Trying to Understand the Puzzle that is Lebanon’s Forward Thinking

October 10, 2019

Okay, I get it…democracy is messy, but it seems to me that Lebanon has taken this notion to great heights (depths) in charting its course forward. Many of its leaders seem to shred the social contract with its citizens by engaging in competitions to ensure that their constituencies, not the country, come first. What is of immediate importance is to shore up Lebanon’s declining status as a result of its repeated omissions in terms of reforms, living up to its commitments under various agreements and resolutions, and allowing its beauty to be marred by complacency and laissez-faire approach to development.

 

In addition to serious efforts to codify and implement CEDRE and other reforms, there needs to be a change in attitude from exploiting to enabling and empowering government institutions. At the heart of the resistance to change are a politician and their business allies whose ambitions are only constrained by what other power brokers will tolerate. This starts with the partnerships at the top that mask relationships that are many times at odds with the national identity of Lebanon. This was made clear by Sami Gemayel, of the Kataeb Party, who is unable to explain why the coalition between uber-nationalist President General Michel Aoun’s and Hezbollah, whose leader has declared that he follows the leadership of Iran, is in Lebanon’s national interest.

 

In a recent interview, he said, “The problem in Lebanon is that officials know what must be done, but they are not lifting a finger. We have also lost friends who used to stand by our side after some parties insulted and threatened them. The irony is that they want to challenge and threaten the world and then ask it for help and money.” While the isolation with the Gulf Arabs is easing, tensions with long-time partners in the West are rising. “We have reached the edge of the abyss, and no one has yet to slam on the brakes,” he warned. “They speak of reform, but instead of implementing them, they are now blaming each other.”

 

While one can attribute his dismay to many causes, his general critique about how unstable external relations reinforce domestic power wrangling, is relevant because many in Lebanon are profiting from the current state of institutional weakness, from the economy and judiciary, to corruption and deal-making. As a recent study from The Lebanese Center for Policy Studies (LCPS) pointed out, “Despite the economic challenges, political actors still benefit excessively from the status quo.” For example, the 2019 “austerity budget” “Only formally curbs the budget deficit. It leaves untouched the structural conditions that gave rise to the economic deterioration in the first place, such as a regressive tax that exacerbates existing inequalities and crowds out much needed public investments.” Proposed cutbacks never made it through Parliament, and “Expenditure targets are achieved by simply deferring the bill of investment projects to the upcoming years.”

 

And it is the lower and middle classes that will pay the costs of reforms in the short term as public sectors jobs are cut back and taxes are increased. Reforms are tied to CEDRE funding that are primarily for capital-intensive and infrastructure projects which create jobs initially but taper off in the medium and long term. Under any scenario, Lebanon’s survival is at stake in the coming months and it will take more than speeches and resolutions for the future to brighten, for all Lebanese.

 

There is no better example of incoherent policies than the confusion surrounding the exchange rate of the Lebanese pound to dollars which appeared to be in short supply. Details are in this story. Suffice it to say, Lebanon has been able to maintain the current exchange rate through the Central Bank buying government debt and paying high interest rates to incentivize people to deposit dollars in the country. “A side effect of this was that local banks could make money through favorable interest rates and buying up government debt as opposed to investing in productive industries.”

 

While the crisis passed quickly, thanks to the leadership of the Central Bank and assurances from political leaders, it marked again the fragile confidence in government policies. The Executive Magazine wrote that whether experts blamed “financial/corruption, fiscal/monetary, or regional/geopolitical angles, what these narratives on the reasons for the sudden crisis have notably in common is that their explanations come in tandem with dire warnings that more, worse, and far longer pain is likely to visit upon the people if no true and radical change is accomplished very soon.”

 

Its short list of needed changes mention that “Lebanon is in need of an economic resuscitation whose dimensions need to incorporate efforts of constructing, restoring, reforming, rebuilding, and reinventing crucial pillars of public trust, governmental credibility, and economic strength.”

 

This was reinforced by the recent decision by Moody’s, the international rating agency, to review Lebanon’s progress, if any, on reform. “A decision to downgrade the country’s rating would take place if the review was to conclude that Lebanon's fiscal, liquidity, bank deposit, and balance of payments dynamics will likely continue to weaken, potentially destabilizing the currency peg and/or increasing the risk of an imminent debt rescheduling or other liability management exercise that may constitute a default.”

 

Moody’s also mentioned the need to adopt and implement the CEDRE reforms and the failure to attract support from other countries, such as the Arab Gulf States, will be critical factors. “We all know the government needs to take measures and cannot rely indefinitely on the banking sector and this is another reminder for the authorities to take in-depth and credible reform measures that would generate a positive shock in the financial market and private sector,” said Nassib Ghobril, chief economist of Byblos Bank. “It’s a question of confidence ... they need to take measures to boost confidence.”

 

 

 

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