Home Economics & Policy Lebanon must kickstart its economy

Lebanon must kickstart its economy

by Paul Abi Nasr

Lebanon is concurrently being hit with multiple crises, generating the perfect economic and financial storm. Net foreign reserves are at an all time low and hard decisions will have to be taken regarding the restructuring of the sovereign debt in all its forms. As the financial and monetary discussion is taking center stage it is crucial not to lose sight of the only way out of this crisis: a strategic vision for an economic recovery.
In order to keep hyperinflation at bay, reduce the drain of foreign reserves at the central bank, and project an aura of confidence when entering into potential negotiations to restructure Lebanon’s debt, we need to address the balance of payments conundrum.

We currently import around $20 billion a year, while exporting a little less than $3 billion. The deficit of $17 billion needs to be covered by inflows of hard currency. Lebanon enjoys a special status with an outsized diaspora that sends remittances in a systematic fashion to the tune of around $7 billion every year.

The very large remaining gap was depleting reserves at alarming rates, forcing BDL to come up with schemes to replenish them by proposing very advantageous rates to attract funds. The whole system was unsustainable and is now headed toward collapse.

We need to reduce the trade deficit to a manageable $7-8 billion, which can only be achieved by reducing imports to around $12 billion and increasing exports to around $4.5 billion. Such a drastic transformation should not cripple growth but rather set the stage for job creation and policies that promote environmental sustainability.

A quick look at our annual imports yields some clear targets for import reduction:

Fuel: Lebanon needs approximately $3.8 billion of imports every year (at current oil prices). In 2019 the country imported closer to $6 billion. There is a general consensus across all stakeholders—BDL, importers, and customs—that around $2 billion worth of fuel was being smuggled to Syria, hence the discrepancy.

Gold and rough precious stones: At roughly $1.6 billion, these are overwhelmingly transiting through Lebanon with very few used in manufacturing.

Cars and trucks: A gradual return to pre-2008 levels of imports can be achieved over the next three years. The current approximately $1.7 billion in imported vehicles will have to be forgone and local stocks used in the meantime.

Luxury items: A repositioning of the shopping habits toward a slightly lower price segment will induce a ticket reduction (the average ticket is what is being paid at the cash register in shops). An estimate based on private sector figures across the various sectors shows that we will witness a reduction of around $450 million for 2020.

Another approximately $2.5 billion would still be required to bring the deficit to a manageable level. This could only be achieved by import substitution.

The manufacturing sector generally runs at 60 percent production capacity and no capital expenditure would be required to increase production to the required target. An increase of 50,000 jobs would be required to fulfill this uptick in production, and another 100,000 jobs would be created in the other economic sectors (per UNIDO, every manufacturing job created would generate another 2.2 jobs in other sectors).

The sector currently employs around 150,000 Lebanese employees and another 50,000 to 60,000 foreign workers. The difficulty in accessing hard currency is inducing a rapid replacement of the foreign workforce with a more willing local one. A total of 200,000 jobs would not be hard to achieve should we provide the manufacturing sector with the basis for success.
A selective access to officially priced hard currency is central to the success of such an endeavor, it would give the manufacturers the opportunity to keep all costs in the local currency, greatly reducing the effect of inflation and rebuilding part of the purchasing power that has been lost.

A review of the tariff code needs to be taken to reduce under invoicing and protect eventual foreign direct investments in the manufacturing sector.
It is also crucial to crackdown on smuggling—the informal economy has crippled all the sectors and drained the public finances. The World Bank estimates the informal economy at 40 percent of GDP.

The manufacturing sector is also the easiest to audit and increasing its share of GDP to 25 percent will disproportionately increase tax collection.
The economy is in a dire state, but we can jolt it back to growth. We need to prioritize our efforts and make sure any use of the remaining resources we still have are invested in productive, job-creating, deficit reducing sectors—and manufacturing will be central to such a strategic vision.

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