Lebanon must heed world bank warnings

Political paralysis is a luxury the country can no longer afford

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While some of the indications of summer tourist activity in Lebanon are encouraging, we must never forget that our economy is structurally weak. The tourist season this summer could well be a stellar one, with some estimates reaching 1.6 million visitors. This is welcome news in view of the political quagmire and overall insecurity plaguing Lebanon since late 2004. It proves that, in spite of everything, Lebanon can still attract tourists and their money.

No signs of political progress

What is worrying at this stage is that there are no signs of political consensus on the reform package. We warned a few months ago that an over-politicization of the debate in Lebanon would deemphasize the need for economic revival. But with every World Bank or IMF warning, hope returns that international institutions will impose some sort of discipline on the economic front. Though many may see any intervention as a loss of sovereignty, it is clear that without direct international pressure and sponsorship of the reform program, political gridlock will continue.

The fact that there was a tacit agreement to calm down political wrangling during the summer season is damning evidence that politics suffocates trade. As one London-based analyst put it, “what the country needs is a cabinet made up exclusively of economy, reform and finance experts.”

While this may be an exaggeration, it reveals the frustration of the outside world. The latest warnings from the World Bank came on two fronts, and if the politicians had not been mired in territorial feuds, they might have taken note. The first was a clear and oft-repeated cry for reform on the fiscal front. It highlighted the astronomical debt-to-GDP ratio of Lebanon (nearly twice GDP) and the lack of movement to correct this imbalance. It also expressed a concern (which almost went unnoticed) on health care financing. But the warning was clear: Lebanon must overcome its political divisions and implement economic reforms if it is to make the most of a surge in international support. “There is tremendous international goodwill for Lebanon, but there is no time to lose,” said Omar Razzaz, World Bank country manager for Lebanon, in a recent interview with Reuters.

Intervention: Lebanon’s only hope?

The World Bank is worried that the political process has lost focus, and that there is little discussion on the economy. Despite all the legitimate qualms one may have about post-World Bank and IMF intervention scenarios, such a move may be Lebanon’s only hope. The country has been unable to place these issues at the top of the agenda: with the exception of Seniora and his entourage, how many of the current crop of political leaders even have an economic program? I have not heard a single mention in the so-called “national dialogue” of the urgency of getting our fiscal house in order. The disconnect between the political leadership and the people’s concerns is worse than ever, as unemployment, economic emigration, and vast inefficiencies in the public sector have not been topics in the “dialogue.”

The fact that the World Bank is linking future aid to reform should be reassuring, because the political will for reform is simply not there. Only a handful of cabinet ministers stand fully behind the reform plan and have spelled out what the World Bank refers to as “making trade-offs between short-term pain and long-term gain.” There is no way that the country’s economic health and finances can be purged without pain, and this pain must be absorbed by all. Although some political currents claim otherwise, and have demonstrated against reform in the streets of Beirut, its inevitability needs to be understood. Hastening economic reform has nothing to do with resisting Israel and little to do with safeguarding a particular sect or attacking the poor, no matter what the opposition’s political spin might say. It has to do with the economic survival of Lebanon, so naturally it ought to be a consensus issue.

The second warning shot from the World Bank said that the financial activities of several public institutions in Lebanon are still not transparent, and these entities pose a significant fiduciary risk to the government. These remarks came in an executive summary of the Country Financial Accountability Assessment (CFAA). This is perhaps the clearest appraisal yet of the decaying state of affairs in the country’s public sector. It addresses the entrenched corruption that is eating away at the country’s ability to reach its full potential to attract and maintain business spending, and thus create jobs.

Can we truly expect the current political system to generate change? Are the current players, many of whom are actually partners in corruption, capable of carrying out reform? Rhetorical questions, to be sure. The only hope may be that economic urgency will gradually sweep the political system off its feet and create a new political order driven primarily by economic priorities, in a triumph of the practical imperative over tribal politics.

Carrot and stick

Why the insistence on more intervention, if only verbal, from the international community? Evidence from several countries seems to suggest that the drive toward reform is often held back by the structural imbalances and even more often by corruption and poor governance. In Turkey, reform – though slow to come about – was accelerated by pressure from the World Bank and the IMF. It is essentially the carrot and stick concept: in order to achieve reform and restructure the state apparatus, the country must feel “boxed in.”

In Lebanon, given the rigidity of the public sector and political obstacles to change from within, World Bank rumblings may force the banks, the lenders of choice to the Treasury, to be principal agents of change. As the banks look to rebalance their risk profiles in line with Basel II, perhaps they can press the political players to engage in true economic dialogue.

What is clear is that the intensification of pressure from the World Bank and the conditions that will surround Beirut I will force the reform mechanism into action. Because the debt is held locally for the most part, the reform program must be a pure product of internal discussions forged from a series of concessions made by all sides. While we hope for more pressure to force us into action, our debt, unlike some examples in Latin America, is not held by foreign institutions and there is a natural limit to the level of pressure that world bodies can exert.

It’s still the economy, stupid

Economic and fiscal improvement – or at least a change in trajectory – may be painful in the short term, but they are the only antidote to mayhem in the country. The fundamental basis of the late Rafik Hariri’s vision was that, like Bill Clinton, he believed that “it’s the economy, stupid.” As the economy moves forward it will ease political and sectarian tensions and lessen the risk of civil unrest.

Without Beirut I, there is little hope beyond a good tourist season this summer. The autumn will be a tough one for Lebanon, when once again we will rely on expatriate remittances to help us dodge a full-blown economic depression.