Some Progress Made in Reconstructing Government – Will it be Enough?

Wednesday, December 4, 2019
Opinion by Jean AbiNader

The saga of Lebanon’s economic derailment is well known, having achieved global prominence both because of the extent and quality of the national demonstrations and intense expressions of concern from the international community. A recent policy paper called the government’s policy of financial engineering a “Ponzi scheme,” and critics are now focusing much of their ire on the Central Bank as access to their accounts are severely constrained and businesses are closing because they cannot secure enough US dollars to keep operating.

Word came yesterday that some progress is being made on the issue of a “clean” government, one that does not include political figures. According to a Reuters story, the caretaker Prime Minister Saad Hariri has nominated Lebanese businessman Samir al-Khatib to head the next cabinet, which, in Hariri’s preferred scenario, would feature only technocrats as ministers. The announcement was made with the ominous caveat that “some details” still had to be hashed out. What does this mean? Two bits of reality…any “experts” would have to be approved by the major political parties, and nothing has been heard from Hezbollah and Amal. Caretaker Foreign Minister Gebran Bassil said there was agreement on a majority of “competent” specialists from each side, without indicating if “majority” means all the ministers, including him, and who makes up the “sides” that will nominate the cabinet ministers. Any new government would still have to be approved by the Parliament where Hezbollah can obstruct any forward momentum.

A painful exposé on the spoils system that passes for government contracts was the subject of an article in the New York Times that gave examples of how the system of awarding contracts reflects the agreement at the end of the civil war in 1990 to divide up the spoils. “Hospitals, roads, schools, and other projects are distributed to favored contractors according to sectarian quotas that ensure every group benefits, regardless of necessity,” was the conclusion. Given that the vast majority of these contracts lack any serious oversight and there are no independent regulatory bodies to ensure transparency and effectiveness, the contracting office will be one of the top spots for action by any reform-minded government.

Delay in constructing a new government can only deepen Lebanon’s fiscal crisis. The Institute of International Finance (IIF) noted that the continued delay only aggravates the country’s economic misery. Addressing the banking situation, it noted that “deposits had dropped by more than $10 billion since the end of August. An important part of this money was sent abroad, while more than $4 billion of it is being kept in people’s homes. This shortage of capital makes loans for any purposes almost non-existent, although dollar financing is available from banks for a reported 20% interest!

An article in the Arab News said that immediate and medium-term steps should include “the careful management of Lebanon’s rapidly dwindling foreign currency reserves; defending the value of the Lebanese pound, including tighter measures of capital control; a deep fiscal plan to fight corruption; new social policies to protect those most affected by the current crisis; a negotiated debt reduction plan with a fair sharing of the burden across society; and a monitoring mechanism that allows the people to put pressure on their leaders to implement these reforms while state oversight mechanisms are reinforced.”

Recent statements from the CEDRE donors in a meeting called by France indicated that some of the funding may be repurposed to provide short-term capital infusion to support the Lebanese currency, if a new government of technocrats was put in place with a clear reform program approved by the Parliament, under international monitoring. Lebanon has now entered a vicious cycle being driven by the rising burden of servicing and refinancing the public debt and the sharp fall of capital inflows, which can only be staunched by reducing the debt and rebuilding investor confidence. Both are long-term propositions.

With the onset of winter and the impact on energy prices, the all but certain disappearance of any significant tourism to bring in valuable foreign currencies, and rising discontent among demonstrators and citizens of all persuasions, Lebanon may indeed be facing a decade-long decline.