The Lebanese economy faces a critical turning point

Friday, July 5, 2019
The Hill

It is an understatement to say that the Lebanese are preoccupied with the state of their economy. Yet during a recent visit to the country, the American Task Force for Lebanon did not find a consensus within the government on the tough actions needed to prevent the Lebanese economy from collapse.

Lebanon barely recorded a 1 percent rate of growth this past year. It has the fourth worst debt to GDP ratio in the world and is at the bottom of the rankings for infrastructure development. Its deficit is running at about $5 billion annually, which will push the debt to GDP ratio to 200% in a few years. Also, Lebanon’s credit rating is declining and this is eroding confidence in attracting foreign investment.

The Central Bank has engineered a monetary policy that many experts believe has bought the country two more years of time to enact a strong fiscal policy before the economy hits bottom. One can only hope that the government understands this and acts quickly.

The Lebanese economy is plagued by two problems: growing public deficits, in large part because of the financial drain of government-run businesses, and a lack of government transparency. Many believe the two issues are interrelated and can be fixed if the government recognizes it no longer can put personal interests ahead of the country’s interests and must find consensus.

International donors have stepped forward, encouraging Lebanon to deal with its dilemma by offering up to $11 billion in soft loans and grants (called the CEDRE) for infrastructure projects such as electricity, roads, information highways and privatization of other government businesses such as the ports, airports and telecommunications. This support, however, is dependent on the government reforming the way it does business by creating more transparency through an open tender process, independent regulatory sector agencies, and disengaging itself from government-run businesses.

The electricity sector is a prime example of how privatization can help bring down the deficit and significantly reduce corruption. Subsidizing the sector costs the government $1.5 billion a year, roughly a quarter of the deficit. Privatizing electricity generation would be a good beginning if carried out transparently and according to international standards. With responsible electricity reform, the government is proposing a budget with a 7.6 percent deficit, as opposed to an 11.4 percent deficit last year.

The devil is in the details. We found that the Lebanese policy community at large, and the government in particular, may not fully understand the specifics of various projects and surely lack agreement on what to do. Some want to leave part of the decision-making of newly privatized companies with the government. Others want CEDRE loans to go directly to the private sector and not the government, to build and operate the privatized facilities; the government would establish independent regulatory authorities to regulate operations and pricing.

Still others say the loans should be given without strings attached, meaning without a demand for reforms. They say that “we need time” to find consensus and, with only a two-year window, no real change can happen in this short period. Saving Lebanon from default should come before reforms, they argue.

Several government officials said the CEDRE money originally was meant to help Syrian refugees by creating construction jobs. Their logic is that the international donors, therefore, would have no choice but to provide funding, regardless of reforms, as long as nearly 1 million refugees remain.

One official with whom we met said, “You can’t clean a house with a dirty mop,” suggesting that they were trying to change the very people who are benefitting from the old order of doing business. Another official opined on who would blink first, the World Bank or the Lebanese? Many Lebanese politicians are banking on the former.

Is there a middle ground? Can increments of money be allocated based upon certain reform markers being met within certain timeframes? Who will blink first? Maybe it’s time for the international community, especially donors, the U.S. and France, to come to a clear understanding with their Lebanese partners about the detailed aspects of donor expectations as well as understanding the tenuous state of the Lebanese economy.

The U.S. Embassy also should continue, and expedite, its dialogues with key decision-makers to clarify donor expectations and facilitate stakeholder consensus around common U.S.-Lebanon objectives on revitalizing the economy. Time is of the essence.

Edward M. Gabriel is president of the American Task Force for Lebanon and former U.S. ambassador to Morocco (1997-2001).