capital account, reevaluating its real estate holdings,” and its options for reducing risk-weighted assets.

When asked about the chances for this latest directive to be implemented, several financial advisers responded that there is a very low chance since it mandates that banks raise their Tier 1 capital ratios(i), or sell assets to meet the ratio requirements. Another agreed saying “This is wishful thinking on many levels. First, it involves equity capital. Any takers? Existing owners will be severely diluted so the bank owners don’t like it. What the bankers want is a bailout which they’re not going to get.”

Without strong leadership from the government to reduce public expenses and a commitment by the private banking sector to take the steps needed to set the financial sector on the road to recovery, the suffering of Lebanon will only continue and the desperation becomes even more widespread.


i. Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves, but may also include non-redeemable non-cumulative preferred stock. In Lebanon’s situation, banks hold 80% of the country’s debt and are reluctant to downgrade the debt and therefore diminish equity on paper.

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

Lebanon and Algeria: Lessons from the Uprisings

The rise of popular movements across the Maghreb and in Lebanon in the past decade is no coincidence. Aside from the shared experience of French colonialism, these countries also share many social, economic, and political characteristics, making for an interesting comparison of these movements across the region. Tunisia is moving towards greater democracy on the basis of negotiations among key players in civil society, while political elites dig in their heels hoping to maintain their preferential economic benefits; and the army is not a key player in the governing formula. Morocco, by contrast, has a king and long tradition of a royal culture that is sustained by deferential behavior from its people as it moves slowly towards broader citizen empowerment.

It is Algeria’s hirak or “movement” where there are the greatest similarities to what has been happening over the past year to Lebanon’s thawra or “revolution.” Both are popular uprisings challenging the vested interests that dominate the country, abet corruption, and drain the country’s economy. They both brought about leadership change; avoided clashes with the military; and crossed sectarian, demographic, and regional identities. They both have also diminished in strength and sustainability due to similar reasons: incremental, largely cosmetic leadership changes which diverted some supporters; the impact of the pandemic; maneuvering by traditional elites to maintain their prerogatives; and eroding commonality of interests, priorities, and tactics.

A deeper analysis may yield some lessons learned as much as how well-intentioned and determined opposition movements were unable to develop momentum to bring about systematic reforms and inclusive societal change.

Algeria’s Hirak
There is a recent opinion piece by Abed Charef in Middle East Eye offering his perspective on the current status of the hirak. He begins with the statement that “the Hirak as a political movement is a thing of the past. The time has come to look at what we have learned and to make adjustments for the country’s new political landscape, a situation requiring the examination of possible new perspectives and means of political action.”

Charef begins by contrasting the hirak to the previous Front de Libération National (FLN) merging from a revolutionary nationalist movement to a status quo political entity that lacked democratic values. He notes that “The Hirak movement is an altogether different beast, born of a mindset and an objective, and lacking any organizational model whatsoever.”

“Beginning on February 22, 2019, in response to the attempt by incumbent president Bouteflika to endow himself with a fifth term, millions of Algerians took to the streets, rising up against the humiliation of a fifth Bouteflika mandate – against the corruption, mismanagement, and injustice of the Algerian political system. It was a broad indictment; a rejection of both the ruling elite and the ham-fisted opposition.”

He goes on, “The Algerian people were marching for recognition, for dignity and freedom, for the right to voice their feelings and to realize their goals. For the first time since independence, the people had taken to the streets. Millions of Algerians of all walks of life, of all generations and persuasions, marched together to say: ‘Enough is enough!’”

The parallels to the October 19, 2019, uprising in Lebanon cannot be overlooked. Upset by the continued mismanagement of the country and its resources, and rebelling against yet another act of intimidation and erosion of their quality of life, millions of Lebanese across sectarian, generational, and geographic lines took to the streets demanding the end of the current government and its culture of cronyism, corruption, despoiling of the environment, and abuse of the financial system. They called for an overhaul of the country’s leadership saying kellon ya’neh kellon: “All of you means all of you.”

In Algeria, the army swiftly reasserted its role as the ultimate arbiter of political power, replacing Bouteflika; bringing corruption charges against many of his cronies and senior officials from the army, security services, and the government; and setting new dates for presidential elections. But a revolution was not in the cards. The hirak was unable to develop a coherent opposition or a political program based on concrete, well-reasoned and implementable policies, and in the end the army stood alone at the top of the power pyramid. To have a credible plan, Charef says ruefully, “This requires reflection, consultation, negotiation and compromise – qualities sadly lacking in Algerian political life.”

Lebanon’s Thawra
The demonstrators in Lebanon initially had a great rush of adrenalin from the vitality of being a national movement that brought hope to their dreams and dread to the oligarchy that controls the country. As Anthony Elghossain writes in the Middle East Institute’s special briefing on Lebanon a year after the uprising, “They attacked Lebanese leaders, learning the hard way that some are more sacred than others — and that sacredness tends to correspond proportionally to the power of any such leader’s partisans. They climbed out of oblivion — reminding their leaders that they existed and statespersons that stability and peace aren’t the same damn thing.”

Joseph Bahout uses the expression of “a mafia and a militia” to describe Lebanon’s union between elites and Hezbollah that bided its time before confronting the demonstrators. According to Elghossain, by the end of 2019, many demonstrators who had mobilized in a common statement of protest had returned to their routines and “left the streets to people who’ve dominated dissent over the past decade: reformists and revolutionaries, including serial activists, dedicated civil society organizers, academics, young professionals, and/or some of Lebanon’s youth.”

With the demonstrations weakened by the weather, the pandemic, and the increasingly precarious erosion of their standard of living, there were few who would claim progress despite the momentary disruption to the old political leadership. “Reformists and revolutionaries have not realized their demands. They’ve not achieved their envisioned change, inspired citizens to join them, or influenced practical politics. And they’ve not — not actually, not adequately — identified, assessed, and exploited opportunities to integrate immediate action into broad-based, long-range campaigns for political power, institutional leverage, and sociocultural influence.”

Yet, as in Algeria, the low level agitation and organizing continues. Civil society and the rapidly dwindling middle class better understand the challenges ahead and there is a growing understanding on what must be done to be better organized and empowered to upset the status quo. “And, regardless of their hopes, ambitions, and disappointments, some of them are doing what is necessary today so that others can do what is sufficient tomorrow.”

A casualty of the reduced energy of the demonstrations in both countries is that many Algerians and Lebanese are headed elsewhere to find a sustainable quality of life. As Elghossain observes that is apropos for both countries, “The Lebanese who desire change must learn from the leaders they’re struggling against. They must operate in the spaces between, understanding that their success is neither inevitable nor impossible. Becoming comfortable with uncertainty, compromise, piecemeal progress, and imperfect practice of politics, they must now do what they would have needed to do had they succeeded, anyway: reimagine their campaign for change as a long-range, ever-evolving initiative, through which they may work to forge the future they desire without losing themselves.”

Both Algeria and Lebanon are facing the inevitable decline that sets in when the social contract is no longer operable, relevant, or credible. The bankruptcy of the spirit is more damaging long term than the financial catastrophe in Lebanon or the lack of economic mobility in Algeria. But neither the protestors and civil society nor the government apparatus can do it without significant recalibration of the state’s role in the lives of its citizens.

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

Trump vs Biden on Middle East Policy – Round 1

There has been a great deal of speculation about how a Biden presidency might differ from the Trump administration in its foreign relations. The range of opinions reflects the authors’ varying perspectives about US foreign policy and America’s place in the world. In some cases there is praise for Trump’s positions while damning his style; in others, the critiques on both sides can reflect a sometimes harsh divergence in beliefs about what is in America’s best interests.

So to help muddle the conversation further, here are some recent analyses.

According to an article from the Quincy Institute, a relatively new player in the think tank community in Washington, DC, “Despite Trump’s instinct for American grievances, the majority of his policies in the Middle East have perpetuated a pattern of US policy toward the region that exacerbates insecurity and human misery.” It commends the administration for its willingness to “embrace audacity” in shaping policy, and its interest in reconsidering relationships in the region to focus on what best serves US interests. The article calls for ending support for the war in Yemen, restarting diplomacy with Iran, and pursuing diplomatic rather than military solutions.

These recommendations all mirror positions in the Biden position papers. The Quincy Institute policy paper, “A new US paradigm for the Middle East – ending America’s misguided policy of domination,” mentions eight steps the new administration should adopt. These include a reduction of US forces from the Gulf “because a large military presence isn’t needed to prevent a hostile regional hegemon” – a stance that is squarely in opposition to the current administration’s policy. It also calls for a new security architecture so that the US can “remove itself as the main security power in the region.” This would go hand in hand with “a deliberative drawdown regardless of stability milestones” that might prolong our presence unnecessarily.

For Biden, diplomacy would once again be the starting point for engagement, including with Iran; avoid making Iraq a battlefield with Iran; and exercise diplomacy in efforts to end the wars in Syria and Yemen. As the former VP has mentioned, the US would reduce its support for allies in the region that encourages aggressive rather than diplomatic behaviors. And finally, on a theme near and dear to Biden, the US would once again be the exemplar of human rights and rule of law at home and abroad.

An interesting challenge for the prospective Biden administration is that, as Trump demonstrated so well in 2016, it is easier to run against the previous administration’s efforts than lead with positions that might be subject to criticism. However, the former VP was a key player in the Obama administration, so he either has to defend past policies or indicate what he has learned in the intervening years. This is well illustrated, for example, by how he might respond to the many changes that have occurred in the MENA region in the past four years. One key issue is the competition among world and regional powers for influence. The US has to decide to what degree its security interests are served by a robust hard power role in that regard.

In arguing against the concern that a reduced US presence in the region will give Russia and China opportunities, a National Interest blog claims that “It is more sensible to welcome rivals’ inheriting the instability, struggles, and grievances that the US has found so vexing than to guard against it… Any power who decided to replace the role vacated by the US will find itself in at least as much of a quagmire – only with far less resources to manage it.”

In a direct reference to the Biden campaign, it says, “The United States can strengthen its position less with bases and permanent alliances and more with the sober diplomatic behavior of a trustworthy yet distant maintainer of a balance between powerful nations.”

This is hardly the view of the President’s supporters. They believe that international alliances, the global economy, and promoting democracy and human rights has not secured stability or prosperity for the US so why continue with policies that do not serve our vital interests?

Regarding who are our friends and who are not, Trump has so far favored supporting leaders who reflect his disdain for democratic checks and balances on executive decision-making, such as Turkey’s Erdogan, Egypt’s Sisi, as well as MBS and MBZ in the Gulf. His penchant for transactional diplomacy is well illustrated by his treatment of the Kurds, Iraqis, the Syrian opposition, Turks, Iranians, and others; often defining diplomacy as a zero-sum competition.

Does this mean a Trump foreign policy in the MENA is without merit? Not if you are a supporter of Israel’s security, a hard line on Iran’s dysfunctional role in the region and beyond, pro-arms sales as a tie that binds us to our friends, and ending what seem to be “endless wars” that make no sense to many American voters.

A second Trump administration would further refrain from direct action in places like Yemen, Libya, Jordan, Morocco, Tunisia, Algeria, and Egypt, again focusing on “what’s the benefit” as the guiding principle. For weak states like those in North Africa and Lebanon, it will continue to be a tug-of-war within the State Department as to how best to support the US interests in any bilateral relationship.

This brings up the concern expressed by Biden supporters for the need to reinvigorate the State Department by generating a new improved vision of American policy abroad, removing Trump loyalists who decimated career personnel and created loyalty litmus tests, and re-empowering diplomats whose opinions and experience were devalued by the Trump administration.

The next part of this blog will focus on country-specific differences and examine the question of whether or not there are enduring US interests in the MENA region.

 

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

What is Erdogan’s End Game in Lebanon?

The last year has seen a significant uptick in the Erdogan’s playmaking in the Mediterranean. From west to east, through hard and soft diplomacy, he has stirred up quite a brew blending historic Turkish ambitions with his profound conviction that now is Turkey’s time to reassert its regional influence. While there has been a great deal of attention paid to the “hard diplomacy” tactics in Libya and along the border with Syria, to a growing presence in the Azerbaijan-Armenia conflict, and to procuring/testing weapons systems, little has been written about Erdogan’s soft power projection in the region.

Turkey’s financial prospects have been buoyed by the discovery of natural gas in the Black Sea. Erdogan’s provocative energy exploration agreement with Libya’s GNA and actions in the Eastern Mediterranean challenging both Greece and Cyprus have given indigestion to the EU. He is seeking to expand trade ties across North Africa, opening port facilities to China, and increasing his country’s LNG storage capacity. Gas pipeline diplomacy is also on the agenda and plays a role in Turkey’s support for Azerbaijan.

So with all of these contentious issues, why is Turkey growing its presence in Lebanon at a time when it has an ongoing conflict with Syria? The top priority appears to be to have its own intelligence sources in the country, so Turkey has a presence in UNIFIL in the south and is providing social and humanitarian relief efforts in the Tripoli and Akkar regions, carried out by TIKA, the Turkish Cooperation and Coordination Agency. Most of its activities are in northern Lebanon, the Sunni center of the country, where there is still a jihadist presence.

Rather than big splash projects that might draw a reaction, it is focusing on rural humanitarian relief such as extending expertise and supplies to households to build poultry and beekeeping businesses. After the Beirut explosions, it started repairing mosque windows and donated 400 tons of wheat. A Turkish hospital is to be inaugurated soon in the city of Sidon. Its foreign ministry has also made a point of stressing solutions that exclude the West, particularly France’s recent initiative, as Erdogan and Macron are feuding over Turkey’s role in Libya and Azerbaijan as well as its conflict with Greece over energy exploration.

Growing Turkish outreach has drawn its share of critics, especially since there are no natural political allies in the country in the major political parties. Since its coloration is more Muslim Brotherhood than secular, it does not readily align with the urban Sunni centers in Lebanon. The Carnegie Middle East Center noted that “These claims of a Turkish role or conspiracies in Lebanon are difficult to substantiate, as Ankara, unlike Iran and Saudi Arabia, hasn’t actively pursued a political agenda in the country.” It is working to build stronger relations through cultural ties with the small Turkic ethnic communities that exist by “providing scholarships, engaging in cultural activities, and granting citizenship to thousands of Lebanese.”

It has rehabilitated the Ottoman-era Tripoli train station and opened cultural centers where thousands of people are learning Turkish. This has raised the stakes for Lebanon’s Armenian community as “thousands of pro-Turkish protesters have shown up at their rallies waving Turkish flags and chanting threatening slogans, often calling for another genocide.”

The end game of all of these activities is hinted at in an analysis by the Middle East Monitor that opines that the Mediterranean provides a theater for Turkey to act as a lever between East and West, building relationships and alliances that will upset or at least delay the objectives of the US, EU, and Russia in the region. Erdogan is not content to be in either camp and would rather carve his own path forward that will give him the power to curb actions that he believes run counter to Turkey’s interests.

Given that he has now refashioned the political system in Turkey to his desire to remain on center stage for decades and restore a central role to the country in the future of the region, Erdogan’s forays into Lebanon can be seen as a small bet with large payoffs as the influence of the GCC and the EU /US declines, and it can build on existing ties and sentiment to develop alternatives that fit his vision of the new Turkey. It remains to be seen if Erdogan can figure out how to outflank Iran, the other serious contender for regional hegemon…

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

What’s the difference between a failed and a fragile/weak state?

Years ago when I worked for another Arab country, and critical observations were made about how the country was governed, its human rights record, level of corruption, and so forth, the standard response was “Well, we’re doing better than our neighbors.” To hold up any country in the Arab world as a model was hardly convincing to outsiders if the comparison was another Arab country. They share unfortunate similarities when talking about basic freedoms, transparency, rule of law, and other markers of political and social development.

A term that is used to describe Lebanon’s condition as a result of its chaotic condition is that it is a “failed state,” or at least a “fragile state,” using sets of criteria developed more than 15 years ago by the Fund for Peace. Yet many readers do not understand how these terms are constructed, sensing only that “fragile” and “failed” sound right when describing Lebanon. I want to elaborate on these terms in order to get at a better understanding of what Lebanon isn’t doing that would make it a functioning/stable state.

First of all, several years ago; “failed” was replaced by “fragile” in recognition that some states can continue to carry out some of its responsibilities and not be on the verge of collapse, e.g. Sudan, Venezuela. Some further definitions from Wikipedia are helpful. “A fragile state or weak state is a country characterized by weak state capacity or weak state legitimacy leaving citizens vulnerable to a range of shocks.” And apropos of Lebanon, “Failing states lack the monopoly of force, while the other areas function at least partially.” “Weak institutions are the central driver of state fragility. Other factors associated with fragility include: economic development, violent conflict, natural resources, external shocks, and the international system.”

The World Bank produces an annual report that provides insights in a country’s capacity and sustainability. In its 2020 Annual Governance Indicators, covering performance in 2019, just at the onset of the current series of crises, Lebanon did not perform well. It is instructive to chart the changes from 2018 to 2019, and compare Lebanon to the rest of the region. Its performance indicators fell in several categories which could be taken as signs of the pending chaos that began after October 17. For example, its highest ranking was in Voice and Accountability where it ranked second among Arab countries. However, in Government Effectiveness, it was 15th in the region, only above Iraq, Sudan, Syria, Libya, and Yemen.

The 2020 report on 2019 performance also noted that Lebanon placed 15th among Arab countries in Control of Corruption and 14th in both Political Stability and Rule of Law. Lebanon declined in both in Rule of Law and Government Effectiveness from 2018 to 2019. To be clear, no Arab country even approached 50% in any of the six categories, further validating my point that measuring against the neighborhood is seldom useful. When looking globally, for example, 80.3% of countries and territories around the world have a better score than Lebanon on the Rule of Law category according to an analysis by Byblos Bank Economic and Research Department.

The Council on Foreign Relations recently released an article titled, “Is Lebanon a Failed State? Here’s What the Numbers Say.” The author examines a number of indicators and sums up her analysis writing, “Whether Lebanon can avoid becoming a failed state is unclear. The government…will have to install a new cabinet and institute certain reforms to receive much-needed foreign aid. But while the reforms would address major issues including electricity and corruption, the country’s flawed political system would remain intact.”

So what does this data suggest for Lebanon’s future? It doesn’t bode well for the needed steps to form an effective coalition to make the necessary reforms. The International Support Group (ISG) called on political parties to come together to form “an effective and credible government that will meet the legitimate needs of the Lebanese people and address the main challenges facing the country,” according to the same Byblos Bank analysis. Reflecting the issues addressed in the World Bank report, the ISG “Urged Lebanese authorities to swiftly implement the needed measures to reestablish economic stability, improve the delivery of public services, restore the credibility of the financial sector, resume negotiations with the IMF, and prioritize key governance measures.” With the continued obfuscation of the French initiative by Amal and Hezbollah, that seems an ever more remote likelihood.

Finally, in a quarterly country risk survey of 174 countries, the Euromoney Group ranked Lebanon in 162nd place worldwide and in 15th place among 18 Arab countries during the second quarter of 2020. This represents a decrease of 62 spots, the steepest decline worldwide and a drop of 10 spots in the region from the same period of 2019. Rather than go into further details, all of which are depressing, you can consult this link . Suffice to say, Lebanon only placed higher that Yemen, Syria, and Sudan…not reassuring to investors, citizens, businesses, and policy makers.

There is little doubt that if Lebanon’s leaders continue to insist on writing their own rules for the country’s recovery that Lebanon will indeed achieve a “fragile” state status with few hopes of recovery. For an instructive video from the Financial Times, just look here, and weep.

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.

Continued Disagreements on Reforms of Banking and Financial Sectors Threaten New Government Mandate

It’s been clear for months that a key issue blocking negotiations with the IMF is the reluctance of the Central Bank of Lebanon (BdL) to open its books to a forensic audit that would allow for the accurate accounting of the country’s debt, assets, funding allocations to the government, and overseas and domestic transfers of funds. Finally in early September, the caretaker Finance Minister Ghazi Wazni signed the three long-promised contracts with outside firms to conduct a forensic audit, financial audit, and financial restructuring plan.

What is unclear, and is the subject of much discussion, are the conditions and limitations the Minister has placed on the forensic audit that would protect the BdL and conceal those who profited from its machinations in the financial sector. In fact, despite public disclosure laws that could force the publication of the contract, there appears that Alvarez & Marsal, the contracted firm, has little recourse but to follow the imposed limitations.

Tracy Chamoun, Lebanon’s Ambassador to Jordan, wrote that she can understand why Speaker of the Parliament Nabih Berri wants the investigation restricted since he may be “Protecting the 30,000 fake employment jobs in the government that he institutionalized? As well as, the more than 5000 fictional positions he created? What about all the illegal daily employees that he also hired in the public sector?”

There is also an alleged restricted time frame on the forensic audit. The previous Diab government opted for a five-year audit, but it is unclear if this is still the case. As Karim Daher pointed out, “A forensic audit traces financial transactions and identifies possible legal infringements, particularly in the context of BDL’s financial engineering or bond issuance/subscriptions. For the international community, including the International Monetary Fund (IMF), the challenge is to determine the exact amount of financial losses. But for the public opinion, the issue is whether there has been embezzlement, money laundering, corruption, insider trading and so on.” Without at least a five year timeline, it will be difficult to establish patterns of illicit or improper actions.

Daher makes the point that misdeeds will have both legal and public consequences, adding to the perception that the opaque nature of the sector is detrimental to an open and credible audit. This was further reinforced by BdL Governor Salame when he promised to cooperate with the government on the implementation of the audit, but “He could not promise that BdL would hand over all the information requested by the forensic auditor because he is bound by Lebanon’s powerful banking secrecy laws.” Ironically, the commission that can lift the laws especially in the cases of investigations is headed by Salame.

The health of the financial and banking sectors is being further eroded by the rapidly depleting foreign currency reserves by a monthly average of $1 billion a month in 2020. According to the Byblos Bank Economic and Research Development team, the drop is due to a combination of decreased trade transactions, “weaker remittances from overseas Lebanese, capital flight in the absence of an official capital controls law, and a growing parallel market for foreign currency.” In the same report, Goldman Sachs noted that “external leakages (of money going abroad) could have originated from capital outflows in the absence of formal capital controls.” It estimated that BdL’s reserves will be fully depleted in the coming 12 months if the contraction rate continues.

In terms of the forensic audit, this decrease reinforces the red flags already apparent in the investigation process. For example, an accurate accounting of the BdL’s reserves is critical to any capacity for the country to borrow funds without paying excessive interest or sacrificing national assets at fire sale prices to raise money.

In the same edition, it was reported that Moody’s Investors Service said that “The economic recovery will depend on access to externally-funded investment projects from the international community, which in turn, is conditional on the swift formation of a new government and the implementation of a specific set of reforms…including restoring the solvency of public finances and the banking system through a comprehensive restructuring of the sovereign debt, enacting legislation to formalize capital controls, eliminating the current multiple exchange rates, implementing comprehensive audits of BdL and state-owned enterprises, and expanding the social safety net to support the most vulnerable segments of the population.”

Speaking of options for growing government revenues, The Hayek Group suggested the establishment of a National Real Estate Fund (NRF) that would include state-owned properties across the country. Of course, there is no centralized system for identifying what properties the government owns, estimated to be worth from $69.1 billion, and little enthusiasm for a public accounting among the private interests currently exploiting these lands.

Which brings us full circle to the importance of an accurate and fully disclosed forensic audit. It is a critical piece of accurate data required to move Lebanon out of its current quicksand of inaction that is leading to default and failure. A credible disclosure will allow consideration of solutions that may yet save the sectors from collapsing.

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.

Mamas – Don’t Let Your Babies Grow Up to be Bankers in Lebanon

In the complicated and arcane world of Lebanese finance, the banking sector has always been held in high esteem and regarded as one of the pillars of the country. Parents could not be happier than if their offspring worked for a bank or investment house. With the right connections, and usually if you were the “right” gender, there was a promising career ahead rewarded with an upper middle-class lifestyle.

Fast-forward to the current day. In Lebanon’s economic downfall this past year, the banks are seen as a key member of the evil forces that have eroded the country’s finances, degraded its currency, and deprived the country of its future. Chief among these villains is the Central Bank (BdL) which drew the banks into a financing scheme for the country’s budgets that enriched the banks, their leadership, stockholders, and biggest depositors. It all collapsed towards the end of 2019, bringing about the first ever default by the country of its Eurobond obligations. Banks have been targeted by angry demonstrators who have destroyed or damaged a number of banking facilities.

Government negotiations with the IMF are not off to an auspicious start as the banks are balking at any reforms that would affect their profitability such as haircuts on their largest depositors and consolidation of the sector. So once again, the Central Bank is attempting to take the lead in strengthening banks, only this time it has drawn the wrath of the Association of Banks in Lebanon (ABL) which represents the banking community. BdL has issued several circulars directing the banks to increase their loss provisions for hard currency deposits and Eurobonds; increase capital by 20% by the end of 2020 with the option of allowing shareholders to transfer ownership of property to their bank for a limited period; and provide depositors an option to convert their deposits into bank shares or convertible bonds.

There is also a wishful thinking recommendation that “Banks should also urge depositors who transferred more than $500,000 abroad as of July 1, 2017, to deposit funds in a special account in Lebanon that will be frozen for five years and equivalent to 15% of the transferred amount. The directive applies to bank chiefs and large stakeholders. The equivalent deposit amount is raised to 30% for “’politically exposed persons.’”

It didn’t take long for the banks and their allies to counterattack, both in the press and in recent meetings with French government officials. Claiming that the measures “will have negative repercussions on the economy and will put additional strains on the already suffering industrial sector,” The Association of Lebanese Industrialists (ALI) objected to several provisions related to conditions for settling loans that in effect would increase funds needed by requiring settlement in foreign currencies.

The BdL also asked banks to encourage importers to transfer from abroad the equivalent of 15% of the aggregate amount of the letters of credits that they opened in any of the past four years, and to deposit these funds in a “special account” and block them for five years, without making a distinction between standby or purchase-related LCs. The ALI warned that the implementation of the circulars could put at risk the remaining productive capacity and sustainability of businesses in the country. These concerns were also echoed by the Beirut Traders Association (BTA).

Another blow is that law suits against the banks in Lebanon and abroad claiming damages resulting from blocking access to depositors are increasingly being decided in favor of the plaintiffs, further diminishing the strength of the sector and leading to the erosion of its credibility. As The 961 opined, “At this stage, with the economic and financial crisis, the banks’ reportedly low liquidity, and their unethical freezing of their customers’ money, Lebanon is losing one the main features that made it stand out in the region: Its banking services.”

And their troubles are far from over. The banks are insisting on selling state assets to repair their balance sheets, a plan rejected by both the IMF and the previous government, so they are now lobbying France which is pushing for reforms in Lebanon as a condition of it receiving international assistance.

The outreach by banks suggests they are “still in denial” over finding a solution that doesn’t inflict losses on their shareholders, according to Dan Azzi, former chairman and chief executive of Standard Chartered Bank in Lebanon. “Banks that were somewhat successful in their local lobbying efforts against a solution which involves a bail-in of their shareholders have realized that the international community will not release any funds until such losses have been recognized.”

However, French authorities prefer to emphasize deep reforms that must be undertaken to restore health to the sector. Among these measures are the swift implementation of capital controls and bank consolidation in a country with 64 banks controlled by 32 groups. Yet the banks are clinging on to the hope of avoiding any painful, large-scale changes in hopes of retaining their once vaunted status as a pillar of the economy. The reality is that the sector isn’t a shining star any longer and won’t be again without serious reforms and consolidation.

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.

Do the US and France See Eye to Eye on Lebanon?

It is instructive to review the French draft Plan presented by President Macron to the oligarchy during his September 1 visit in light of the subsequent visit, statements, and interviews by Assistant Secretary of State for the Near East David Schenker. There has been some commentary that France’s position on Hezbollah is less stringent – proposing that political and economic reforms will weaken its control over large swaths of the Lebanese government and people – whereas the US prefers to use sanctions to change Hezbollah’s behavior. France also regards Hezbollah as made up of a political and a military wing, to which Schenker responded, “In democracies you have to choose between bullets and ballots. You cannot have both. Political parties do not have militias.”

The differences over a Hezbollah strategy notwithstanding, a closer reading of the plan shows a strong correlation between the approaches and reflects what Schenker refers to as the close collaboration between the US State Department and the French Ministry of Foreign Affairs. Schenker notes that the US and France are on same page when it comes to political and economic reforms being a prerequisite to unlock any international financial assistance to Lebanon.

According to the Lebanese Center for Policy Studies, “The plan requires the majority of the commitments (20) to be achieved within one month of the government gaining confidence, two within the first three months, one by the end of this year, and one within one year.” Here are some of the highlights of the French draft Plan that demonstrate overlapping approaches.

The first two points refer to the need to address the impact of Covid-19 on the most vulnerable and marginalized segments of society. This is accompanied by the statement that immediate steps should be taken to set up a coordinating mechanism with the UN to facilitate the distribution of international aid in a “transparent and traceable manner.” The US is currently the largest contributor of humanitarian assistance to Lebanon to fight Covid-19 and is working to strengthen its initial allocation of $30 million in both humanitarian and reconstruction assistance after the Beirut blasts. On the ground, the US is working with the UN to provide food assistance despite the White House’s known disdain for UN bodies. Even France is insisting that the government of Lebanon keep its hands off humanitarian assistance to circumvent pilferage and the resale of donated products on the open market.

Another area of cooperation mentioned in the proposal is the reconstruction of neighborhoods and the port of Beirut according to “fair standards.” Given the general reluctance of the international community to provide direct assistance to the government, it will be challenging to develop a comprehensive redevelopment plan without some official involvement as there are many issues including zoning, utilities, transportation access, etc. that will require coordination. Perhaps this is one of the areas in which the yet-to-be-named government can make a credible attempt to gain recognition and support. A good start would be implementing the plan’s call for “Conducting an impartial and independent investigation within a reasonable timeline.”

Of course, underlying all of the issues in the Plan is the need to engage the IMF in reforming the economic and financial sectors, which will require extensive reworking and a myriad of regulations. One recurring condition mentioned in the plan are time specific deadlines for actions. This includes implementing passed reforms to the electricity sector, launching tenders for gas-fired power plants while reducing the reliance on private sector generators, and recasting the current Selaata power plant project that is mired in controversy.

On the issue of raising electricity rates, the plan calls for rates that first affect more affluent users. It also mentioned the importance of the capital controls draft law that must be completed and implemented, again according to a rigorous timetable. While US statements have not been as detailed, this is consistent with the general thrust of its policy recommendations. Importantly, as in Schenker’s statements, throughout the Plan, the French insist that the government regularly exchange views and ideas with civil society.

Rather than giving immediate access to the CEDRE funds as steps are being taken, the plan envisions a local follow up conference to review priorities and set schedules. This is to be in conjunction with implementing actions to approve the proposed law on an independent judiciary and transparent appointments based on competence in the judiciary and electricity, telecommunications, and civil aviation sectors. In tandem, it is recommended that the new government work an international body on an analysis and census of the public sector and an assessment of the public administration.

On the pervasive issue of corruption, the French Plan calls for setting up the National Anti-corruption Commission that has been drafted and provide it with the necessary resources to do its job. It encourages the government to establish within 90 days controls to provide oversight at the ports of Beirut and Tripoli, the airport, other cross-border entry points, and implement customs reforms. To strengthen the investment environment, it stresses the need for a law on public procurement and to provide adequate resources to the Higher Council for Privatization and Public-Private Partnerships.

It calls for the now instituted forensic audit of the Central Bank and asks Parliament to vote on a 2021 budget by the end of 2020.

Although there are no additional explicit terms in the French plan regarding political reforms, there is a call for election reform in that “The government will organize new legislative elections within a maximum period of one year,” and, “The electoral law will be reformed to fully include civil society, allowing Parliament to be more representative of the aspirations of civil society.” This also reflects the US position that steps need to be taken to more broadly engage civil society in governance whether through electoral reform or other mechanisms.

Both the US and France refer to the imposition of sanctions if steps are not taken in the short term. While the French have made some explicit references to deadlines, the US has already imposed initial sanctions against leaders who are charged with enabling Hezbollah to subvert the Lebanese state. A well-coordinated pressure campaign towards the new government, when it is installed, will be a crucial opportunity for the US and France to make a significant contribution to Lebanon’s recovery. With Gebran Bassil and Nabih Berri already saying they will not be part of a new government, it is hoped that other old regime paragons will likewise fade and give some semblance of new leadership emerging to lead Lebanon forward.

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.