Lebanon is facing a very challenging time, and our governments have taken no action at all and remained in a state of procrastination for the past three and a half years. This inaction and waiting for an agreement with the International Monetary Fund (IMF), clearly reveals that the government is not qualified to address the economic issues and the state of crisis Lebanon is confronting. International institutions have provided numerous reform ideas and approaches, but the crisis governments failed not only to respond to such external reforms but also failed to challenge any of the reform proposals, and has continued to be totally submissive to the proposals of international financial institutions and other potential donors, albeit without any action taken, and displayed inability to decipher what could be an optimal solution for Lebanon. Clearly, many of the so-called reform proposals by external institutions could have a deleterious impact on Lebanon.
A destructive approach
Government plans have focused on managing losses rather than focusing on a realistic recovery path. Simplicity prevailed in the governments’ solutions and the most prominent among them is the intent to cross-out deposits (nearly at a 90 percent rate) and most government foreign currency debt, which is a serious constitutional violation. This also includes the imprudent sequential reform strategy of restructuring banks as a prelude to any reform. Such an approach is very destructive to trust in the banking system and does not provide a viable solution, instead it aggravates the current crisis and exposes Lebanon to legal action by depositors and debt holders.
The government and the central bank have resorted to a multiple exchange rate system that nourished indirect subsidies, increased quasi-fiscal operations that created financial market distortions. Instead, the government should have pursued a floating exchange rate system and a rescheduling of impaired financial assets and liabilities that were brought about by the government and central bank default on their financial obligations.
It will generate the necessary liquidity that is desperately needed in the financial markets and private businesses, and restores trust and confidence in the banking system. It will revert back to the feasibility of using virtual money (foreign and domestic), promotes savings and investment, enhances competitiveness, and promotes the inflow of foreign investment into the Lebanese economy. To build a plan aiming at regaining external bilateral and multilateral financing only will result in increasing the burden of debt, and creates an additional pathway for corruption generated from increasing public spending by proven inept governments. Such targeted aid will not provide liquidity that is needed the most in the financial sector, and will not promote sustainable growth.
The absence of meaningful subsidies and monetary policies have further derailed the economy towards regressive outcomes that were revealed in large real income losses resulting from high business closures and a massive inflation exceeding one thousand percent, compared to the period preceding the crisis.
Continuation of the same
The current government plan failed to generate trust in the banking system. On the contrary, cash transactions became the norm, while hoarding foreign currency cash became the alternative to bank financial savings, thus resulting in a massive reduction in intermediation and a run-on the banks.
The outcome for 2023 is not expected to change, but rather to continue to face stalled economic activity and continued currency depreciation. The government is still insisting on adhering to the same failed approach in spite of massive opposition from all syndicates and most political party’s groups as well as depositors. Some sectors in the economy, particularly those that benefited from the currency depreciation in the parallel currency market, have regained competitiveness in the export markets and import substitution markets and realized real gains, but were not sufficient to compensate for the massive losses in other sectors.
To move forward, essential corrective measures need to be implemented immediately without waiting for an agreement on an IMF program. The IMF itself explicitly has shown a disregard for the rights of depositors and has raised doubt on its ability to reach a fruitful outcome based on its program. Rather, it has adopted an approach for further destruction of confidence in the banking system and the government as a whole.
The following is a guideline for exiting from the perceived intended crisis:
- Adopt a clean floating exchange rate without the misguided intervention by the central bank. Floating the currency has numerous advantages. It will allow the financial market to regain the real value of financial assets and liabilities and terminates the current distinction between fresh dollars and bank dollars.
- With floating, it is imperative to adopt tight fiscal policies as large fiscal deficits deplete reserves and threaten the free exchange rate stability. Floating will facilitate realizing the objective of reaching a balanced budget.
- As well, it is essential to reschedule all private and public (including public debt) financial assets and liabilities. This will generate confidence and an orderly return to a normal state of financial instruments’ maturity.
- Promoting private sector management of failed publicly owned enterprises is needed to transform them into profitable entities. Proper procedures, including an international bidding process, should be followed in contracting with competent private management companies.
- Restructuring banks should be considered after exchange rate, fiscal and monetary reform are considered. Failed policies and government mismanagement should be tackled first. Restructuring banks by simply writing off deposits is a suicidal approach.
Without serious and proper reform, Lebanon will continue to move on a destructive path. Reform should start now, waiting for the grace of the IMF and the World Bank for approval is a waste of time as negotiations with such institutions are lengthy and could also be based on a faulty premise. The Lebanese government should cease to procrastinate and should initiate sequential reform immediately. Otherwise, the economy will continue to regress, poverty will escalate, and mass exodus of human capital will remain a way out of this prevailing chaos.