Long overdue reforms

What can the Lebanese government achieve in less than two years?

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After nine months of deliberations, Lebanon formed a new government at the end of January. Saad Hariri, now in his third term as prime minister, announced a reform agenda as the cabinet’s raison d’être. Since 2011, Lebanon’s economy has been exhibiting recessionary symptoms and reforms are needed to reboot the economy.

According to media reports on the contents of the ministerial statement (the government’s mission statement), the agenda includes: adopting a fiscal and monetary policy to instill confidence in the economy and reduce the debt-to-GDP ratio through growth and spending reduction; passing the 2019 draft budget and auditing public finance from previous years; adopting an anti-corruption strategy; and ensuring 24-hour electricity “as soon as possible,” while reducing the subsidy to the failing public electricity utility. There is much that needs to be done, but given the length of time it took to form this government it is fair to wonder how many of these reforms can be achieved, and whether this cabinet’s term will be long enough to make any substantive difference ahead of the 2022 parliamentary and presidential elections.

A long to-do list

State officials attended CEDRE in April 2018, pledging reforms in exchange for donor financing to develop the country’s infrastructure and ease supply-side bottlenecks. In Paris, Lebanon presented donors and investors with a Capital Investment Plan (CIP). The CIP was prepared to address specific economic shortcomings: tremendous challenges in public finances, monetary policy that has exhausted all options to maintain stability, low growth rates, high unemployment, increasing levels of poverty, and the balance of payments problem.

The reforms promised involved fiscal discipline measures—mainly through the reduction of the debt-to-GDP ratio by decreasing the deficit by one percentage point of GDP over the next five years. The state could work toward this reduction in two ways: First, by reducing the subsidy to the failing public electricity utility, Électricité du Liban (EDL), which averaged $1.6 billion per year between 2010 and 2017, according to figures from the Ministry of Finance; second, by shoring up revenue to the treasury by increasing the tax base and reducing evasion of the value-added tax, which the International Monetary Fund last estimated in 2013 at $1.5 billion.

In February, Lebanon’s political parties met with the Economic and Social Council (ESC)—an advisory body to the government addressing economic, business, and civil concerns—for discussions of a 22-point economic plan. According to a draft version reviewed by Executive, the parties agreed to recommend fiscal measures the state should adopt to address the country’s fiscal imbalances. The plan included: eliminating the EDL deficit, with a timeframe of three years to achieve this; a call to reduce the cost of public debt servicing by at least 10 percent through a mechanism that the government, the central bank, and commercial banks agree on—though at the time Executive went to print it was still unclear how this mechanism would work; and a recommendation that the state reform public sector pension systems and benefits, review public sector personnel and positions, and freeze hiring for 2019.

As Executive reported last month, international organizations have advised Lebanon to adopt an evolving list of structural and sectoral reforms and doing business measures to spur economic productivity and enhance the private sector environment.

Experience and longevity needed

In order for the government to be effective in implementing reforms, it needs ministers with some experience in office. If a seasoned cabinet minister retains their portfolio or is granted a new one, there may not be as much disruption or as long a learning curve as there would be for a fresh member of cabinet. It would not be accurate to call this a technocratic government, but it has a high share of members that have at least one of the following three qualifications: experience as cabinet member in previous governments, experience as a leader in a private sector enterprise, and/or experience that is related to the portfolio they are in charge of. There are definitely individuals in this cabinet appointed thanks to political ties, but even then there is no indication they are completely unsuited to their position of appointment.

What could derail the reform agenda of this new government? In a recent interview published on the website of the Carnegie Middle East Center, the think tank’s director, Maha Yahya, cited internal factors, including the usual domestic political infighting as well as a deteriorating economy, the fight over normalizing relations with Syria, the potential for conflict with Israel, collateral damage from possible US financial sanctions targeting Hezbollah, and other security challenges.

If the maximum constitutional lifecycle of this cabinet is until spring 2022—which is when Parliament and the presidency are up for election (as Parliament becomes the election college for the president)—then Lebanon will need to have a new cabinet empowered to continue the reform agenda soon after. Why? As Lebanon experienced during the presidencies of Michel Sleiman and Michel Aoun, a caretaker cabinet has much less power than an empowered government. For the country to have an empowered government requires three elements, otherwise known as the troika: the speaker of Parliament, the prime minister, and the president. For most cabinets after Rafic Hariri’s assassination in 2005, this has not been the case. In the period since, there have been vacuums in every area: in cabinet, in the presidency, and in the mandate of Parliament—though not in the role of speaker of Parliament, which is somewhat ironic. That the speaker has had a 27-year run in the job would normally be a cause for concern, but for Lebanon this has been almost a happy factor because everything else is so dysfunctional.

Looking back at how much downtime the state has had over the last two decades—in terms of caretaker governments, extended mandates of Parliament, or vacancy of the presidency—suggests why the reform agenda has been stalled for so long. The question now is how much of the reform agenda can actually be accomplished if this cabinet has less than two years left of effective full power?

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Jeremy Arbid

Jeremy is Executive's former economics and policy editor.