EconomyFinanceLeaders

Economic democracy

by Thomas Schellen
written by Thomas Schellen

Seen in isolation, the situation of Lebanon at the onset of 2022 is that of a country which is still in the depths of a mindboggling crisis. The national crisis of everything is singularly encompassing and to be grasped by the human mind needs no historic denominator, geographic comparison, or even numerical quantification of GDP contraction, annual inflation rates, currency depreciation, or increases in inequality, unemployment, and poverty. A walk through Beirut and a journey into other urban centers and outlying villages is enough to nurture a sense of unspeakable economic shock, common suffering, and utter dismay at this national tragedy being born and raised in the presence of corrupt and self-absorbed leaders. A religious founder walking the hills of the region was once purported to ask his listeners “is there anyone among you who, if his son asks for bread, will give him a stone?” Observing Lebanon, one might ask why some will treat their people, like no sentient moral person would a stray cat.

But this small slice of attractive real estate on the edge of a calamitous region, cannot be seen in isolation. Neither in time nor in its contemporary geopolitical space. This says first that without international push, the individuals and political factions entrusted by the people or by fate with the care for country and society, will not budge. Left to their own devices, they will not cease being self-absorbed, paying lipservice to their duties while incessantly violating them, and acting either corrupt or not at all. That much has been demonstrated beyond question by the past two years’ failed, aborted, or stillborn governing bodies. 

Still, there is no human situation without a way forward. The financial economy is a human idea and a practice of people (public and private). This is why our turn-of-the-year issue focuses on the financial economy of Lebanon, and the need to resolve misunderstandings and deliberately mal-programmed perceptions of the financial economy components, most importantly national dealings with the International Monetary Fund (IMF) and the options that always exist when two sides negotiate in good faith. There is no reason at all to think the IMF wants Lebanon to suffer. 

IMPERFECT BY DEFAULT BUT…

At this point, a program for a virtuous financial economy will by default be imperfect. The mess is so deep that any attempted solution, for example whether to still go for a currency board or how to restructure our banking sector so we do not do our competitor nations the favor of destroying our strongest economic asset ourselves, will not be free of conceptual and implementation errors. We asked the best experts that we found to give their perspectives on the financial economy, the engineering of which will have to constitute several crucial wheels in our national economic machine that has to be made to work in the coming year, lest Lebanon lose more of its qualified people and those who stay slink along life as beggars. 

Thinking and tinkering with the financial economy will not be enough to begin saving Lebanon this year, however, regardless of how much international input the country might get. Two more considerations need to be undertaken. One is the continued effort, against all previous conceptual flops, communication imperfection, and current lack of power, to debate our economic future from as many angles as there are strong and justified interests. Let it be stated clearly if reiteratively: Lebanon has great business and economic minds. An abundance of talents, more than it needs. Now more than ever, the talents must not be buried. 

If we want to effectively benefit from outside help, we have to help ourselves and do our part to construct the better operating system and economic machine. That is why we are publishing our Roadmap 5.0 at this time, inviting your participation in the effort to push for economic democracy where the public and private and third sector wheels finally move productively in synch, empowered by free and fair elections and by your constructive ideas. We are not only publishing an update but we are adding a new pillar, focused on enabling private sector industries and economic agency (for more details on the new pillar and our Roadmap journey, see Leader on page 8). 

USING THE WIDE ANGLE LENS

 The third viewing angle of our crisis of everything necessitates a look at the global picture. Gauged against any conventional wisdom and experience for country development, the paradox of the Lebanese situation at the start of 2022 is that the country has in the past year done worse, far worse, than rational thinkers would have expected. At the same time, the country has, in its social fabric and will to perform with civil decency, not deteriorated nearly as badly as some evangelists of self-abandonment and despair had promised in pessimistic scenarios of a failed society. The people’s generosity and welcoming inclusiveness has not been destroyed. There are still those who want to make this country shine as bright as it can.

However, if the optimists succeed, Lebanon might in a few years shine on a global stage considerably dimmer that it was in the first twenty years of the century. Two recent benchmark publications show the state of the world is causing growing fears at least for the next two or three years. The 2022 Global Risks Report (GRR) by the World Economic Forum (WEF), published in January, starts out with three headlines: burning societal and environmental concerns, collaborations on challenges rendered more difficult by rising inequalities under divergent economic trajectories, and the danger of a disorderly climate transition that will further exacerbate said inequalities. The GRR sees a horizon marked by increasing tensions.

About a quarter of the people polled for the 2022 GRR are worried, over 60 percent are concerned, and not even 4 percent are unrestrainedly “optimistic.” Without claiming to be scientific, this magazine’s memories of hearing Lebanese business leaders say that they are optimistic for this country, optimistic despite everything they have experienced, is a multiple of 4 percent. Note: Lebanon-based economic leaders included in a sample of some 12,000 individual leaders asked by the WEF to assess the top risks in their countries, most often cited state collapse, followed by man-made environmental damage ,and absence/collapse of social security. Global risks by comparison concentrated around climate and weather, flowed by societal risks, with economic and debt risks distant runners up. 

Another report, more extensive and more authoritative than the GRR, published in January is the World Bank’s study on the Global Economic Prospects (GEP). The press announcement for this report condenses its key message by saying darkly that the global economy is entering a “pronounced slowdown.” Stating some fascinating numbers, the GEP informs, for example, that total global debt reached 263 percent of global GDP in 2020 and government debt in Emerging Markets / Developing Economies (EMDE countries) leapt up nine percentage points to 63 percent of GDP (one could only dream of Lebanon to be in the median range of EMDE public debt). 

The headlines in the report’s first pages describe the global economic horizon as clouded by unprecedented macroeconomic imbalances and growing inequality within and between countries. It further sees the horizon enmeshed in exceptional uncertainty, which is further compounding in equalities. “Half or more of economies in East Asia and Pacific, Latin America and the Caribbean, and the Middle East and North Africa, and two-fifths of economies in Sub-Saharan Africa, will still be below their 2019 per capita GDP levels by 2023,” (emphasis added) it augurs broadly. To tackle those exacerbating inequities in the developing world, the GEP report proposes an agenda of “concerted effort to mobilize external resources and accelerate debt relief efforts,” plus invigorated steps for “domestic growth and innovation.” 

MICRO LOOK LEBANON 

Lebanon is the single MENA economy estimated in the GEP to have ended 2021 with a GDP contraction (minus 10.5 percent versus regional growth forecast to increase from around 3 percent in 2021 to 4.4 percent in 2022), and has a 99.999 percent outlook to have GDP far below 2019 numbers at the end of 2023. The World Bank did not see it fit to include Lebanon’s (nor Libya’s, Yemen’s and Syria’s) GDP estimates for 2022 and 2023 in regional numbers. The Lebanese who are told in the GER that their “new government formed in September 2021 is beginning the process of economic stabilization,” indubitably will be enamored by World Bank leaders’ promises for acceleration of debt relief efforts, and good advices on growth and innovation. 

But even if there were projected numbers for Lebanon’s economic fortunes in 2022 and 2023, it has to be remembered that all the world’s models and experts have not proven any more trustworthy for predicting the mid-term or even the impending global performances, neither ahead of the 2007 Great Recession nor during the unfolding of the 2020 pandemic recession. Nonetheless, when considering the mood of impudently exuberant expectations at the start of 2007 in comparison to today’s confessed skepticism, the pained anticipation of troubles in the next three years looks more credible than past irrational exuberances. 

This brings home two messages. Lebanon’s efforts for building the national economic machine in 2022 should be both holistic, i.e., encompassing all political and social and economic fronts, and self-reliant as much as any how possible. They will have to include foreign assistance and agreements but need to assume that the world community, and with it the ability to respond to the mounting needs of developing and countries and failed states, will be heavily burdened this year. Lebanon needs to use its own devices, expatriate and local, and all its purported friends, but most of all, it will have to be self-motivated to engineer a new economic democracy with the tools of state buildings and construct trustworthy contracts. 

The global message is not to ignore that the past seven fat decades of global growth will have to be replaced by a paradigm of prudent resource preservation that entails much more than climate risk mitigation, appeasement of societal upheavals, and improvement of virtual spheres or cyber defenses. If the coming global shift will be disruptive for as long a period as the need for climate risk and population risk and information society risk has been ignored or improperly treated, we are in for decades of disruption, shock and denials, stagnation, fitful restoration, and recreation of our economic democracies amid ongoing uncertainty. The lessons of the crisis of everything in the Lebanese laboratory deserve to be preserved and solutions that might be tested successfully in Lebanon in the coming few years might become this country’s most productive and valuable exports. This moment in time is one to prepare for most interesting challenges, whether in Lebanon or in the world. 

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Economic roadmapLeaders

Let number 5 be alive

by Thomas Schellen
written by Thomas Schellen

Published in its fifth draft iteration, this year’s Economic Roadmap is coupled with an important addition of a fifth pillar, enable. It adds seven industry-specific agenda priorities to our menu of measures that we propose to aspiring change leaders and decision makers. These new agenda priorities and related proposals specifically target the enablement and self-enablement of leading productive industries in Lebanon, namely manufacturing, agro-industry, media and content creation, hospitality, knowledge enterprises, organic beauty, and renewable energy. 

Other changes in Roadmap draft 5.0 can be found in revised introductions to the 19 agenda priorities and their detailed policy priorities and proposals. Sadly, only updates, in the rarest cases, mean that proposed measures under a policy priority have been achieved – updates of proposed measures mostly reflecting unfortunate changes in context of the economic crisis rendering actions unachievable or theoretical for the foreseeable future. 

Last but not least, innovations of the Roadmap involve the addition of almost 90 content links within this online edition. These links connect you to Executive’s stories of the past six years analyzing and elaborating agenda priorities listed under pillars one to four, as they retain their titles of build & reform, strategize, combat, and develop.

ROADMAP FLASHBACK AND THE ELECTIONS AHEAD 

At the time when the magazine was systematizing its internal Executive Roadmap project discussions – with first informal inputs to the roadmap dating back to the idyllic 2000s – reformist Lebanese minds, including Executive as publication in advocacy of a better economy, were committing themselves to the run-up period to the 2018 parliamentary elections.

As Lebanon’s change advocates were energized by the 2016 municipal elections, many of them looked to the long delayed parliamentary elections for fresh representation that would lead a tidal of wave of change. One that would challenge the status quo, witness the rise of women within the political spectrum, and see many more overdue to changes. 

In just one example for the desires tied to the 2018 elections, we titled our November 2017 issue “Reformist Mutation,” with the message that the country was experiencing the gestation of a future governed by this new DNA. In parallel, we noted in that issue’s leader and overview story that the anti-establishment political groupings and individuals must get their act together, while asking whether the new will be “fundamentally different and better, or just as vain as the old.” 

Alas, the 2018 elections did not result in even as much as 10 or 20 percent infusion of reformist DNA into the political aisle. The question hovering over the constructive impact of new reformist voices on the Lebanese Parliament remains levitating, and begs for another answer in this year’s electoral showdown. But notwithstanding the unlikely occurrence that a reform-minded Parliament would be empowered this spring, the Executive Economic Roadmap has from its inception been and continues to be based on consultative principles and processes. Among our aspirations – then and now – is that elected servants of the people would consider Executive’s Roadmap a useful tool for economic policy making and consult it as a platform for dialog with their well-informed constituents 

UNIVERSAL VOICES

 As elections are, yet again, on the political horizon, it is necessary to not only acknowledge how desperate the economic reality has become, but also how political processes have shifted to the worse. From a partisan and self-serving sectarian model of horse trading driven by joint, albeit minimal, mutual interests to seek partisan benefits at the lowest cost to themselves and their fiefdoms, the political sphere seems to have “advanced” to a basket case setting of mutually assured destruction of public interests and clinical paralysis where absolutely nothing strategic and long-term gets done. 

In this dark reality, one cannot but note that reform demands have been thrown at the Lebanese Republic in a growing barrage. Universal opposition to the government’s economic behaviors – with its two defining components of inactivity and corruption – has been stated on the Lebanese street in the 2019 protests as well as the garbage protests before it. Lebanese economists have frequently voiced scathing criticism of monetary policies over the course of the past 25 years. A few voices from the Lebanese business realm, enlightened academics, and responsible media have even tried to provide constructive criticism. 

Embarrassingly, even global institutions, supranational alliances, and donor governments have, for over a year, showered the government of Lebanon with increasingly harsh rebukes and reform demands. At time of writing, the World Bank’s labeling of Lebanon’s economic crisis as “deliberate depression” evoked the image of a new superlative for recession. Being designated ground zero for an entire new category of sponsored disaster economics – is this the unique Lebanese contribution to the history of economics? 

REALITY VS STATUS QUO 

Lebanon has witnessed all that protest, all those admonitions, but to what avail? One small answer to this question can be derived, depressingly, from a glance over the 2021 Corruption Perception Index (CPI). Within the global criticism and local outcries of distrust of the status quo in Lebanon, the fight against corruption has been an important and vigorously pursued part. (For evidence, see pillar 3, Agenda Priority 13 of the Executive Economic Roadmap.) 

But the 2021 CPI edition, released by Transparency International on January 25th, shows Lebanon having taken another small notch of deterioration in trust last year, from 25 to 24 points, further entrenching the country’s perception as being among not the worst but the almost-as-bad cultures of corruption in the 180 countries listed. What matters here, from this magazine’s perspective, is not so much the drop by one point – out of a theoretical maximum of 100 – or the rank on the CPI list but the fact that all efforts of combating corruption, including our own, have failed to instigate an improving picture of corruption resistance.

In the most recent iteration of a seemingly political process, the draft for the 2022 Budget law has shown how the latest cabinet’s top ambition appears to combine increasing the output of hot air with deflection of reforms. The budget process signals an unhappy continuation to cabinet draft laws of the past few years that yielded nothing but ad-hoc inadequacies, focusing on escaping from structural changes in public finance and the public sector overall. 

The political discourse of the young year fits in unfortunate perfection to what the World Bank’s Saroj Kumar Jha called the “deliberate denial during deliberate depression” when presenting the Fall 2021 Lebanon Economic Monitor on January 25. 

THIS MAGAZINE COULD NOT AGREE MORE. 

But against all economic reason and evidence, Executive has internalized its informal motto to embrace the absurd. This magazine insists to prod on – bloodied but unbowed, as we titled our summer 2021 issue – in advocating for Lebanon’s better potentials. The Executive Roadmap is one of our tools by which we seek to rally you behind the peaceful flag of win-win-win for the Lebanese economy, society, and public interests. 

For this reason, after having had to witness the continued absence of macroeconomic and political will to reform among public sector stakeholders, Executive was more than ready to embrace the idea of zooming our analytical focus, conferencing, and communication skills onto potentials of industries to realize a better economy. 

Last year, we thus eagerly partnered with the United States Agency for International Development (USAID) to discuss an economic framework for job creation and growth in five productive industries. The outcome of this project – with addition of two more industries – is what we present to you as pillar 5 in Roadmap Draft 5.0, with the humble and eager request to invest your minds into discussing and improving it together with us. 

Because, in deliberately and determinedly denying deliberate depression, we can, together, build a new economic democracy for this country.

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Last Year

LAST YEAR

by Executive Editors
written by Executive Editors

January February 

Lockdown and labor protests

Following the government decision to extend a total COVID-19 lockdown and curfew to the first week of February, exasperated citizens left without the possibility of securing income from daily labor or sales activities took to the streets and blocked roads in protest across the country. At the start of the year a lockdown was implemented for the January 14-25 period, in response to a skyrocketing rise in COVID-19 cases during the holiday season. The extension of the lockdown was decided in a desperate attempt to flatten the curve of infection but was perceived as economically detrimental by laborers and business owners already struggling to remain afloat and deprived of any compensation or social safety net. The resigned Lebanese government did resolutely nothing. 

COVID-19 vaccination starts 

After a long wait, the first doses of the COVID-19 vaccine arrived in Lebanon and the Ministry of Public Health initiated a nationwide and widely promoted vaccination campaign prioritizing medical personnel and senior citizens. The good news was marred by reports of expected nepotism and abuse by public figures, ineligible for priority vaccination, rushing ahead of others to get jabbed. When called out, some of these politicians responded publicly as expected with dismissive remarks and, in some cases, insulting language. Further complications arose from the insufficiency of imported doses amid high demand and need, while different political figures worked through alternative channels to secure additional doses for their electoral base. This prompted the private sector once again to step in and secure vaccines at their own expense for their employees free of charge or at competitive prices.

Journalist murdered 

Lokman Slim, a prominent journalist, activist and vocalcritic of Hezbollah politics was found shot in his car in southern Lebanon on February 4. Slim had previously received explicit death threats from Hezbollah supporters and had issued a statement holding the group’s leadership, along with the Lebanese army, responsible for his personal safety His murder adds another heinous crime to the list of assassinations of people able to testify on nefarious activities in recent months, amid nationwide certainty that it too will also go unsolved. The inability to single out any suspects, much less secure a conviction, or even launch prosecution, meant “the elephant remained in the room,” and the guilty would continue to kill with impunity and pursue their unbridled efforts to advance their own agendas. Slim’s assassination was only the most recent case of attacks against journalists and freedom of expression since the beginning of the October 17 protest movement. His funeral and requiem were attended by a slew of artists, activists, foreign ambassadors, and multi-confessional religious delegations. 

The Lebanese pound in free fall 

In March, the dollar exchange rate reached 10,000 Lebanese pounds on the parallel market for the first time. This figure, regarded by some as the symbolic point of no return for the national currency’s depreciation sounded the alarm for both businesses and citizens who once again took to the streets and blocked roads in protest. This depreciation below 10,000 pounds had been anticipated by a number of economists and analysts but had managed to be delayed in the wake of the August 4 Beirut Port explosion, following an influx of US dollar notes to the country from international donors and expatriates. In the months that followed, this accelerated inflation has been steadily contributing to the depreciation of the Lebanese pound. The subsequent lifting of all lockdown measures and reopening of most businesses did nothing to slow down further depreciation or the dwindling of purchasing power.

April May

No more gasoline? 

The spiralling depreciation of the Lebanese pound and shortage of hard US dollar currency began threatening fuel importers’ ability to afford additional supplies at the subsidy rates effective then. Unscrupulous distributors and gas station owners radically reduced and rationed supply across, pretexting acute shortages even as reports increased of fuel hoarding, black market sales and smuggling of fuel to Syria (along with US dollar banknotes, flour, and a slew of subsidized goods). Panicking commuters queued for up to six or eight hours – sometimes parking their vehicles in line overnight – at gas stations to fill their tanks at steadily increasing rates, provided daily rations lasted. Main roads and highways saw heavy congestion from queues at gas stations, sometimes spread over three lines and extending kilometers. Scenes of vehicles, including ambulances, having run dry and been abandoned mid-road or towed by hand were repeated in different parts of the country, and so were scenes of violence at gas stations, a few of which with tragic endings. Once more, the resigned Lebanese government expended minimal efforts to address the situation.

No more electricty? 

The fuel crisis spilled over to the electricity sector, increasing outages and blackouts, with private generator owners struggling to fill the gaps and beginning to raise subscription fees while reducing supply. The continuing depreciation of the Lebanese pound began to make it more difficult for many citizens to afford price hikes. Some socially minded businesses started welcoming even non-paying customers, specifically students, freelancers and remotely-based employees, to allow them to recharge their laptops and mobile devices or simply escape the relentless summer heat. Again, the resigned Lebanese government remained predictably idle and hoped to stall until a new government would be formed under Prime Minister-designate Saad Hariri. 

Judicial mishaps 

Two Lebanese judges made headlines in this period. Like his predecessor Judge Fadi Sawwan, Judge Tarek Bitar who replaced him in leading the Beirut Port explosion investigation, started facing political pressure from officials and former ministers called on to testify or be investigated. Recurring monthly demonstrations by the families of the victims began to take on a clear character of support for Bitar in challenging systemic impunity and the judge managed to overcome many of the early legal hurdles thrown at him. On the other hand, the controversial Judge Ghada Aoun, Mount Lebanon’s state prosecutor, engaged in a highly mediatized campaign to hold bankers accountable for transferring funds outside Lebanon. Judge Aoun’s perceived bias and untimely agenda divided citizens and eventually led nowhere. Both cases put the issue of an independent judiciary in the spotlight.

Tourism hopes hang on returning expatriates 

Despite the escalating fuel and electricity crisis, the hospitality and tourism sector was betting on a good summer season to recoup some of their losses and stay in business. Import restrictions and the depreciation of the Lebanese pound exacerbated shortages of medical supplies (worsened from the hoarding of supplies by households and, in speculation, by some distributors and pharmacists) as well as other essential goods. Expatriates returning to the country after a year of lockdowns flocked to Rafic Hariri International Airport laden with suitcases of over-the-counter and prescription medication, hygiene products, baby formula, and “fresh dollars” to succor their families. Restaurants and nightlife venues filled up, buoyed by the multiplied purchasing power of these expatriates’ US dollars.

June July August 

Hariri out, Mikati in 

Nine months after his designation as new Prime Minister in the wake of the resignation of the previous Hassan Diab government, and following endless disagreements with President Michel Aoun on his cabinet’s constitution, Saad Hariri finally conceded and withdrew his candidacy on July 15, and was replaced two weeks later by Najib Mikati as prime minister desingnate. By then, with talks of elections in 2022 already thriving, these developments had virtually no bearing on energy, fiscal, or social policies of any kind, barely causing a bump in the upward curve of the Lebanese pound’s unrestrained depreciation, while fuel, electricity, and medication shortages held strong. Queues at the passport office of the General Directorate of General Security started swelling as demand for passports increased dramatically, fuelled by rumors of passport papers running out with hopes of escaping the increasingly untenable situation resting on hypothetical immigration. Hassan Diab’s care takeover government idly watched on.

Deadly gasoline

At least 30 people were a clear stand on demands to replace Bitar. Mikati, however, maintained his refusal to get implicated in the judiciary process. Meanwhile, human rights groups expressed their fears that Bitar would eventually be removed, further stalling the investigation, especially after some of the relatives of the victims of the explosion suddenly wavered in their support of Bitar, a turn-around they justified as efforts to avoid further conflicts and violence while others condemned as betrayal and acting under political pressure or threats. Despite these tensions, demonstrators still gathered peacefully in Nejmeh Square on October 17 to renew their demands for reforms, justice and accountability against the backdrop of an economic and social crisis worsening by the day.

August 4, one year later

One year after the deadly August 4 blast, justice for the victims of the disasters remained elusive, amid a flurry of attempts to remove Judge Tarek Bitar presiding over the investigation. On July 2, Bitar had announced legal procedures against a number of high-ranking politicians and security officials, among them General Security Chief MajorGeneral Abbas Ibrahim. Following caretaker Minister of Interior Mohammed Fahmi’s refusal to lift the immunity of Ibrahim, families of the victims of the explosion protested outside Fahmi’s residence in Beirut and clashed with anti-riot police, even managing to break through the perimeter after Fahmi’s evacuation. Protest movements continued through July until August 4, 2021 where demonstrators gathered en masse in Beirut to commemorate the tragedy. The day was marked by the unveiling of a monument to the victims on the site of the explosion, a massive 25 meter-tall sculpture made from debris of the explosion, that was nine months in the making funded by private companies, with support from state institutions. The monument sparked mixed reviews and the unveiling ceremony was boycotted by some of the families of the victims who held another ceremony simultaneously on the highway overlooking the port. Later in the day, security forces in Nejmeh Square, once again, clashed with demonstrators demanding truth, justice, and an impartial investigation. Later in the month of August, the Lebanese and visitors suffered terse moments as central bank Governor Riad Salameh announced an upcoming complete withdrawal of fuel importations subsidies. However, fears peaked, and the summer holiday season resumed with tourists and expats experiencing their visits without feared increases in violent protests.

September October 

The battle for justice spills over to the streets

The tug-of-war between supporters and opponents of Judge Tarek Bitar in the August 4 Beirut Port explosion investigation intensified over the months of September and October, culminating in roadblocks and a violent demonstration denouncing the politization of the investigation on October 14, that ended in armed clashes between the Tayyouneh and Ain El Remmaneh areas of Beirut near Adlieh. Residential neighborhoods in the district suffered business and property damages, while rooftop shooters apparently targeted demonstrators causing at least six deaths. The violence ignited political and confessional tensions, and somehow dampened motivation for a strong second commemoration of the October 17 protests. Since his appointment as lead investigator, Bitar was forced to suspend his probe repeatedly in the face of lawsuits filed by former ministers suspected of negligence over the August 4 explosion. Following the latest violent confrontations, Hezbollah representatives announced they would boycott meetings of Prime Minister Najib Mikati’s newly formed cabinet until his government took a clear stand on demands to replace Bitar. Mikati, however, maintained his refusal to get implicated in the judiciary process. Meanwhile, human rights groups expressed their fears that Bitar would eventually be removed, further stalling the investigation, especially after some of the relatives of the victims of the explosion suddenly wavered in their support of Bitar, a turn-around they justified as efforts to avoid further conflicts and violence while others condemned as betrayal and acting under political pressure or threats. Despite these tensions, demonstrators still gathered peacefully in Nejmeh Square on October 17 to renew their demands for reforms, justice and accountability against the backdrop of an economic and social crisis worsening by the day.

Blackouts and breakdowns 

Electricity: The electricity crisis reached its peak in October with the first total blackouts across all regions. Private generators instigated serious rationing due to high fuel prices following the full elimination of fuel subsidies and rising fuel prices. Inefficiencies and high costs of imported fuel across the energy sector took their toll on households and businesses alike, with increased closures anticipated. The situation fuelled (forgive the pun) a nationwide dialog about alternative solutions from renewable energy sources, specifically solar energy. Energy was the subject of a high-impact Special Report by Executive in partnership with Konrad-AdenauerStiftung (KAS-REMENA) that engaged technical, legal and financial experts. Fuel: With subsidies removed, gasoline seemed to magically rematerialize in gas stations after a summer of shortage, albeit in a sketchy manner at first, but fewer citizens could still afford it without the lifeline of remittances by their expatriate relatives. This was reflected in the increased demand for bus transportation by parents for their children as schools started reopening. Waste: The cost of fuel disrupted waste pickup and management operations, resulting in garbage piling up on sidewalks and burned or dumped erratically. On a positive note, diminishing purchasing power caused the overall volume of household waste to diminish, as reported by different recyclers. Arts: Rising costs strained the arts sector that was already struggling with production difficulties linked to COVID-19 restrictions and a dwindling turnover at artistic events. During the October 14 violent clashes in Beirut, the entrance area of the Sunflower Theater in Tayyouneh, one of the city’s cultural mainstays, was seriously damaged and eventually closed off, marking another blow to the sector.

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Editorial

Vengeance Economics

by Yasser Akkaoui
written by Yasser Akkaoui

The year 2021 left a bitter aftertaste. And believe it or not, this horrible flavor of systemic failure keeps getting worse. The government’s inaction increasingly exasperates people’s frustrations, as they maneuver around daily threats, uncertainty, and desperation. This reality promises the worst behavior from both the establishment and the citizen; arrogant incompetence from the first and misinformed confusion from the latter.


The proposed budget’s lack of alignment to a clear and detailed strategy that draws an elaborate plan to revive the economy and returns people’s rights defies all expectations and economic principles. We are worried about the damage that might be caused by passing, before elections, another amateurish plan similar to that of 2020. A non-reformist budget full of haphazard spending and unjust revenues will only serve the political class. It will reinforce a failed extractive economic model that will deplete remaining resources and capital.


As we bleed, we recognize that we need to immediately adopt a plan that distributes the losses fairly before more funds are drained, yet, the fear is that what is being concocted behind closed doors is nothing but another treachery that will allow the government to escape punishment and responsibility for their mismanagement and corruption, and worse, throw most of the burden on the citizen. The asymmetry of information is alarming; the people deserve to be involved in formulating a plan that promotes an inclusive economic model which advances equitable opportunities for financial participants in economic growth, while benefitting every section of society.


On the other hand, we are still awaiting a promising, constructive, and ambitious counterargument from reformist groups or individuals. So far, we only come across reactive, vindictive, and aggressive statements in the form of letters and responses that do not add up to even an introductory discourse on a political reform doctrine that would mirror people’s urgencies and support realistic expectations.

Unfortunately, the international community has also caught on to this lack of vision. None among local or international advocates is amused by our society’s failure to even propose a solid alternative to the corrupt reality, which more and more is resembling sectarian fascism practiced by those few who loudly declare themselves to represent the best interests of the Lebanese but are constantly violating the people’s rights and are willing to use lies and any means at their disposal to achieve their violent goals.


No democracy has ever been entirely immune against violence from the outside, or radical and brutal takeover attempts from within. Thus, while we are busy pegging our hopes to the much-anticipated elections and make our bets that the fragility of democracy does not fail our illusions, it is high time for reformists and opposition to put forward a comprehensive and viable vision that can invalidate the establishment’s attempts to undermine our rights.


Yes, we want to take vengeance for the corrupt past but by building a viable, diverse, and just economy. We cannot invest our hopes into voting for another political fantasy, as we need more than just a good plan or agreement.

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CommentEconomyFinanceSpecial Report

No way out?

by Salim Taha
written by Salim Taha

The Lebanese national debt, seen in relation to the country’s GDP, has been one of the highest in the world for many years. When the cost of servicing that debt became extreme and international investors lost faith in the country’s ability to manage its finances, it was inevitable for the whole financial system to crash. [inlinetweet prefix=”” tweeter=”” suffix=””]Generations of savings by Lebanese residents and non-residents evaporated through high exposure of banks and the BDL to the sovereign risk. [/inlinetweet]Getting out of the debt trap requires drastic measures.

Sovereign debt defaults have been part of the modern world’s economy for centuries; some defaults are even traced back to the fourth century in Greece. Countries choose certain economic, fiscal and monetary policies that put them at risk, and when adverse events occur over a relatively short period of time, the system endures a distress that mostly ends in a financial and economic crisis. The risky policies usually involve overspending by a government, leading it to borrow more. The consequence of this is higher interest rates to compensate for the increased risk, which, if not reversed with economic growth in time, leads to a spiral of risk that threatens the government’s finances and the national currency.

Like a hell-broth boil and bubble

Lebanon treasury finances were always in deficit and mostly in Lebanese pounds. A large and constant inflow of dollars from remittances, personal capital flows, and – in some years – tourism, helped contain the risk of expansion in Lebanese pound debt.

However, Lebanon’s dollar borrowing to fund the deliberately failed electricity company, Electricité du LIban (EDL) and the interest on dollar debt, meant that every new dollar borrowed locally translated into a Lebanese depositor’s dollar wasted. By the end of 2019, the interest expense of the Lebanese government had reached 65 percent of its total revenues.

Lebanon’s last Eurobond market issuance was in 2017, which means [inlinetweet prefix=”” tweeter=”” suffix=””]no one wanted to hold Lebanese Eurobonds because it was clear to investors worldwide that the Lebanese debt had crossed its point of sustainability. [/inlinetweet]Instead, only BDL had the appetite to buy those bonds, with depositors’ money, as one of the tools of its “financial engineering.” By the time the crisis reached its peak, out of the $120 billion in depositors’ money, $20 billion had been borrowed by the government and $80 billion had been borrowed by BDL under the appellation of “reserves.” The government policy of peg of the Lebanese pound to the dollar artificially overvalued the currency and depleted deposits.

The Lebanese national debt reached 174 percent of GDP towards the end of 2019 and two years later, at time of this writing, stands at 210 percent at market rates. The envisioned restructuring of the debt would now involve a haircut of 60 percent to make it sustainable, which would have been equivalent to a haircut of around 50 percent on depositors in 2020. This was considered the best case scenario by some in 2020 when the government issued its ill-fated recovery plan. However, the plan was never adopted, and the BDL monetary policy intervention continued, opting to inflate the system by printing trillions of Lebanese pounds, thereby rendering people’s deposits worthless, and inflicting an indirect haircut of 80 percent on them.

Any restructuring that would be imposed would still need to haircut depositors, but these depositors would be much poorer now, given the spiral of inflation and devaluation of the Lebanese pound.

Lifting the curse?

[inlinetweet prefix=”” tweeter=”” suffix=””]For the debt to be sustainable in the coming decade, its cost has to be contained.[/inlinetweet] For the Treasury to afford the interest on the newly restructured debt, it needs to be able to collect taxes again from a functioning economy. For the central bank to be able to pay back its debt to the banks and hence to depositors, it needs to replenish the dollar reserves. Therefore, the solution to the debt is an economic, fiscal, and monetary one.

Unless there is a holistic approach to the Lebanese crisis, the country would risk being subject to multiple defaults over the next two to three decades, with increased poverty and no cumulative wealth, rendering the country one of the poorest in the world.

The restructuring of the dollar debt requires an international bailout. The restructuring of the Lebanese pound debt is important to keep the cost of debt low. It is nonsense that the large portion of the debt which is denominated in Lebanese lira is not a threat anymore because its value, it terms of dollars, has shrunken and is continuing to shrink. But lira-denominated debt is payable in lira, from lira revenues. Indeed, the only fiscal revenues that could be used to pay this debt, as all fiscal revenues of the finance ministry in Beirut, are lira revenues; hence the 3 trillion Lebanese Pounds in payable interest on this debt still hold.

In such a severe recession as currently experienced by the Lebanese economy, one cannot expect to collect more money from existing taxes or hike tax rates; the focus should be on increasing the productivity of the Lebanese economy and supporting export-oriented sectors. One time-honored idea for boosting productivity is to invest in needed infrastructures, and once the international community was standing by to inject those billions of dollars in infrastructure projects that would boost the economy and support the fiscal and monetary policies. But alas, we missed that opportunity and we now seem to be on our own – and we all know what that means.

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The road that was never taken

by Salim Taha
written by Salim Taha

The definition of reform in the dictionary is “making changes to something in order to improve it.” [inlinetweet prefix=”” tweeter=”” suffix=””]It seems the fiscal situation in Lebanon has reached a point where no amount of changes can improve it.[/inlinetweet] The challenge has become insurmountable and the country’s finances might fall into a permanent failure trap that might persist for many years.

Let’s look into the major categories of revenues and expenditures historically in Lebanon.

State treasury revenues are generated, in order, by income taxes, value-added tax (VAT), state owned enterprises (SOEs), customs and excises, and real estate registration.

Down, down, down
All treasury revenues in Lebanon were collected at levels far below their optimal level due to endemic corruption; corporates and individuals rarely declared the right level of their income or real estate transactions. Customs and excises generated approximately half of the expected revenues, the VAT tax gap reached around 80 percent, and SOEs such as Middle East Airlines (MEA), Beirut’s port and airport, Casino du Liban, the Régie, Electricite du Liban (EDL), and telecom operators are overstaffed and mismanaged to say the least.

[inlinetweet prefix=”” tweeter=”” suffix=””]The Lebanese economy is estimated to have shrunk by around 40 percent in the past two years and is going through one of the most complex and dire crises in history.[/inlinetweet] For the same reasons that treasury revenues were under collected, reasons newly exacerbated by the shrinking of the economy, the erosion of purchasing power and increase in poverty, the finances of the Lebanese government in the coming years will be a fraction of what they used to be. In dollars, at the now-deceased official exchange rate, revenues were around $10 billion during the beginning of the collapse which really started in 2016 and was artificially postponed by the “financial engineering” undertaken by the Lebanese central bank, Banque du Liban (BDL), at a very high cost. In the first five months of 2021, according the latest published figures by the Ministry of Finance, the treasury collected 6,658 billion lira, the equivalent of $246 million at the closing black market rate of 2021 (27,000 Lebanese pounds/$1). Extrapolated to a full year, this means the revenues would reach around $590 million, or 6 percent of what they used to be in dollars.

In a sorry state

On the expenditures side, the highest categories are occupied by personnel costs at the top, with debt interest payments coming in at a very close second, followed by subsidies to Electricité Du Liban (EDL), then capital expenditures (capex), then municipalities. An overly bloated government with some 300,000 employees on the payroll between active duty and retired staff (no one really knows the exact figure), where clientelism has always been the name of the game, is not expected to fire anyone anytime soon. End-of-service and pension payments were already unsustainable before the crisis, and printing more Lebanese pound notes to keep them up will only make things worse. Transfers to EDL shrunk by half between 2018 and 2020-due to lack of funds, not to mention the absence of reforms. This has translated as reduced deficit but more blackouts, higher costs on households to substitute increasing blackouts with generators, increased pollution, and less economic productivity. Capex was zero in 2019 and 2020, which means even the small amount of spending on maintaining the minimum infrastructure – post obscene profits margins that had been granted to politically affiliated contractors – is not available, which will only make the country more unlivable, and require much more investment in the future to rebuild it.

As for the interest on debt, following the default decision on Lebanon’s external debt (Eurobonds), billions of dollars in depositors’ funds, in principal and interest, must be factored in with a proper debt restructuring agreement with investors. The restructuring will not be feasible without an International Monetary Fund (IMF) program, which will not materialize without fiscal reforms. But given the clear unwillingness of the political godfathers of the system to reform anything, the country and its government are expected to remain in a zombie state. This means the treasury, with its miniscule revenues and expenditures in real value, will artificially be kept alive with additional printing of Lebanese pound notes, creating a spiral effect of devaluation/inflation/poverty/negative growth, which can go on for a long time.

Succession planning?

You are probably wondering by now what the solution might be. Well, the official answer to that is: reform public service, restructure debt, restructure the banks, restructure the state-owned enterprises, take money from the IMF and rebuild the economy hoping to get back to pre-2019 GDP levels in 15 years. Here you go, la vie est belle.

Is that a realistic scenario? When companies fail, the first thing that bankruptcy administrators do is change the management. [inlinetweet prefix=”” tweeter=”” suffix=””]A whole country failed and is witnessing the largest exodus of human capital since its civil war 40 years ago, but the managers are still the same. [/inlinetweet]Until the managers are changed, one way or another, we should expect Lebanon to become a small, poor and failed economy, surviving indefinitely on a few billion dollars in net remittances.

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Waiting for Godot

by Ali Hamieh
written by Ali Hamieh

More than 120 countries in the world have some form of a pegged exchanged rate system, in either soft or hard pegs mainly to the US dollar or the euro. Small economies benefit from pegging their currencies to reduce macroeconomic volatility and improve predictability for investors and visitors of the country.

Leaning tower of Lira

The Lebanese Pound before the civil war benefited from a period of floating exchange rate system driven by strong influx of dollars from tourism and banking. During the civil war, political money took over remittances and tourism and capital flows, and these murky funds of conflict finance were the only source of foreign currency. In 1987, the Lebanese Pound witnessed its biggest crash ever with a devaluation in excess of 400 percent in less than two years, crossing 800 Lebanese Pounds to the dollar. When the Lebanese Pound was pegged to the dollar at the end of 1992 and settled at 1,507.5 Lebanese pounds/$1 in 1997, Lebanon had a lot to benefit from exchange rate stability and predictability.

[inlinetweet prefix=”” tweeter=”” suffix=””]Pegged exchange rate systems require adjustments over time when macroeconomic features of a country witness a change. [/inlinetweet]Countries with free capital flows and fixed exchange rate lose monetary policy autonomy, a concept known as the impossible triemma. For Lebanon, this means that to maintain stability in Lebanese pounds and free movement of capital, the Lebanese central bank, Banque du Liban (BDL), has to follow interest rate movements in the base currency (USD in this case) plus a certain risk premium, otherwise capital would exit the country.

At the onset of the Syrian civil war, the Lebanese pound was already suffering from an overvaluation due to dollar inflows to the economy from Lebanese expatriates, which were not channeled to the productive sectors in the economy but rather to bank accounts chasing high interest rates. This rendered price levels in the services industry very high, a concept knows as an increase in the value of non-tradable goods and services in a Dutch disease scenario. Simply compare the cost of a hotel room in Lebanon in US dollars in 2010 vs. 2021. A gradual adjustment of the soft peg’s 1,507.5 rate was long overdue.

Repercussions of Financial Engineering

In the past decade, remittances, personal capital flows and tourism income declined gradually due to regional instabilities and a host of adverse factors, leading to an erosion in the balance of payment surpluses of the previous decade. This in turn led to a dwindling of BDL reserves. In the three years preceding the crash in 2019, BDL raised interest rates to high levels without controlling capital flows or imposing exchange rate rules.[inlinetweet prefix=”” tweeter=”” suffix=””] The Lebanese government failed to induce reforms that were requisite to receiving CEDRE funds.[/inlinetweet] For instance, if interest on deposits in Lebanese Pounds had to be raised to 20 percent to attract inflows, depositors collecting that interest should not have been allowed to exchange it for Dollars and then transfer this profit abroad because they would practically have been taking someone else’s Dollar deposits. These repercussions, which enriched large depositors and banks, eroded tens of billions of much needed dollar reserves. The government failed to deliver promised reforms expected by Riad Salameh, some of which include infrastructure investments, consequently losing a chance at receiving CEDRE money.

Following the crisis, further depletion of BDL reserves was caused by subsidies of essential and some non-essential imports and further capital flight by those powerful enough to manage it. Now the economy has multiple exchange rates operating at the same time, three official rates for the Lebanese pound to the dollar (1,507.5; 8,000; 12,000) and one market rate. The real market rate, standing at around 27,000 Lebanese Pounds/$1 at the time of writing this article, will always be ahead of any official rate as long as there are no proper macroeconomic measures being taken. BDL claims to have only around $14 billion of depositors’ money left in its reserves. Where will the Lebanese Pound go from here?

Million-pound chicken dinner

[inlinetweet prefix=”” tweeter=”” suffix=””]The devaluation of the Lebanese Pound technically has no limit[/inlinetweet]; with the vicious cycle of inflation and devaluation, the Venezuelan Bolivar reached such a devaluation in 2018 that it would have been cheaper to use the currency as toilet paper rather than buy toilet paper with it. Will the Lebanese pound get there? Maybe not to that extent, because a few billion dollars of remittances are still coming in every year from expatriates who support their families. However, Lebanon is highly dependent on imports, especially for its energy needs, which means that reserves will continue to be exhausted for the operation of the economy. The first step to halt degradation is confidence. When a government was formed in September 2021, the Lebanese Pound appreciated to 14,000 Lebanese Pounds/$1. It has halved since then because literally no action was taken yet to save the country from one of the worse crises in history.

Prime Minister Najib Mikati is still debating with BDL Governor Riad Salameh about the losses of the financial system two years after the crash while depositors’ purchasing power is evaporating by the minute. Let us hope they conclude their argument before the cost of a chicken reaches 1,000,000 Lebanese Pounds. It is to be hoped that before then, they would have restructured the central bank, the financial system, and the public sector, then designed the right macroeconomic policies that provide confidence so the very long recovery can begin. Should we wait for that, or would waiting for Godot be less painful?

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AnalysisEconomyFinanceSpecial Report

An economist’s review of the 2022 budget draft

by Mounir Rached
written by Mounir Rached

The Budget draft law for 2022 that has been submitted to the Council of Ministers, projects   55.2 trillion Lebanese pounds in expenditures with revenues of 39.1 trillion. The need for a 2022 Budget is required sanctioning spending and its approval by the cabinet has been a precondition for negotiations with the International Monetary Fund. 

However, the Budget of 2022 reveals most disturbingly, the absence of any profound and comprehensive reforms. It is merely a continuation of past policies with an inflation adjusted factor. [inlinetweet prefix=”” tweeter=”” suffix=””]The Budget does not state objectives for growth, an inflation target and the balance of payments, nor how it can contribute to resolving the crisis.[/inlinetweet]

First disturbing sign: multiple fixed exchange rates 

The continued provision of applying multiple fixed exchange rates under the 2022 Budget is by itself a setback for reform. A regime of multiple currency exchange rates (MCR) is not only unjust but an infringement of the constitution. It exhibits the intention to gradually deplete banks of a substantive amount of deposits to reduce their losses at the BDL. Either the intentions of the government and BDL are being concealed or it is not understood that fixed rates constitute a large loss for depositors and for the economy. Actually, it was this multiple rate policy that has in recent years completely eroded the little remaining trust and confidence in the management of the system. 

The frequently stated excuse that unifying and liberalizing the exchange rate is inflationary is a false argument. To the contrary, the current multiple rate policy has the ingredients for a continued decline in the parallel (free) exchange rate and persistence of inflation. The free unified market rate leads to equilibrating the financial markets – and allows depositors to regain the value of their dollar deposits and absorb their LBP deposit losses.

[inlinetweet prefix=”” tweeter=”” suffix=””]Given that many banks are being influenced/controlled by the political elite that is involved in Budget law decisions, it’s not surprising that the Budget draft law prescribes a multiple rate system.[/inlinetweet] However, the fixed and multiple exchange rate policy that is being sponsored is very likely to preclude reaching an agreement with the IMF that has been all along preaching freeing the exchange rate – a staunch policy of the IMF. 

While the persistence of a multiple rate system proposition is void of reform intentions, the central bank’s unsustainable currency intervention to prop up banks seems designed to provide a false signal that reform is coming. The fact that Banque du Liban has been able to convert most of its SDR holdings into a reserve currency (probably a gesture from a friendly economy) does not change the fact that this intervention in the exchange market has been facilitated temporarily.

The second worrying signal

Apart from the draft’s stipulation for continued multiple exchange rate practices, the Budget in its current draft also does not show intent for serious reform; it is rather a collection of fragmented measures of tax rates, excises and spending.

Total spending in the Budget surpasses LBP 55 trillion, including the credit extended to Electricite du Liban. Support to EDL cannot be classified as a loan (and thus excluded from budget spending) because the utility is unable to pay back its existing loans that have exceeded $ 20 billion. Fiscal support of EDL is a subsidy, was classified as such and included in spending for many years. Even the case of a loan was to be made, the budgeted expenditure should be classified as an increase in acquiring non-financial assets, and the counterpart classified as an increase in financial assets in financing (a loan) of the Budget; thus increasing the deficit and increasing the financing needs by an additional LBP 5.2 trillion.  

Another notable Budget item relates to wages and salaries, where an expenditure increase of a full month salary is stipulated in addition to increased transportation support. Counter to a standard recipe for administrative and fiscal reforms, the Budget fails to reveal any structural reform in the civil service. The apparent preference is to retain a large civil service body which is much larger than that of any peer country. In summary of the 2022 Budget, its current components are dominated by wages and salaries (12.3 percent), civil servants’ benefits (16.6 percent), EDL subsidies (10 percent), and domestic and foreign debt service cost (13.8 percent combined).

Also, notably, in the context of analyzing the Budget, the allocation of LBP 9.2 trillion to civil servants includes LBP 7.0 trillion of social spending allocated to government employees (نفقات اجتماعية غير محددة) without providing a clearly defined purpose. For both domestic and international debt service interest payment, it’s not specified whether these amounts are based on a debt rescheduling agreements or not. The capital Budget on the other hand remains low at 4% of total spending and is not growth oriented.

The revenues 

Revenues, however, add up only to LBP 39 thousand billion. This side of the fiscal plan reflects primarily tax increases on interest earned to 10 percent (from 7 percent in the previous budgets), and hikes in the tax rate on wage incomes where the new maximum rate is 25 percent on upper income brackets (from 21 percent) , and wage bracket increases for  all  tax rate ranges. In addition, revenues are assumed to improve on basis of increased customs rates in combination with the new exchange rate applied on customs receipts.. Depending on what exchange rate is used, the imposition of a new customs regime could lead to customs increases – with the real size of the increase depending on how the market reacts to these changes.

A full exemption from tax on interest is introduced on new dollar deposits for 5 years from the time of approval of this Budget law. Other tax relief measures include rescheduling of due taxes and excises for a 3 -year period, resettling of VAT and income tax arrears on large tax payers, and transferring losses one year forward. 

The beneficial effects of the proposed tax relief measures and hiking of customs levies are highly uncertain. The tax exemption on fresh dollar deposits is unlikely to attract financial inflows as the risk factors remain dominant in repelling inflows. The proposal to set a broad 3 percent customs rate on most imports may incur a conflict with trade partners who can demand adherence to existing trade protocols. The same issue may arise with applying a 10 percent customs rate on imports for which domestic substitutes exist. The Budget revenue draft thus represents an inward-looking approach to trade.

The main observation of revenue items in the 2022 Budget is that indirect taxes (which are regressive) dominate the picture. VAT is the largest source of revenue. Adding in fees and charges on trade, indirect taxes on goods and services are the largest source of government receipts at 50.3 percent of all fiscal income. 

[inlinetweet prefix=”” tweeter=”” suffix=””]The Budget is attempting to generate revenues in foreign currencies by stipulating that wage taxes should be based on the currency that salaries and other receipts are paid in.[/inlinetweet] The same principle could be applied to other sources of income but with a high danger that such a policy will raise public opposition and at the same time see as justification for using foreign currencies as a local legal tender.

The Ministry of Finance (MoF) is, surprisingly, being given a discretionary power to set the exchange rate for the purpose of collecting customs and VAT on imports, and other taxes. This implies a continued absence of transparency, as no basis for such decisions has been provided in the draft law. In addition, the policy in the current budget gives the MoF the discretionary power of determining certain tax exemptions and discounts on un-specified income taxes and fees. 

The 2022 Budget draft law, reviewed here before its finalization by the Council of Ministers, is subject to debate and approval by the Lebanese Parliament. Many details will be discussed and adjusted. However, there are many fundamental questions that are not addressed in the draft and remain to be answered. The people of Lebanon have the right to receive answers on two fundamental issues on which the current draft is silent, namely the question of how the budgeted deficit of nearly LBP 15 .4 trillion could be financed and the equally important question is to what extent the Budget is in compliance with IMF demands. 

There are vital questions (listed below) that could make the start of Lebanon’s long journey of rebuilding the economy.  In addition to the strategy for economic recovery and the faith of public deposits, is there consistency between the recovery plan and the Budget?  Furthermore, the question on every economist’s mind relates to the sources of financing the Budget, and yet ignores the losses of people’s savings through the banking system and its holding of T- bills and Eurobonds. Thus we need to know: does the domestic market (banks and non-banks) have the will to provide financing to the government? By my understanding this is very doubtful. We also ask: is there any intention to compensate, at least partially, depositors for the losses linked to bank-held T- bills and Eurobonds? The Budget cannot remain silent on this. 

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BusinessCommentFinance

A fiscal space to breathe

by Rayane Dandache
written by Rayane Dandache

In its efforts to address the grim situation that the economy and financial system are in, the Government of Lebanon published in April 2020 a financial recovery plan aimed at restoring confidence and putting the country back on a long term sustainable path. Most importantly, the program pointed at forcefully addressing “fiscal and financial imbalances” – the main pillars of the scheme that has fueled Lebanon’s downfall. These imbalances were addressed within one of the nine central headlines targeted at fiscal adjustment and focused on improving tax compliance, streamlining expenditures, and reforming the public sector.

Unfortunately, [inlinetweet prefix=”” tweeter=”” suffix=””]the government has failed to embark on immediate reforms to create fiscal space and support existing social safety nets despite the impact of the compounded crises falling hardest on the poor and the vulnerable.[/inlinetweet]  As such, we address in this article the need and means to create this space and prioritize a set of actions from within the proposed reform pillars stipulated in the government’s plan.

As a result of the multiple crises, particularly during the last two years, Lebanon’s GDP dropped to below $20 billion, and the UN-ESCWA report on multidimensional poverty in Lebanon (2019-2021) stated that poverty almost doubled from 42 percent in 2019 to 82 percent in 2021, with nearly four million people facing deprivation in education, healthcare, public utilities, housing, assets, employment and income.

These alarming figures, coupled with rising inflation rates and the ongoing devaluation of the local currency, have exacerbated already existing vulnerabilities and exerted further pressure on the Lebanese people who are facing dire shortages of food, medicine, and fuel.

The medium-term fiscal strategy at a glance

In order to reduce the country’s fiscal deficit that has exceeded 10 percent of GDP, the recovery plan stressed on the need to re-evaluate the state’s fiscal policy and to define a clear set of targets or “golden rules” on which future budgets need to be based.

Several corrective measures were proposed – at the level of expenditures and revenues – geared toward creating a primary surplus by mainly cutting off wasteful spending and enhancing tax revenues. These proposals include but are not limited to increasing budgetary revenues by curbing tax fraud and evasion, improving the compliance rate, and revamping the entire tax system.

At the level of expenditures, proposals tackle the need to build spending priorities on the basis of clear criteria that meet the economic, social, and financial needs of the country such as controlling the public sector wage bill, addressing the hefty pension scheme, limiting transfers to Electricité du Liban, and reducing transfers to and financing of state-owned enterprises, agencies, and funds.

Despite the importance and inevitability of all these reform pillars to achieve the Government’s fiscal objectives, it is essential to recognize the fact that the majority require a relatively long process and, in many cases, the adoption of a set of reform laws. As such, most of them cannot yield a much needed immediate impact.

Fiscal space can exist

Sad to say, the social component in the program does not address the severity of the situation in the country. Despite surging poverty rates, the plan merely focused on the support that can be provided by international organizations (i.e., the World Bank) without realizing the importance of prioritizing many of the proposed corrective measures to create fiscal space.

Fiscal space is normally defined as the ability of the government to confidently use the available room in its budget without risking any unfavorable impact on its financial position or the economy’s stability. 

The reality is that Lebanon has no fiscal space. The country’s financial position and economy’s stability are already jeopardized; however, this does not deny the importance of looking at readily-available options to be implemented.

Delving deeper into these alternatives, the main titles of re-prioritizing expenditures and increasing tax revenues top the list. In terms of spending, the government should immediately opt for implementing the plan aimed at addressing the ineffectiveness of many of the 73 public entities by “merging entities when feasible, reigning salaries and benefits, and rationalizing operational costs, while closing other obsolete entities and eliminating redundancies when deemed relevant” .  Accordingly to a recent report by Institut des Finances Basil Fuleihan, despite there being many revenue-generating State Owned Enterprises (SOEs), others constitute a liability to the State. Lebanon’s classified off-budget spending is equivalent to more than 16 percent of total budget with large SOEs operating outside the budget, and managing substantial amounts of public funds that are not submitted to the legislature’s approval or reported into consolidated data.

At the level of revenues, [inlinetweet prefix=”” tweeter=”” suffix=””]quick-wins lie in increasing taxes on luxury goods and improving tax collection by first and foremost closing illegal crossings, fighting smuggling, and enforcing fines on projects illegally built on public domain maritime and other sites. [/inlinetweet] The occupancy of these large properties, whether licensed or not, fails to bring in the revenues corresponding to the value of the occupied areas mainly due to failure in collection. According to figures from previous draft budget laws, the average expected revenues amount to roughly $100 million.

These decisions do not only address inefficiencies and complement the government’s efforts in building fiscal resilience, but also support the already existing and weak social safety net program in adapting to the major economic downturn that the country is witnessing.

Reallocate spending for a better social safety net system

According to International Labor Organization (ILO) 2019 figures, Lebanon spends around 13.8 percent of its GDP and 30 percent of its public expenditures on social protection. Unfortunately, social coverage remains among the lowest and most inequitable.

That being said, and given the recent removal of subsidies that have long crowded out social spending, the reallocation and reprioritization of existing government spending has become unavoidable. This re-arrangement in fact feeds into expanding the budget allocated for the existing social safety net program (i.e., the National Poverty Targeting Program) in efforts of building a comprehensive system that is catered to the poor and the vulnerable Lebanese.

While the World Bank funded Emergency Social Safety Net (ESSN) and the foreseen Broad Coverage Cash Transfer (BCCT) programs can address the situation, they remain temporary solutions to all of Lebanon’s woes – a truth that further justifies the necessity of creating fiscal space that is able to provide a longer term solution in anticipation of the Government reaching an agreement with the International Monetary Fund.

However, it is worth noting that the support provided by the World Bank in terms of financing and the development of social safety net registries and databases would proves crucial to capture current and future vulnerabilities and to allow Lebanon’s current social safety net program to scale up and expand its coverage successfully in the future.

The need to act now

While many of the deeply rooted structural problems require medium- to long-term actions, [inlinetweet prefix=”” tweeter=”” suffix=””]the government must act immediately when addressing social issues and related policy responses [/inlinetweet]by at least trying to implement one of the reform pillars they initially suggested in the recovery plan.

People are in the heart of the storm, and unless the latter’s impact is mitigated, the situation will remain a ticking social bomb.

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AnalysisBusiness

Saving private SMEs

by Thomas Schellen
written by Thomas Schellen

Tools designed to channel new money into Lebanon’s economy in the start of January 2022 shine in the same way as they did last year: They emit rare vibes of hopes against reason. But they do so in an uncanny semblance to the sensations which life-support machines in an intensive care unit evoke in all the unfortunate people who depend on them.

This is to say that tools which keep us alive and breathing, whether financially or physically, carry the unquestioned connotation of desperate measures. As long as the ventilator works, ICU patients will not be inclined to debate about their aesthetics, design, color scheme, or even the manufacturer’s name. (Actually, if an overly image-conscious hospital administrator were to insist that only a life support machine by a leading brand manufacturer be used in a coronavirus emergency, any number of patients might expire over the debate).

Infusion of finance is as vital to the Lebanese manufacturer as oxygen is for the COVID-19 patient. That does not mean that all great funding ideas will work out. Some of the financing treatments that opened up for manufacturing companies last year have led to questioning their compliance methodologies, and one must consider that some investment fund concepts indeed may not succeed, given the tremendous uncertainty about anything that still permeates the fabric of the Lebanese economy. But any ethical and operational investment fund that will secure a bunch of industrial jobs and contribute to Lebanon’s GDP is today more than welcome. If the fund is well constructed and operated by a reputed financial player with experience in the Lebanese market – even if not the exact same market segment – all the better.

The question is whether this unquestioned authority of an economic-life-saving tool will be proven in the case of the latest new fund, a special investment vehicle with a projected funding power of about $15 million and a five-year duration. It has been designed by IM Capital and IM Ventures, the pair of fund operators in the entrepreneurship ecosystem that has for the past years been co-financing startup ventures and acting as matching capital partner of numerous venture capital players under the regime of the Circular 331 system by the Lebanese central bank Banque du Liban (BDL) for development of the knowledge economy. IM Capital and IM Ventures respectively are implementing partners with the United States Agency for International Development’s (USAID) MENA and Lebanon investment initiatives.

Keeping it simple

The new fund goes by the abbreviated name SME Fund, the term associated with small and medium enterprises. The fund indeed targets SMEs in three broadly defined sectors of agri-food, chemicals, and paper and textile products, Nicolas Rouhana, general manager of IM Capital and IM Ventures, says in recent confirmation of plans that he first shared with Executive several months ago. According to him, agri-food sector enterprises are expected to represent about half of the fund’s portfolio while the other two manufacturing sectors of chemicals and paper/textiles together will make up the other 50 percent.

Surprisingly however, the SME in the fund’s name stands not for small and medium enterprises but for the unwieldy construct of “Scale up Manufacturing and Exports.” Semantic purists could rightfully raise a fuss about such an incongruous phrasing. Yet notwithstanding that the long form of its descriptive term doesn’t match the most common reading of the abbreviation, the new fund has been designed to help export-oriented SMEs reach new markets.  

Grammarian and wording concerns aside, the new fund has over the past few months cleared important hurdles in terms of concept, registration, structuring and targeting. According to Rouhana, up to 15 enterprises will be financed with investments of, on average, one million mostly “fresh” dollars each. “We are now [undertaking] due diligence with up to seven companies while also talking to others and putting them into the pipeline, and we are creating the vehicle for investing into these SMEs,” Rouhana tells Executive.

The new vehicle is the second emergency rescue fund that IM has created since liquidity tremors and policy miscalculations sent heavy shockwaves through the financial markets and banking system in late 2019. IM’s SOS Fund (nope, the abbreviation is close but does not spell out as “Save Our Souls”) was developed last year in collaboration with venture capital firms and similar financing houses. The “Save Our Startups” Fund has injected a total of $12 million into 11 mature startup companies that found themselves in the financial desert after the funding channels of BDL’s Circular 331 financial irrigation systems suddenly ran dry.

SMEs to be funded by the new vehicle need to be growth-stage companies, meaning that they are ready to tackle new markets and already have to achieve at least 30 percent of their revenue from exports. Companies with annual revenue below $500,000 also don’t need to apply, says the fund’s basic fact sheet of selection criteria. However, pointing to the fact that definitions of an SME show quite some variances in terms of company size and headcount, Rouhana emphasizes that structuring of the portfolio will prioritize diversification and that the fund’s focus in assessing companies for investment is on revenues and growth potentials rather than on technical definitions of SME status. “We are looking to build a diversified portfolio in terms of the sectors and in each sector in terms of company size and risk level,” he says. Investment tickets are not going to exceed $2 million per company, he adds.

Need for speed

Both the SOS and the SME Fund are focusing on Lebanese companies that have strong economic potentials but would be stunted in their growth or even doomed without access to new finance. Both funds thus have been designed under a paradigm of speedy fundraising from investors and allowing their beneficiaries to run as fast as possible in the difficult Lebanese economic terrain.

But these parallels of approach are juxtaposed with major differences in the constitution of the contestants that they support in the economic survivor race. In financing companies in the broader economic habitat of SMEs, IM Capital has ventured from its previous ecosystem of entrepreneurship into the jungles of privately-owned enterprises.  

One pronounced difference between tech startups and companies outside of the entrepreneurship ecosystem is that the former are from their ideation phase onward groomed towards attracting venture capital and outside investors. The SMEs now on IM’s investment radar usually are not. “Creating a product for SMEs differs in key ways from the funding of startups. [SMEs] are family businesses, not open to capital, [and] they may be cooperatives or one-man ownership from legal aspect,” Rouhana explains.

With such structures and mindsets, most SMEs are not primed for easy valuation or capital injections. Moreover, with IM being pressed for time to come up with fast solutions for this heterogeneous group, the fund was constructed on a type of “mezzanine debt” foundation. According to Rouhana this framework uses a “one-size-fits-all approach” of debt finance and investors will rely for returns on what he called “revenue capital” over the fund’s five-year investment period.

Such a royalty-based solution generally offers investors strong returns. As applied by the SME Fund, it also allows portfolio companies to retain control of their operations and does not make an injection of money by the SME Fund dependent on the sort of collaterals that are demanded by banks in a debt finance agreement. To receive funding, companies benefiting from the SME Fund will not have to produce collateral upfront but will enter convertible agreements that act as collateral and provide investors with the assurance that their money will not disappear without trace.

The terms of these agreements are such that equity provided by the SME Fund will convert into shares if the loan is not repaid, noting that the standard grace period for start of repayments is two years, and that the injected capital and agreed royalty payments have to be returned to the investors by the end of the five-year participation period. Payments due by invested companies entail fixed and performance-dependent interest. The former component is 8 percent and the latter is 8 percent royalty on delta, or the growth of revenue.

The conversion of the investment to equity is triggered only as final recourse in case of the invested company’s failure to repay. Otherwise, the SME Fund operators will not take equity in the invested companies. “What we take is like a convertible agreement. So if [invested SMEs] don’t pay out on the loan, we will eventually convert [the investment] into shares,” Rouhana emphasizes.

On the operational side, contractual provisions are such that IM assumes a role of strong observer on board level/senior management level. To this end, IM is partnering with external audit firms and will have access to the books of portfolio companies. It will not intervene on governance but will offer hands-on technical support and organize management trainings at invested companies. 

IM Ventures will be both the manager and a shareholder in the SME Fund, meaning it will earn a one-time management fee upfront and will secondly be compensated from the equity returns. Rouhana says that IM Ventures, in addition to being entitled to the upfront management fee, will be on equal footing to any other SME Fund investor in terms of returns.

Mobilizing players and resources

In marketing the fund and finding suitable enterprises to target, IM spoke with economic organizations such as chambers of commerce and industry, manufacturing associations, the Investment Development Authority of Lebanon (IDAL), and banks. The approach to potential investors has been developed to whet appetites by presenting profiles of the three targeted sectors and subsectors, such as food and beverages in agri-food; cosmetics, beauty and pharmaceutical producers under the chemicals tag; and fashion under paper and textiles. 

Ongoing fundraising efforts are to be completed in the first quarter of 2022 and would include the presentation of the SME Fund’s concepts, mechanisms, and potential returns to institutional and individual investors.

“We will fundraise for a maximum of three months. We will put our own money in, seeding the fund with $6 million, and try to fundraise [upwards of] $6 million to be able to deploy the fund,” Rouhana says. His fundraising expectations include participation by international development finance institutions and regional investors as well as individual local investors from the network that IM Capital has already developed. “The investors that we are approaching are knowledgeable investors. This is one extra option for them to diversify where they put their money. But the safest bet will be targeting individuals, locally or in the diaspora,” he adds.

The SME Fund is open to include components of some old ”lollars” (bank deposits in US dollar currency available at a set exchange rate lower than current market rates) from local investors and convert these at the market rate where such investments make sense under the financial needs of the funded companies, but will give high preference to fresh dollars in fundraising and disbursements. Investment returns will have to be in “fresh” dollars and thus earnings which the invested companies achieve in fresh dollars from exports, ideally while relying on short local supply chains for inputs, will be key for the viability of the scheme.

The export growth and job creation journey of the up to 15 companies will run from mid-2022. Considering the country risk of Lebanon, the SME Fund could attract investors who are eager to diversify and seek between 15 and 25 percent internal rate of return, Rouhana opines. If the fund performs as planned, he and all prospective investors will see a handsome return on the money that they invested. In the worst case scenario, flow back of investments will not materialize and the outcome of the SME Fund after five years would be ownership of numerous companies that need to be managed or sold. 

This is not a desired outcome and such risk, especially given the current times in Lebanon, might not be accepted by a bank. But high risk is a normal consideration for IM as venture capital firm, Lebanon needs daring and innovative investment funds (and lots of them), and IM is on a mission, Rouhana concludes, saying, “We are venture capital by nature. We took the model of revenue capital or mezzanine debt and turned into a Lebanese type of business.  We don’t want to go to the point of converting the loan to equity. The mission for us is not to take equity but to create jobs, keep people in the country, let [companies] export more, and so on.”

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