Economics & PolicyEurobondsOpinion

Lebanon needs an IMF bail-out—minus the austerity

by Sami Halabi & Jacob Boswall
written by Sami Halabi & Jacob Boswall

The clouds have been forming above Lebanon’s financial sector for years, and now the storm has come with just one silver lining: most of the debt owed to creditors is held by Lebanese. Theoretically, this means that financial institutions and Lebanese bond holders are the ones who need to sit around a financial kitchen table and discuss how we preserve the collective long-term interest of the country. But that lining is beginning to thin, and fast.

The latest discussion about whether to pay the next segment of dollar eurobonds has been sullied by Lebanese bondholders offloading their debt holdings to international hedge funds—at a significant discount. Such firms have little to no interest in Lebanon or its financial stability, evidenced by the fact that they have just bought up enough of the bonds (25 percent) to have veto power over default negotiations for all 2020-dated bonds. In other words, instead of filling the moat, manning the towers, and stocking up with provisions, local financial institutions with a stake in Lebanon’s long-term financial stability just lowered the draw bridge with financial barbarians at the gate. If Lebanon does not want to surrender then it needs to wise up, fast.

Learn from others

Fortunately, hindsight is 20/20 and offers up good lessons for the prudent. Lebanon can learn from our Mediterranean cousins in Greece, who, five years into their financial crisis, finally changed tack with the creditors that were pummeling their economy with so-called reforms. But in waiting so long before coming to the table with concrete counter proposals, Greece found its creditors were in no mood to negotiate. We all know what happened next: all reasonable counter proposals—ranging from GDP-linked debt repayments and a stimulus plan to kickstart the economy—were dismissed by the Troika of the International Monetary Fund (IMF), European Commission, and European Central Bank as unreasonable, and the eurozone almost cracked. As for Greece, the country’s debt-to-GDP ratio worsened after a 25 percent contraction, youth unemployment rose to 48 percent, 400,000 Greeks emigrated, and fascism reared its ugly head in politics.

Yet lacking a financial package would have even more devastating effects on Lebanese society, and all depositors would be punished for the mistakes of Lebanon’s irresponsible financiers and politicians. Economists at Bank of America Merrill Lynch have predicted a necessary bail-in of around 50 percent in a disorderly scenario, if spread evenly across all depositors and without taking into account further devaluation of the Lebanese lira. In effect, this would mean unfairly liquidating small and medium account holders’ deposits in an attempt to recapitalize Lebanese banks. If possible, we must avoid this scenario.

Accepting that external financial assistance is necessary to avoid social collapse and food shortages, careful attention must then be paid to the conditions imposed by the creditors. Lebanon’s options are scarce; the tantalizing $11 billion promised at CEDRE in April 2018 is unlikely to arrive any time soon given that most reforms attached to the soft loans and grants remain unimplemented, and good will from the international community has been replaced with frustration over the lack of progress. Gulf countries and the US will also be loath to fund a cabinet formed by Hezbollah and its allies, while the IMF’s second largest contributor, Japan, has its own grievances with Lebanon over its harboring of international fugitive Carlos Ghosn.

As Lebanon enters into negotiations with the IMF and other donors (namely France), it needs a negotiation strategy that can save the country from financial collapse, but also tap into the funds needed to do so. This requires different thinking.

Throw out the rule book

A typical IMF plan that increases regressive taxes, enacts fire sales of the public sector, and cuts up the public sector without careful consideration of the social effects will be neither accepted nor useful. Levying regressive point-of-consumption taxes would come down heavily on the estimated one third of the Lebanese population already in poverty, and impact those the World Bank expects to enter into poverty as a result of the ongoing crisis—in total half of the Lebanese population. To avoid impacting those most vulnerable, upper income earners would need to pay the price through a progressive haircut on the top account holders in the country and an increase in the top tax tier—currently at a ridiculous 22 percent.

In fact, the IMF estimates that improving collection in the current system could raise the tax-to-GDP ratio from around 13-16 percent to 34 percent, some $18.6 billion annually. This would be enough to pay for the electricity sector reforms proposed at CEDRE some 3.5 times over, or raise the estimated $20-25 billion we need in the form of an IMF loan in less than two years. Should there be a need for immediate tax revenue on consumption, one avenue would be to increase value-added tax on luxury products—maybe it is time to start taxing yachts.

Second, any sale of state-owned assets will need to be preceded by long-planned and legislated reforms in each sector. For instance, as the prime sector for privatization, the telecom sector would need to empower its currently toothless regulator to ensure that public monopolies do not become private ones. Same for the public electricity utility, Electricitié du Liban, for Beirut Port, and for Lebanon’s national carrier, Middle East Airlines.

Third, simply slashing and burning the public sector, which pays out more than 300,000 salaries a year, would only make poverty levels in Lebanon that much worse. No doubt the civil service needs to be at the top of the list of necessary reforms, but these need to be carried out fairly. This can start with implementing the organizational structures developed by the Office of the Minister for Administrative Development and filling empty full-time positions in the civil service with those who are currently on temporary contracts—based on merit, not religious affiliation.

Ensure fair reform

Naturally, political and business elites who have long gamed the system and built patronage structures across the public and private sectors will not like such reforms—but they have little choice. Further regressive and punitive financial measures will not be accepted by a society that has simply had enough.

A country’s bargaining power in debtor-creditor negotiations increases if it has secured other financial assistance in advance, and we need all the bargaining power we can get. But as much as we need the IMF, we also need to preserve the long-term interests of Lebanon and its financial standing. Time and again, the classic IMF package has proved ineffective in bringing financial stability to countries around the globe—quite the opposite in fact. But the IMF also knows this, and has been keen to change its stripes. Case in point, the IMF offered Argentina a package that it ostensibly knew it would default on, which it has. But Lebanon is not Argentina, we do not have the size, importance, or leverage of a large South American player. Nor are we like EU-member Greece. We must acknowledge our relative weakness on the international stage as we lower the drawbridge for the IMF. If we cannot strike a deal that will protect those most in need, however, then we must be willing to walk away, batten down the hatches, and prepare for the oncoming siege.

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Hospitality & TourismLaborSpecial Report

Lebanon’s economic crisis weighs heavy on F&B outlets and hotels

by Nabila Rahhal
written by Nabila Rahhal

In Lebanon’s service-oriented economy, the hospitality and tourism sector is largely considered a beacon of strength. Its direct contribution to GDP by end of 2018 was 6.5 percent (according to the World Travel and Tourism Council) and it employs 150,000 people, the biggest employer after the public sector, per the tourism syndicates of Lebanon (the Syndicate of Owners of Restaurants, Cafes, Nightclubs and Patisseries [SORCNP] and the Syndicate of Hotel Owners in Lebanon).

Throughout the frequent periods of regional political instability and local insecurities in Lebanon, the hospitality and tourism sector has been among the first sectors to bounce back, demonstrating its resilience numerous times. The current economic crisis, however, is unprecedented in recent memory, and is stretching the industry to its limits, according to those to whom Executive spoke.

No sign of let up

A month into the thawra (revolution), in mid-November 2019, Executive spoke with both F&B and hoteliers to gauge the impact of the situation on their businesses.

Restaurateurs told Executive they had been feeling the belt tighten since late 2017. Among the factors at play was an oversupply of venues and an increase in taxes on some imported foods under the 2018 budget, which had negative impacts on the already dwindling purchasing power of local Lebanese and increased the costs on F&B operators.

Several hotel managers, however, told Executive that they had been having a record 2019 up until mid-October, when thawra-induced street protests impacted tourism levels and hotel occupancy rates fell to single digits almost overnight.

The situation has not improved much since, despite hopes that the holiday season of December would help the hospitality sector bounce back. Georges Ojeil, area general manager of Le Gray Beirut and Campbell Gray Amman, tells Executive that the former hotel’s location in close proximity to the protests is now a curse whereas, in better days, it was an asset to be in the heart of Downtown Beirut.

Maya Bekhazi Noun, general secretary of the SORCNP, says that F&B operators were hopeful that December would bring with it some expats and an increase in nights and meals out. As such, operators who could, waited until 2020 to judge whether they would be able to sustain business in the long run or be forced to shut down. Others were not able to ride out the immediate impacts of the ongoing financial and dollar liquidity crisis. Figures from online restaurant directory Zomato recorded 108 closures in October alone, followed by a further 56 in November and 78 in December. Come January, a further 241 outlets had closed.

No call to raise a glass

Operators who were betting on a successful December to save their business were met with disappointment. Bekhazi says that although sales in the F&B sector were higher in December 2019 than they were in October or November, they were still nowhere near what is typical for a December in Lebanon. “It was a very, very shy month—not the usual festive month season at all—and we did not have the kind of activity that could make a big difference in the long run,” she says.

The main challenge the sector is facing, she explains, is one being faced across the Lebanese economy: the dollar liquidity crisis and increased price of the dollar in the unofficial foreign exchange market, which is impacting both the ability of businesses to secure necessary funds to pay importers and their bottom lines. “Today, as restaurant owners, we spend most of our day identifying which suppliers take Lebanese lira versus dollar or checks versus cash,” Bekhazi says. “Most of them are now asking for cash in dollars while very few of our customers are paying their restaurant bills in dollars anymore—and when they do it is by credit card, not cash. So, we are having to buy dollars at the market exchange rate, which can reach LL2,400 to the dollar on some days, while as restaurants we follow the official rates of LL1,515 on our POS.” She explains that restaurants cannot increase their prices by much for fear that consumers will no longer dine out, and so this is a losing situation for the sector.

Doors shuttered

Given all these factors, it is no wonder then that 241 F&B outlets closed and only 99 opened in January 2020, with a net loss of 142 outlets. The high number of closures versus openings is indicative because the Zomato compiled data (see figure below) indicates that from June to December 2019 the numbers of outlets closing versus opening have by and large equaled out. This high turnover could have been down to a variety of factors such as operators migrating from a location that is losing popularity to the latest hotspot or a restaurant owner replacing an unsuccessful concept with a new one in the same location. As such, it was not a very concerning when it came to employability nor could it be read as a negative trend in F&B.

The number of openings in January, however, was less than half the number of closures, and those in the industry predict that this gap will only get wider. This has grave implications for the sector’s 150,000 employees, many of whom now find themselves jobless, Bekhazi says. According to a February press release by the SORCNP, 25,000 employees have already been laid off since early September 2019. She estimates that an even larger figure has seen their hours—and so their pay—reduced, with some venues now closing several days a week or shutting down sections of their hotel or restaurant to cut down on costs. Ojeil says that due to the very low occupancy rates they have not been able to pay salaries in full at Le Gray and have introduced a 40 percent pay cut. “We had to do this because it is now a game of how much cash we have in the bank and how we can manage with that,” he says.

The situation is bleak, but despite this Lebanon’s hospitality and tourism sector is still managing to draw on its famed resilience to support some employees in these difficult times. Many Lebanese F&B operators have businesses in the Gulf or Levant—be it a consultancy or an expansion of their outlets—and so are benefiting from that cash flow to sustain their venues in Lebanon, Bekhazi says. They are also using these locations and the networks they have developed in the region to secure jobs for some of their Lebanese employees.

Some hotels are also benefiting from sister properties by sending their employees to work there, thereby reducing their cost and ensuring that at least some of their staff is getting fully paid. Ojeil tells Executive that they will soon be sending 10 percent of their workforce to Campbell Gray properties in Zurich, Bahrain, Liberia, Scotland, and Amman, where they will stay for an initial three-month period.

The main indicator of Lebanon’s economic crisis, namely the weakening of the Lebanese lira to the dollar, could also act as a pull for tourists, as a more favorable exchange on the dollar will work to their advantage and increase their purchasing power. This was seen in Turkey in 2018 and in Greece after 2016, where the low costs drove tourism from the EU.

With spring comes the time for summer planning, and so it would do well for tourism stakeholders in Lebanon to devise a marketing strategy that can attract visitors—and their hard currency—to the country once again. As the sector that has proven the quickest to bounce back after a crisis, the hospitality and tourism sector is best placed in terms of recovery. For Lebanon’s hotels and restaurants who can afford to wait out this period, bluer skies could be as close as summer 2020.

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Economics & PolicyLaborOpinionSpecial Report

Lebanon must move toward universal social protection

by Lea Bou Khater
written by Lea Bou Khater

Decades of social and economic injustice were a driving factor in the social unrest that burst onto Lebanon’s streets in mid-October 2019, unfolding into a revolution. Lebanese had been pushed to breaking point by the effects of a longstanding economic malaise that has since worsened into a ongoing financial crisis with job losses, lowering of wages, and informal capital controls preventing people from accessing their money. But while the immediate, painful effects of the crisis are being debated widely in the Lebanese discourse, less attention has been paid to long-term risks. Most significantly, the impacts on the levels of poverty in the country and the state’s ability to care for those left behind.

Lebanon has long been an unequal country in terms of wealth. A study covering 2005 to 2014 by Lydia Assouad, a fellow at the World Inequality Lab, found that 10 percent of the Lebanese adult population had captured 45 percent of wealth. More recently, data from a leaked 2020 document by the Banking Control Commission of Lebanon showed that 1 percent of depositors held 52 percent of deposits in 2018. The country is a textbook case of a neoliberal state: a rolled back welfare state that maintains a laissez faire relationship with businesses and investments at the expense of the well-being of residents whose social protection becomes secondary. In other words, the state’s laissez faire relationship with the private sector—illustrated by regressive taxation policies or the floated privatization of public enterprises—dismantles the commitments of the welfare state in guaranteeing social and economic justice through progressive taxation and the provision of public services and universal social protection.

Left behind

As it stands, Lebanon’s current system lacks developmental logic, resulting in inefficient social protections that exclude a significant portion of the population—44 percent of residents do not benefit from any form of social protections according to 2018 figures from the Central Administration of Statistics (CAS). The inability of the Lebanese government to provide these protections is a breach of the social contract between the state and its citizens. Formal social protection devices are restricted to health insurance, family allocations, and end-of-service indemnities through the National Social Security Fund (NSSF). In addition, public sector employees—estimated by CAS at around 300,000 people, including the army and security forces—are covered through different institutions. Excluded from existing social protections are unemployment insurance and insurance for disability and work accidents. These fragmented and uncoordinated schemes leave many behind, including those working in the informal economy such as seasonal laborers, construction workers, and domestic workers, as well as the self-employed, unemployed, and retirees.

In lieu of the states’ role, there is a heavy reliance on services provided by organizations that further weaken the ties between citizens and the state while conversely maintaining the pervasiveness of traditional sectarian patron-clients relationships—what Professor of International Affairs Melani Cammett dubs “compassionate communalism.” The Ministry of Social Affairs (MoSA), for example, has been outsourcing social services to around 250 civil society organizations (CSOs) that are in charge of delivery for around 40,000 beneficiaries. In other words, the MoSA funnels around 60 to 70 percent of its annual budget—public funds—to CSOs that tend to have sectarian denominations. Partnerships between the state and CSOs require strong governmental oversight, with clear procedures for contracting and monitoring—this is not currently the case. It is necessary to reconsider the extent of delegation of social services in order to secure effectiveness, efficiency, and equity.

Lebanon does have a National Poverty Targeting Program (NPTP), implemented by the MoSA with the support of a World Bank loan, which is used to deliver direct cash assistance as well as other services and exemptions to some 42,000 poor households selected from a database of 140,000 households. With the backdrop of the financial crisis, the NPTP has been scaled up with a $400 million loan that was earmarked in the 2020 budget. However, currently the only anti-poverty policy of the government, the NPTP requires a great deal of revision with the aim of improving its administrative structure, household database, benefit package, use of its financial resources, and oversight.

Before assessing the needs of impoverished Lebanese, it is also necessary to determine how many citizens live below the poverty line. Yet this has proven difficult. A report by the CAS and the World Bank in 2011/2012 had 27 percent of the population under the poverty line but dedicated most of its pages to explaining why it could not be compared to previous studies and its many methodological limitations such as a high non-response rate. Working without data has long been the norm in Lebanon, impacting the state’s ability to provide for its citizens’ needs. Without accurate data of the levels of poverty in Lebanon, this situation will only get worse.

Moreover, there is a consensus among social protection practitioners that targeted cash assistance can only be effective in reducing poverty when accompanied by universal social policies that encompass the population at large. Ideally, funds allocated to different health protection schemes, including those targeting healthcare under the NPTP, should be consolidated into a universal health coverage scheme. Lebanon pays too much for relatively too little in terms of healthcare. Poor households spent around 12.7 percent of their income on health in 2012, a high proportion by international standards (the World Health Organization defines a large health expenditure as one that exceeds 10 or 25 percent of the total household expenditure or income).

Distorting effects

With restricted and inadequate social protections, the Lebanese diaspora has long been playing the role of social security for their families—in 2018 the World Bank estimated remittances to Lebanon at $7.2 billion. However, this safety net has social consequences. Alenjandro Portes, director of the Center for Migration and Development at Princeton University, argues that remittances tend to have a palliative effect on the country to which they are being sent, consolidating the ruling elite despite increasingly deteriorating political and economic conditions—with the result of taming or at least delaying the struggle for change. As soon as remittances drop, poverty previously cushioned by migrants’ transfers hits hard. Remittances to Lebanon have decreased five times year-on-year and expanded three times in the 2010 to 2017 period, with 2017 noting a drop of 7 percent that has yet to be recovered. With the current crisis and the lack of trust brought on by opaque capital controls, it remains to be seen what impact this will have on remittance levels moving forward—and by extension if it will have an effect on poverty levels in the country.

Bleak horizons

The unfolding economic crisis is expected to further deteriorate living standards with the now de facto depreciation of the national currency, the unofficial capital controls, hidden haircuts, and ensuing price inflation. Looming austerity policies aimed at streamlining state expenditures and increasing revenues—those suggested in the 2019 Article IV consultation by International Monetary Fund (IMF) such as raising value-added tax, increasing fuel excises, and eliminating subsidies to the state electricity utility Electricitié du Liban—would have the greatest impact on the poor and middle classes that are already struggling to make ends meet. These proposed indirect and regressive taxes would put additional strains on economically vulnerable Lebanese and the few social protection schemes that exist.

The crisis and expected austerity policies are also likely to increase underemployment, unemployment, and informal employment (see article). Unemployment was estimated at 11.4 percent of the total labor force in 2018, and 55 percent of workers are not registered at the NSSF, falling under the informal economy, according to a 2019 CAS labor survey. While there are no firm figures, since October 2019 Lebanon has already witnessed business closures, layoffs, salary cuts, and the decrease in real value of wages. The decrease of state revenues will also make it very difficult to pay the public-sector wage bill for the estimated 300,000 public sector employees.

In need of overhaul

It is important to implement wage-indexation and protect the value of NSSF end-of-service indemnities—which after 40 years of work would only cover a former employee for just over three years, excluding health insurance. In fact, today the state owes the NSSF sickness-maternity fund the staggering amount of LL2.4 trillion. In addition, the Lebanese public sector needs to be restructured in a way that streamlines excessive employment while protecting wages and benefits. Drawing upon critical phase of reforms and austerity policy, it is also necessary to launch the much-needed reforms of the labor code that would guarantee the rights of currently excluded workers and would sanctify the freedom of association that is crucial in the present and imminent struggle for social and economic justice. Labor reforms should urgently include the abolition of the kafala system which will exponentially improve the working and living conditions of migrant workers, particularly during the current financial crisis.

At this important juncture, the demands of protesters converge into bringing back the state for the protection of all its residents and the livelihoods of families, students, workers, elderly, and retired. For this, it is necessary to question and reconsider our harsh neoliberal economic model and its accompanying targeting protection schemes that foster and maintain deep-seated sectarian clientelism that in turn consolidate the autocracy of the ruling elite. We need to bring to the fore universal social protection, putting the state in front of its responsibilities vis-à-vis its residents, which is imaginable if we efficiently redesign our social protection policy. Reforms to social policy should be designed in tandem with the structural reform of our failing economic policy in order to ensure fair and sustainable development.

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Economics & PolicyLaborSpecial Report

Job insecurity and unemployment on the rise

by Nabila Rahhal
written by Nabila Rahhal

Businesses across all sectors in Lebanon, and the employees that are at their foundation, are suffering under a weakening economy. Indicators of this reality are in full display across the country and include the long lines in front of banks most mornings, the “for rent” signs now vying with the “70 percent sale” signs for space on store fronts, the restaurants and bars that only operate four days a week or have closed down permanently, and the reduced working hours of many factories and offices in Lebanon.

All of which, according to those interviewed for this article, is just the beginning. Although there is no reliable data regarding the current rate of unemployment in Lebanon and the impacts of the unfolding crisis, the World Bank warned at the end of last year that “unemployment, especially among youth, is already high and could further rise sharply” and that the poverty rate could hit 50 percent of the population if the economic situation worsens.

Whether it is the executive who has to decide on tough measures to keep the company afloat or the employee who is bearing the brunt of those measures through pay cuts, reduced hours, or being laid off, it is clear that Lebanon’s economic challenges are taking their toll on the country’s workforce. Executive sat down with business owners, syndicate heads, and lawyers to better understand the complexities of the labor crisis facing Lebanon and how it can be handled in a manner that would safeguard the dignity and livelihood of employees.

Long in the making

The current labor crisis in Lebanon did not emerge out of nowhere. The most recent statistics come from the Labour Force and Household Living Conditions (LFHLCS) 2018-2019 survey, conducted by the Central Administration of Statistics in partnership with the International Labour Organization and funded by the EU delegations in Lebanon. While the timing of the survey meant it was unable to capture the effects of the financial crisis that hit in Q4 of 2019, it serves as the best available base for assessing the labor market reality upon which the current crisis has been unfolding. According to the LFHLCS, the youth unemployment rate in Lebanon was 23.3 percent, more than double the general unemployment rate of 11.4 percent. Among university graduates the unemployment rate was even higher, at 35.7 percent. The LFHLCS had the Lebanese labor force at 1.79 million people, of whom 1.59 million were employed and 203,600 were unemployed. There was also a stark difference in labor force participation between men and women, with the former making up just over 70 percent of all those working. Attempts by Executive to quantify how these numbers have changed since October 2019 were unsuccessful, what can be said for certain is that the ongoing financial crisis has already exacerbated poverty and unemployment levels in the country.

What has changed in the past few months is the nature of the challenges facing businesses, especially in light of the restrictive banking policies imposed on them amid a dollar liquidity crisis that first began to show its effects at the end of last September. Nicolas Chammas, chairman of the Beirut Traders Association, explains that prior to October—and the onset of a civil thawra (revolution) in large measure sparked by economic pressures—traders had already been dealing with slow demand brought on by consumers’ decreasing purchasing power. Since these twin economic and political crises took sway, the main challenge for traders has been the devaluation of the lira in the unofficial exchange market, which has effectively meant a 40 percent loss for businesses trying to secure the dollars they need for importing goods, as well as more recent capital controls causing immense difficulties for businesses that need to settle accounts abroad. “We are stuck between a rock and a hard place,” Chammas says. “Traders don’t export so they have no way of getting dollars except through sales, which have dropped even further. The drop in sales can reach 50 to 80 percent depending on the sector, with luxury and durable goods—which constitute two thirds of traders’ businesses [in terms of operations]—hit the hardest.”

Maya Bekhazi Noun, general secretary of the Syndicate of Owners of Restaurants, Nightclubs, Cafes, and Patisseries, says that the hospitality and tourism sector has been suffering from consumers’ low purchasing power since late 2017. The lack of dollars and unofficial rates have hiked the costs of most imported goods, including foods, and so F&B operators who were already struggling prior to the October uprising were hit hard, she says, with restaurants and cafés among the first businesses to shut down or take extreme measures with their employees.

Riccardo Hosri, CEO of security system supplier Sacotel and vice chairman of the board at the Family Business Network Levant, believes it was the abrupt halt of credit facilities that was the last nail in corporate Lebanon’s coffin. “Banks took this unilateral measure without considering the other sectors, thereby completely blocking the operation of many companies which rely on these facilities for their mobility,” he says. “In this context, business owners are sometimes being forced to pay out of their personal wealth to honor their commitments to their suppliers, others are closing down or reducing their staff number or giving pay cuts.”

No money, no jobs

Employees pressured to sign a document should write “with reservation” by their signature.

Given these financially challenging circumstances, business owners and managers are under pressure to cut down on their costs to stay afloat and minimize their losses.

When no amount of cost reduction can make up for losses incurred, however, Lebanese business owners are increasingly turning to reducing salaries in parallel to a reduction in working hours or—when that is not enough—laying off employees. According to Hosri, Stronger Together—an organization of 150 Lebanese CEOs that formed after the crisis to try and mitigate its effect on their businesses—estimates there will be 300,000 job losses by end of Q1 2020. This figure that does not seem unreasonable given the current situation. Hosri also says that, based on his conversations with CEOs in Stronger Together, there is an average of 40 to 50 percent reduction in salaries across the private sector balanced with a reduction in working hours.

Chammas tells Executive that paying employees’ salaries in Lebanese lira—when their contract is in dollars—is already a 30 percent pay cut because of the difference between the official exchange rate and the market. But, in the many cases where businesses are almost at a standstill, he says, more drastic measures are being taken, including laying off employees—he estimates that thousands of employees have been laid off so far in the trade sector. “Simply put, when you cannot pay your supplier, your supplier will stop sending goods to Lebanon and you cannot keep your staff doing nothing,” he says. “Inventories are being slowly depleted and we will reach a point whereby many businesses will just go bankrupt.”

Paul Abi Nasr, CEO of Polytextile and member of the board of directors at the Association of Lebanese Industrialists, says some sectors have been so severely impacted by the crisis that even reducing salaries was not enough to make ends meet. “Some companies, especially manufacturers in the construction sector, went down to 20 percent sales and so had no choice but to let go of some of their employees,” he says. “It is unfortunate but they don’t have another solution and are on life support today.”

To reduce or to let go?

To some, a temporary reduction in salaries coupled with less working hours is a far better solution than laying off employees as it allows those employees to get at least some consistent income and to remain in the National Social Security Fund (NSSF). “I reduced the hours of the whole company by 20 percent,” Abi Nasr says. “This way I am being fair to everybody. Instead of having some being taxed at 100 percent, which in this case would mean being let go, and others still being paid 100 percent. This is actually better because you also reduce costs that are not related to salaries such as electricity.”

He says that by retaining employees but reducing their hours, a company can recover more quickly once this crisis is mitigated. “The second we find a solution, bringing back those 20 percent [working hours lost] is as easy as flipping on a switch,” Abi Nasr says. “But if you let go of these employees, bringing them back is very difficult if not impossible. Either they will have moved on somewhere else, or, if they do come back, they won’t identify with the company as a safe haven for them because they will think that if they let me go once, they may do so again.”

Chammas points out to the time investment loss when employers are forced to lose staff. He explains that companies have spent years training their employees and developing their skills and so, for those who have made staff cuts, it would mean starting all over again with a new team once conditions stabilize.

While few disagree that reducing salaries and hours is more favorable than termination, the argument would be to work toward a solution that would not involve either, if at all possible. “At the end of the day people would rather work and earn their full salary then stay at home and do nothing, earning half their salary,” Hosri says.

Milking it

The business owners and managers Executive spoke to voiced genuine frustration and sadness over having to lay off or reduce the pay of team members and it is evident that it was not an easy decision for many of those in charge of a company’s bottom line to take.

“The situation is that many companies, including ours, have been losing money for at least two years now.”

Riccardo Hosri, CEO of security system supplier Sacotel and vice chairman of the board at the Family Business Network Levant

Yet, it cannot be denied that some companies are using the economic situation as an excuse to downsize and let go of employees. “At the end of the day, corporations are run by humans and not computers and humans tend to be abusive” Hosri says. “But we cannot generalize, because there are a lot of decent people as well and I hope they constitute the majority.”

Karim Nammour, lawyer and member of Legal Agenda, says he has seen several cases of companies that have either fired a sizable number or all of their employees, using the excuse of the current economic situation—but he believes that not all cases were justified. “Nobody can argue that the economic situation is bad but it doesn’t mean the company’s situation is bad,” he says. “A lot of companies have the bulk of their business abroad, while many companies were not affected by the economic situation [in terms of of needing imports]. I cannot assume that just because the economic situation is bad then ipso facto all companies are doing badly.”

Hosri asks those who express their surprise that some companies that have been making money for years crumbled so early into the crisis to remember that the economy has been suffering for years. “Company owners and management are burdened from taking these measures but they are necessary,” he says. “The situation is that many companies, including ours, have been losing money for at least two years now. But back then, we had regular inflows and outflows and so could plan to get out of the crisis. Now it is different from two years ago.”

See video

Employee rights

Here is where the law should step in to distinguish between companies that are really losing money and need to take these measures to survive and those who are just abusing the situation.

Nammour explains that article 50 of 1946 Lebanese Labor Code outlines the procedure to be followed if a company needs to lay off some of its employees due to economic difficulties or because it wants to restructure. “The article basically says that if employers want to fire employees for economic reasons, they should notify the Ministry of Labor (MoL) one month before they plan to terminate the contracts and agree on a program or procedure with the ministry that creates a framework for the restructuring of the company or the terminating of the employees,” he explains. “This is very important because it grants the MoL authority to overlook whether or not this step that the company wants to take is legal and justified.” He explains that, for example, the law would not consider it justified for a company that has suffered small operational losses for a year to claim it is not making profit and fire its employees.

If the law is followed, then an inspector would go through the company files case by case to see why particular employees were selected for termination, according to Nammour. This would ensure that companies do not use this as an excuse to fire employees who have been with them for a long time and whose indemnities would be very high otherwise. If the MoL agrees to laying off employees, they do not get any compensation, only the guarantee that they would be rehired within a year if the company reopens job positions, he explains.

In Nammour’s legal analysis, companies independently deciding to reduce employees’ pay by reducing working hours is also a violation of article 50. “If employers reduce salaries without going through the mechanism of informing the MoL and making a program, they would be changing a substantial condition of the labor contract and thus [this] can be considered a form of termination and the employee can then sue for arbitrary termination, which means they can ask for up to 12 months of compensation,” he says. “As an employee, I am working for my salary and I am expecting a certain amount, so when the salary is changed it is a substantial amendment to my contract and as such is considered by jurisprudence to be an unlawful termination.”

Malek Takieddine, lawyer at firm Al Jad, notes that, even without resorting to article 50, breaking a significant term of an employment contract—in this case working hours and pay—is against the law. Whether these legalities are understood or followed by business owners is less clear. Hosry tells Executive there is no transparency around the labor law, which makes it difficult for companies to know what is expected from them in this crisis. “How will the public institutions deal with corporations once this crisis is over?” he asks. “Now we are all on survival mode and no one cares if you make mistakes or not, but at some point things will settle down. When we make a decision [regarding our staff], we have to really consider the repercussions because we might pay the price later.”

Takieddine says that although the Lebanese labor law generally protects employees well, what lies between the letter of the law and the situation on the ground is a thousand shades of grey. He says many companies do not resort to article 50 because they have not paid their dues to the MoL or the NSSF and are not in good standing with them. Although he does not have precise figures, Nammour says there is a big discrepancy between the number of people fired, which he says is close to 160,000, and the submissions for termination received at the MoL.

What is happening on the ground, according to Takieddine, is that employers are not involving the ministry but instead agreeing on a pay cut with their employees—often by playing on their emotions and their fear of losing their job. “In principle, the contract signed by both parties should be honored,” he says. “But companies say we will either have to lay you off or close down, or you have to bear with us in this tough period.”

Labor cases take on average three and a half years.

In the case of termination, Takieddine says it is hard to prove that it is illegal. “Companies should not be biased against any specific employee but practically this is open to discretion and interpretation and we cannot assume that it will be fair in terms of which employees get terminated,” he says. “If an employee feels he has been wrongfully terminated, he can sue but it is hard to prove especially if the company followed all legal procedures.”

Even if an employee had a strong case for wrongful dismissal against an employer, Nammour says that the labor courts are overwhelmed and that labor cases take an average of three and a half years to be processed, which is very problematic for someone who has been unlawfully laid off. Moreover, even if more companies do follow the letter of the law and submit employee termination claims, Nammour says the MoL does not have enough inspectors to go around the businesses. “It is not enough to have a good law, you need it and the judiciary to be effective,” he says.

A black hole

All those interviewed for this article agree that this is just the beginning of a labor crisis that threatens to topple Lebanon’s already fragile economy and—arguably more importantly—its social fabric. “My biggest worry as a Lebanese is the social impact of the crisis, not now, but in June or July when we will have an unemployment rate exceeding 40 percent,” Hosri says. “When we have hunger—and we will have hunger—when the crime rate will shoot up because people will find themselves in a situation where they have to be aggressive to feed themselves and their children, when people will be out of schools and universities because their parents will be unable to pay tuition. When education is hit, the future of the country will be hit, and we would have eliminated the possibility of any real growth. If nothing happens very fast, at least for our generation, we can forget seeing a country we can live in.”

Facing the labor crisis is like standing at the edge of an abyss but there is time to avoid free falling into a pit of bottomless despair if action is taken fast. The government needs to formulate a strategy that would create jobs to reintroduce those who have been laid off to the work force and to provide opportunities for fresh graduates within their own country. And it needs to do so fast.

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LeadersOpinion

Facing the economic crisis with productive realism

by Executive Editors
written by Executive Editors

It plainly is depressing. Practically every story in this issue of Executive starts—if not with the scary ad-hoc topic of the coronavirus—but with a reference to the dire economic straits that Lebanon is in. And even before the March issue went to the newsstands, the mood among some of our online readers seemed to be correspondingly explosive to this dismal perception: an online-first interview with a banking economist on the eurobond repayment question triggered a handful of instant, nasty, and non-quotable responses when it was posted at the end of February—a far more visceral response than had been garnered by an op-ed published the week prior that laid out opposing views.

That the Lebanese have become more vocally engaged with the country’s pressing economic issues can only be a good thing. But amid the op-eds, interviews, tweets, and blogs there must also be an acknowledgement that the national financial story of Lebanon is complex and at risk of biases on all sides of the debate. Somewhere in the midst of all this economic noise there is a viable path forward for Lebanon. Finding it, however, is proving elusive.

Throughout February there was talk of an economic rescue package from the new government of Hassan Diab. But governmental talk in the public’s eyes these days is not just simply cheap but discounted almost in totality, as any such talk suffers from the distrust that has become entrenched in the populace over a decade or more. Moreover, on the month’s most hotly debated question of macroeconomic concern, the cabinet, needing time to find its footing, proved unable to magically pull a solution for the pressing eurobond question—to pay or not to pay—out of its hat.

Amidst the looming deadline for payment and all the economic uncertainty that has colored the day to day lives of Lebanese for the past few months it is understandable that people are angry, both with the government and with the banks. The fact remains, however, that rage can be destructive but never productive. It needs to be remembered that the people’s civil thawra (revolution) and the national economic mess have sprouted from the same ground of arrogant political corruption and limited economic room for financial action, but that neither was directly causal of the other (whatever narrative to the opposite has been spun). Now is the moment to recognize once and for all—based on the various governmental calls for international help and latest appointments of foreign legal and financial firms on the eurobond and debt restructuring issue—that the mess of the Lebanese public debt has taken on a dimension which neither the state nor the banks appear able to manage out of their own power.

All this means that it is now a time to step back from discussions of local guilt or ideological debates over whether the elites are waging war on the less fortunate or, inversely, the lower classes at the elites. Like we need to substitute imports with local production, the mental striving to improve the situation needs to substitute ultimately pointless talks of blame and ideology with value-added thought—namely with realism, civility, and even a dose of humility.

Humility, through acknowledging that the economic and financial mess of Lebanon is larger than the country’s capacity of autonomous self-healing, should guide the country in dealing as constructively as possible with the international community and the multilateral financial institutions whose support is urgently needed beyond any question and reservation.

Realism will help the thought leaders among protesters and establishment to—hopefully jointly—direct their energies to the search for local solutions such as empowerment of better social safety nets, industry, or crowdsourcing, which might come without guarantees but nonetheless offers infinitely better prospects than remaining in a mode of paralyzed and action-less economic despair.

But the most important virtue to preserve and nurture is civility. As the country’s sustaining asset clearly is neither political prowess nor the ability to manage an impossible economy, civility means that if Lebanon wants to preserve its validity as human habitat and virtuous society, there is no room for any hate speech or violence against outspoken minds, such as that leveled this month against economic journalist Mohammad Zbeeb. Respect for critics as well as proponents of the banking sector must be ascertained in any however passionate discussion over the economic course of action, the paying or restructuring of public debt, or the need of financial market reforms for building a new economic future.

In this period of accelerating difficulties and fears, and with expectations of even greater social troubles in Lebanon, it is time to remember that the outstanding quality of the past four and a half months was the peacefulness of protests, which was maintained against all provocations and in all moments of temptation to turn into belligerent unrest. Maintaining this culture against the pressures of this period is the challenge of preserving civility.

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LeadersOpinion

Lebanon faces growing unemployment

by Executive Editors
written by Executive Editors

The last study on unemployment in Lebanon—conducted by Lebanon’s Central Administration of Statistics (CAS) in partnership with the International Labor Organization in 2018- 2019—revealed a general unemployment rate of 11.4 percent, reaching as high as 23.3 percent for youth. In light of the past few months, there can be no doubt that these percentages have worsened.

The country is facing an economic crisis characterized by the untethering of the lira to the dollar in the parallel exchange market and restrictive banking policies, with measures against transferring money abroad and extending credit facilities being the most damaging to businesses. These factors have taken their toll on Lebanese businesses, many of which had already been suffering under less than optimal economic conditions over the last few years. As the crisis unfolded over the past five months, many business owners and managers have reduced the salaries and working hours of their employees, with some even resorting to firing staff in order to cut costs.

It is clear from media reports, to talks around the dinner table, to the chatter on social media that lower pay and unemployment are becoming real concerns for many Lebanese. Estimates regarding unemployment from business owners and CEOs of companies that Executive spoke with confirm that they have reduced the salaries of their employees by percentage increments or laid them off.

But while we know anecdotally that Lebanon is in the beginnings of an unemployment crisis, what we don’t know yet is its scale. A press release by the Syndicate of Owners of Restaurants, Nightclubs, Cafes and Patisseries says that 25,000 of the 150,000 employees in the hospitality and tourism sector have been laid off since September 2019, while online restaurant directory Zomato monitors the number of F&B outlets that open and close on any given month, recording a net loss of 142 in January alone, both of which help to quantify the issue to a degree. But this is only one sector of the many that make up the Lebanese economy.

For all the other sectors, precious little data on current unemployment rates exist. Compounding the problem is the fact that migrant workers and the estimated 55 percent of working Lebanese who are informally employed (according to a CAS study) are not counted as part of Lebanon’s official or formal labor force, although they are an integral part of it. This risks skewing any data gathered rather than giving us results that are indicative of the actual scale of unemployment in Lebanon.

If we have any hope of dealing with this crisis, we must first understand how big it is. At the end of November last year and again at the end of January this year, Lebanese research firm InfoPro carried out a survey with 300 companies, and found that the total number of jobs lost since October was 220,000. But without examining the methodology behind their study, it is hard to know if these 300 companies are actually representative or whether there is any account for informal and migrant workers.

In a country with no unemployment benefits and fragile social security nets, an unemployment crisis has grave implications that would have long lasting damaging effects not only on the economy but on the very social fabric of the country. If the situation continues as is, the World Bank warns that already high unemployment will rise and the country’s poverty rate could reach 50 percent. For those who are employed in the informal economy, they do not even have the arguable luxury of being covered by the National Social Security Fund (NSSF) nor do they have the law to protect them if their employers decide to arbitrarily terminate them. The same goes for migrant workers who have already been suffering under the kafala system. Due to the current financial situation, migrant workers are increasingly being paid their salaries in Lebanese lira instead of dollars—if they get paid at all—and so their already low salary is taking a double hit, first by being paid in lira and again when converting these lira to dollar in the black market in order to send them home. There is no telling how drastic the impact of such an unemployment crisis will be on those marginalized segments of the labor force.

The Ministry of Labor (MoL) must work with CAS to quantify the current labor problem in Lebanon, across all segments. Being equipped with reliable and recent figures on unemployment rates, including which sectors have experienced the most layoffs and in which areas of Lebanon, is the base from which the ministry can then begin to tackle the problem. Only with this information would the ministry be able to work with stakeholders to develop a targeted action plan that could contain the worst effects of the labor crisis and create new employment opportunities for the Lebanese labor force.

As part of this plan, the MoL should start with itself and acknowledge that it needs a reboot if it is to have any hope of containing this crisis. According to Legal Agenda lawyer Karim Nammour, the MoL lacks enough inspectors to be able to adequately cover the businesses that submit requests for restructuring or laying off employees, as is required by law. Labor courts, meanwhile, are overwhelmed, with cases taking an three and a half years when they should take three months. There is much to address, a difficult task during the current financial crisis of the country but nonetheless a necessary one.

The MoL should also develop and widely disseminate a campaign that would make labor laws clear to both employers and employees, particularly on the steps to take to renegotiate pay or lay off employees to due to financial constraints. That way business owners can no longer hide behind their ignorance of the law and employees will be empowered to not make decisions based out of fear or lack of clarity.

The MoL needs to apply more stringent measures and controls that would guarantee that companies register all their employees. Only through this measure would all employees be registered with the NSSF—the only social safety net Lebanon has. Employment in the informal economy should also be discouraged and limited as more employers register their employees and allow them the full benefit of the labor law; here a plan with clear deliverables and a timeline is needed.

If and once these measures are followed—and the worse effects of the labor problem is contained—the MoL should work with other ministries to set up plans that would revitalize Lebanon’s economy and create new job opportunities. There are several economic rescue plans that have been developed over the past few months—including Executive’s own Economic Roadmap—that can be used as a starting point for the government.

What will bring all this together—what is still seemingly lacking to date—is serious and sincere political will to take the steps and measures that would get Lebanon back on track. Civic society and private sector individuals can come up with the best laid plans, but if the state does not choose to adopt them they will go nowhere.

Here, we call for the alternative labor unions and associations that have formed to be the voice of Lebanon’s workers and pressure the MoL into adopting the measures outlined. They should be relentless in their efforts to get the MoL to take the labor crisis seriously. The time for wait and see is long over. Only through action will we pull ourselves out of this crisis.

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EditorialOpinion

The virus within

by Yasser Akkaoui
written by Yasser Akkaoui

The situation has become even more surreal. We have a government that is totally disconnected from reality. No matter how many American passports the cabinet collectively has, this government is still undeniably perceived by the international community as a Hezbollah, Amal, and Aounist government, backed by Iran, Syria, and Russia.

Meanwhile, this government’s attempts to create committees, hold consultative sessions, and form economic rescue plans have unfortunately been overshadowed by the backseat driving of the usual political players. These old hands are still trying to exert their control. The appointments at the Banking Control Commission, among other key positions within government, are testament to that.

The people are still calling for early parliamentary elections, while they wait in vain for any sign that corruption has been given the importance it deserves. For all the lip service, since the Lebanese took to the streets to demand accountability from all their politicians over four months ago, by now there has not been a single indictment nor any investigation by our judiciary into any person involved in corrupt practices.

As the economic crisis deepens, people’s worries have turned inward. The productivity and the purchasing power of the Lebanese are being eroded. This will only generate a more anxious, more vulnerable, and more easily manipulated populace. Coupled with the panic around the first wave of coronavirus cases in Lebanon, the atmosphere in the country is tense.

No matter how much human nature is constrained, at some point our fears, our anger, our desperation will come bursting out of us. This can be devastating on an individual level, nationwide the consequences are unthinkable. The economic pressures, the collective anxiety, the job losses, the pay cuts, the price hikes, the food and medicine shortages, the fear of a pandemic—people can only take so much.

In October we danced in the streets, we celebrated our new-found voice, our solidarity in the face of a system that worked for the few at the expense of the many. If things do not change, if we continue on the path of self-destruction, people will once again take to the streets—and this time there will be no dancing.

Time for change is running out. To those still playing the same old political game I say this: Beware the revolution of the hungry.

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Coronavirus AnalysisEconomics & PolicyHealthcareOpinion

Why coronavirus in Lebanon is no reason to panic

by Khalil Diab
written by Khalil Diab

A video shared on Twitter by Sky News Arabia’s Larissa Aoun shows an adult, clad in full protective gear, spraying an unknown substance over school age children as they walk in line into their school. Aoun notes in her tweet that spraying alcohol or chlorine will have no effect on viruses already in your system, but can be harmful in of themselves, particularly to mucous membranes such as the eyes and the mouth.

Since the announcement on February 21 that the first case of the novel coronavirus had been discovered in Lebanon, reactions have skewed toward the panicked and misinformed, with some Lebanese donning surgical masks or gloves in public, and the more extreme case as cited above.

This is not to say that the novel coronavirus—officially known as severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), the disease of which is called COVID-19—should not be treated seriously. Since it was first discovered at the end of last year in Wuhan, China, COVID-19 has spread to 48 countries, and, at the time of writing, there have been 82,166 cases diagnosed worldwide, 2,804 deaths, and 32,832 recoveries. The World Health Organization (WHO) declared COVID-19 as a global health emergency at the end of January.

With seven cases of coronavirus confirmed locally in February and more likely in the near future, it is important to separate the myths from the reality and make sure that reactions to the virus are based on facts rather than fears.

What is a coronavirus?

Coronaviruses are a family of viruses that more often than not cause nothing worse than a regular cold in humans. Certain strains of coronavirus, however, can evolve and become more dangerous. Examples of coronaviruses that evolved into a more severe and deadly strain include Severe Acute Respiratory Distress Syndrome (SARS), which emerged in 2003 in China, and Middle East Respiratory Virus (MERS), which emerged in 2014 in Saudi Arabia. This new strain of coronavirus is another example that can cause a more severe illness than the common cold.

Timeline on the discovery and initial spread of COVID-19

December 26: Four unusual cases of pneumonia were noticed by Dr. Jixian Zhang in Wuhan, the capital of the Hubei Province in China.

December 27: Dr Zhang reported the cases to the local Center for Disease Control.

December 28: Another three cases were detected.

December 31: The national Chinese Center for Disease Control and the WHO were made aware of the virus.

January 1: The Huanan fish market was closed due to suspicion the virus started there. 

January 7: COVID-19 was identified.

January 13: Testing kits became available.

January 23: Due to the rapid spread of cases, Wuhan was declared under quarantine with no travel in or out the city.

January 24: Another 15 Chinese cities were placed under quarantine

January 30: The WHO declared “a public health emergency of international concern.” 

When was the first case of COVID-19 reported in Lebanon?

The first case of coronavirus was confirmed in Lebanon on February 21. A female passenger had arrived the night before on a plane from Qom, Iran. All passengers on the plane had been screened on arrival by officials from the health ministry after Iran had reported its own cases of COVID-19. The woman in question had tested positive for cold symptoms and had been transferred to Rafik Hariri University Hospital with a suspected case of coronavirus. A second case was confirmed on February 26, another passenger on the plane. This was followed by a third on February 27, an Iranian male who flew from Iran in three days prior; a fourth on February 28, the first case of local transmission; and a further three cases through contact with infected patients on February 29.

Can hospitals in Lebanon house COVID-19 infected patients?

Currently all confirmed and suspected cases of COVID-19 in Lebanon are to be isolated at Rafik Hariri University Hospital. No other hospital is allowed to keep patients with the disease at this time. The WHO helped set up the quarantine department at the hospital, and it was reported on February 26 that the head of the health committee in Parliament, Assem Araju, said that Lebanon has asked the WHO for help establishing similar quarantines across Lebanon.

How does it spread?

The virus can be spread from person to person through a variety of ways. If an infected person coughs or sneezes near you this can put you at risk. It can also spread through objects or surfaces that have been touched by an infected person, if you touch these and then your own face, especially by rubbing your eyes or putting your fingers in your mouth.

What are the symptoms of COVID-19?

You can carry the disease from two to 14 days before you develop any symptoms. In most people (81 percent), the symptoms are mild, including a cough, shortness of breath, and a low grade fever that increases over time. For others, symptoms can be more severe, or even critical, requiring hospital admission.

How would I know if I have COVID-19 and who would I report my symptoms to?

If you develop cold or flu-like symptoms and have been to China or another endemic country in the past 14 days, or have been in close contact with someone who visited these countries, then you should report your symptoms to your doctor right away.

How is COVID-19 diagnosed?

Typically, a doctor or lab technician takes a swab from your throat or a blood sample and then sends it for a polymerase chain reaction (PCR) test in the lab. This identifies whether COVID-19 DNA is present.

What is the available treatment?

If you receive a positive diagnosis of COVID-19, you will be placed in isolation for the duration of your symptoms. So far, treatment is mostly supportive as there is currently no cure for the disease. In severe and critical cases, admission to the intensive care unit may be necessary and you may be placed on an artificial respirator.
There are ongoing studies on several drugs as potential treatments for COVID-19. Chloroquine, an anti-malarial drug, is showing promise in a study in China.

Is COVID-19 dangerous?

The death rate from the disease so far is between 2.3 to 2.7 percent of infected cases, meaning for every 1,000 people infected by COVID-19, 23 die due to the virus (although these numbers may change). What is important to note, however, is that most people infected by COVID-19 suffer symptoms very similar to a common cold—81 out of every 100 people infected. In children under the age of nine, no deaths from COVID-19 have been reported. Those more at risk seem to be the elderly and those with underlying conditions. The death rate increases to 8 percent in people aged 70 to 79, and to 14.8 percent in people aged 80 and above. People with diabetes and heart disease are also at increased risk of death. Those who die after contracting COVID-19 usually develop pneumonia (an infection in their lungs). But it bears repeating, for the vast majority of those infected, the death rate is very low.

What can I do to avoid contracting or passing on the infection?

  • If you have the infection, always wear a mask when around people.
  • If you are caring for somebody who has the infection who is not wearing a mask, wear an N95 mask (the model used when caring for or around people with tuberculosis).
  • Frequent hand washing preferably with soap and water for at least 20 seconds is recommended, especially when touching surfaces that could be infected. A sanitizer with an alcohol content of more than 65 percent may also be used. If your hands are dirty, however, always use soap and water.
  • Frequently wipe surfaces that could be infected with an environmentally friendly disinfectant.

Should I wear a mask in public?

There is no reason whatsoever to wear a mask in public. The risk of infection in outside spaces is low, and a regular mask will still allow particles to pass through the sides. Bear in mind that the availability of masks is limited at this time. Hoarding masks at home may limit the availability of masks in pharmacies and at hospitals. If healthcare workers taking care of sick patients are unable to secure their own supplies, this could put them at risk.

Wearing an N95 mask (see box) would certainly be effective, but it is not necessary and it makes it hard for you to breathe.

Should I travel on a plane? If so, should I wear a mask on the plane?

The risk associated with airplane travel is similar to that of train or bus travel. In fact, some people say that the HEPA filters on airplanes may help prevent a viral infection. Regarding mask use on an airplane, the same caveat applies, it may not be effective as the virus can still enter through the sides. Sitting within one to two rows of somebody who is coughing and sneezing leads to the highest risk of infection. Surfaces are the biggest risk. Try to wipe the back pockets of airplane seats with sanitary wipes before touching the airline magazine and regularly wash your hands.

Why close schools? If they reopen should I send my children?

At this time in Lebanon, there is no COVID-19 epidemic. Seven cases were reported in February, and the education ministry made the decision on February 28 to close all schools and universities until March 8. On the face of it, this decision was perhaps unnecessary at this time. If reopened on March 9 there are precautions schools should certainly take, such as disinfecting surfaces frequently touched by students on a daily basis. Any student who has recently been to a country with an epidemic may be asked to self-quarantine for 14 days, likewise students with cold symptoms should stay home until these resolve. But bear in mind the risk of infection in children is very low.

The important thing to remember is to remain calm and rational in face of COVID-19. While this virus has to be taken seriously, there is no need for widespread panic. Be careful with the information you come across online or through others. It easy for misinformation and rumors to spread as people allow their fears to cloud their judgement. The best advice would be to follow that given by your doctors or the health ministry and make sure to wash your hands frequently and thoroughly when interacting with others and public spaces.

This article was updated to reflect the decision of the Ministry of Education and Higher Education to close all schools and universities in Lebanon until March 8. The number of cases of coronavirus cited within the article are valid up to end February. This is an ongoing situation and numbers will rise.

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Economics & PolicyEurobondsOpinionQ&A

Q&A with Nassib Ghobril on Lebanon’s eurobonds

by Executive Editors
written by Executive Editors

Lebanon is due to make a $1.2 billion principal eurobond payment on March 9, with opinions divided on whether to pay or put in place a plan to restructure the debt.

As part of our coverage, Executive spoke via telephone with Nassib Ghobril, chief economist of the Byblos Bank Group, to find out why he is in favor of Lebanon paying the dollar eurobonds due this year.

There has been a fierce public debate on the issue of whether or not Lebanon should pay or default on its upcoming eurobond dollar payments in March. Is it correct you are part of a minority who believe it should be paid?

I’m a part of the silent majority who believes it should be paid.

What is your reasoning behind that?

First of all, we have very little time left between now and the date the eurobond is due. And we have taken too little time to address this issue. From the experience of other countries, when you have a situation like this you start setting things in motion at least six months in advance, not two weeks in advance. 

Second, the authorities should have known this was coming long before even six months ago, because at the end of 2018 the Ministry of Finance, on behalf of the government, asked the central bank to cover all the maturing eurobonds and the interest payments accrued on them in 2019, which the central bank did. So they knew at the beginning of 2019 that they had an issue to deal with, which is the inability of the government to pay its eurobonds back then—because it’s not the responsibility of the central bank to do this. 

Third, when the national protests started on October 17 the government simply disappeared. Instead of forming a crisis cell to address this and other urgent issues it just disappeared. [Even] when the government resigned it did not form a crisis cell. [Then] the political procrastination to designate a prime minister and the formation of the government took all this time—it’s only two weeks ago that the new government received its vote of confidence—so we are very late in the game for not paying or considering other options. 

Fourth, it’s not true that we don’t have the resources, and [there is] this misleading notion that we have to choose between financing the imports of basic goods and paying the eurobonds. This is misleading because the central bank already has declared several months ago that it has liquidity for the importers of basic goods.

Fifth, we have enough resources, contrary to what is being said, to pay the eurobonds. For instance, last week Fitch Ratings issued a detailed report saying that the central bank has enough foreign currency reserves to cover all the maturing eurobonds between now and the end of 2021. But, the report added that because of political pressures this option is highly unlikely and unrealistic.

The central bank also has a lot of resources nobody is talking about. The central bank has $15 billion in gold reserves and we have been saying we cannot touch the gold reserves because these are assets to use in crisis—what more do we need than the current crisis to consider, not selling the gold, but at least utilizing those assets through securitization, or collateral, or through other means. The central bank also has a portfolio of real estate at about $2.5-3 billion conservatively, and that could also be considered to cover, not the eurobond payment, but at least to inject liquidity in the market. The Lebanese state also has a huge portfolio of real estate assets, to name just one of the state’s multiple assets.

Between the gold and real estate at the central bank you have around $18 billion in sitting assets, non-performing assets, that can be used to help—whether to inject liquidity into the market or to cover the payments of the eurobonds.

Do you think that a restructuring of the debt will be inevitable?

I’m advocating the payment [of the March eurobond]. We have to choose the least costly option for the economy, the financial system, and depositors, and the least costly option for me is paying. I hope they realize what a debt restructuring, or a disorderly default, or even an orderly default means for the country. And I hope this is being studied carefully, otherwise we are jumping into the unknown. If you think we are in an ambiguous situation now, the alternative could be much worse.

At this stage, so late in the game, paying the maturing eurobond is the least costly option.

Isn’t there an option to ask for a grace period to make these negotiations?

You cannot go that route because you cannot go back. Whether you have an orderly default, or a disorderly default, or suspension of payment, you are jeopardizing the reputation, credibility, and historic track record of the state meeting its obligations. Unfortunately I see this has been taken lightly because I believe that this rush toward the other option is a way to avoid in-depth structural reforms.

The main three international ratings agencies, S&P, Moodys, and Fitch all came out in February and said to some extent that restructuring or non-payment is virtually certain, so is there not a degree to which the reputation has already taken a hit and most actors are thinking that this is something that is inevitable down the line?

They are saying it is inevitable and they downgraded because we have senior politicians who have publicly declared that this is the best option. But this is a very risky road that we are taking, especially since such a decision could have been avoided—the whole crisis could have been avoided. The decision to default can and should still be avoided. We are taking the easy road, we are not even trying to see the alternatives.

I came up with the gold reserves and the real estate portfolio of the central bank as examples, I am sure there are other ways to cover the shortage of liquidity in the market until structural reforms are in place. My concern is that this rush toward debt restructuring or defaulting is a way to avoid the deep structural reforms that the economy needs. Usually countries start with structural reforms and when there is no other alternative they move to debt rescheduling or restructuring. We are going directly to the riskiest possible solution and we haven’t even tried reforms. We have a track record of not implementing reforms.

The last round of reforms that Lebanon agreed to undertake was at the CEDRE investment conference in April 2018, in exchange for which the country would have unlocked $11 billion in loans/grant from the international community. These reforms have not materialized in the almost two years since, do you think that the political will for reform exists?

No I don’t think it exists seriously. Despite all the good will of the current ministers and the team they have formed, I don’t think there is real will for in-depth structural reforms. But I sincerely hope that they prove me wrong.

So isn’t there a risk that if we do what you are saying and pay to maintain Lebanon’s reputation and use gold reserves or other avenues that we are just delaying a default along the line because these structural reforms won’t happen?

Defaulting would—from the optic of the political class or most of it—prevent or avoid in-depth structural reforms that would affect their base.

But what I am saying first of all is that reaching that decision should be the very last resort. We need to have a comprehensive, credible reform plan with clear priorities that includes a medium-term fiscal framework, whose goal is to reduce public finance imbalances and therefore reduce the deficit-to-GDP ratio and the public debit-to-GDP ratio for the medium term. Before getting into debt restructuring, we need to put together this plan and I don’t think there is enough time to start implementing it prior to the March 9 deadline.

Second, after we start implementing reforms and we show credibility, and all options are exhausted on the reform front, then we can see if we can continue to afford the debt or not.

Many of the comments pieces that are circulating are engaging with the eurobonds issue from a purely economic lens, with no acknowledgement of the political nature of the bond decision. In your opinion, how much can this be a question of pure economics and much it is by necessity a political game with lots of divergent international interests involved?

International interests are an excuse. The best way to prevent international or foreign interference in Lebanon is to have a strong economy, public finances that are healthy, and an economy that is functioning properly—and this can only happen through reforms.

Since 2002, there hasn’t been real political will across the board to implement reforms because reforms are viewed as a zero-sum game in political terms by political parties. If the authorities are serious about reforms they shouldn’t spend their energy blaming the banking sector for all the problems we are facing today—they are avoiding taking responsibility.

One way to avoid a worsening of the situation is to try to reach an agreement with the IMF through its various programs. It doesn’t have to be a stand by agreement it could be a precautionary credit line that the government can use if it needs to.

Because of the track record of not implementing reforms, today the current authorities do not have the credibility. I’m not taking about international credibility, I’m taking about local credibility. The people don’t believe them, the private sector doesn’t believe them—until they see concrete things happen. So in order to put in discipline and show a sense of urgency in the implementation of reforms—and more importantly to show there is political will to implement reforms—the option should be there on the table to take our reform plans and submit it to the IMF and try to negotiate a package that can be satisfactory for both sides.

If we discover that the conditions or the requests of the IMF are detrimental to the Lebanese citizen, then we should say no, we should pull out. If we find out that there is a hidden political agenda as some parties are concerned about, then we should pull out.

Do you think there are any lessons to be learned for Lebanon from the recent experience of Argentina with the IMF?

No I don’t compare with Argentina. But I would say that overall that if a country defaults and goes to the IMF and has international support, the Argentina experience shows that you need domestic political will and leadership to implement reforms. You need domestic buy-in.

How worried should Lebanon be about the possibility of vulture funds?

We should be worried about the lack of a sense of urgency from the political class, the sense of denial about the gravity of the crisis and measures needed to get out of it that we have been seeing, at least since October 17. [Despite] all the speeches, all the promises, the formation of the new government, the committees, there hasn’t been a single measure taken yet.

Regardless of where analysts seem to fall on issue of whether to pay the eurobonds or not there seems to be an agreement that a haircut on deposits is inevitable, and by and large a consensus that such a haircut should be targeted toward larger deposit holders. What is your view on the inevitability of a haircut and how to distribute it across depositors?

They are taking the easy way out. They want the banking sector and the depositors to pay the price of their errors and lack of urgency and lack of political will to implement reforms. The priority should be to protect depositors, regardless of the size of their deposits. Large depositors who earned their money legitimately and through hard work deserve to have their money protected, just like every small depositor.

My opinion is that we need to pay the eurobonds now, which is a less costly road, not continue to procrastinate. It should be the last time we get so close to a maturing bond and be in this confusing situation and indecision. It should be an incentive to put together a clear, comprehensive, credible program and rescue plan and start implementing it immediately.

We have a maturity in April and a maturity in June and I believe we should pay those as well because the next maturity is in April 2021, a $2 billion maturing bond in 2021. So we have time to show we are serious about implementing reforms and we want to salvage the economy.

This interview has been condensed and edited for clarity. The views expressed are those of the interviewee and do not necessary reflect the editorial policy of Executive Magazine. 

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Economics & PolicyEurobondsOpinion

The case for Lebanon restructuring its debt

by Mohammad al-Akkaoui
written by Mohammad al-Akkaoui

Lebanon’s economic vulnerabilities are on full display. Investors and other stakeholders have lost confidence in the Lebanese financial system, triggering an existential economic crisis. In short, Lebanon’s future is jeopardized by three intertwined crises of sustainability with regard to the public debt, the current account deficit, and the financial sector. As such, resolving Lebanon’s crisis requires a full-blown multifaceted stabilization and reform plan initiated by restructuring the stock of public debt.

Restructuring Lebanon’s stock of public debt is inevitable since it has exceeded the economy’s capacity to service it. Expected to be at around $90 billion—and assuming it can be refinanced at 7 percent over seven years—the stock of debt will demand roughly $19 billion in maturities and coupons annually, or around one third of 2018’s GDP. This high level of debt service is not a new phenomenon and governments have sustained it from borrowing from the market and building on top of the existing debt stock.

Over the years, these governments were repeatedly warned over the unsustainable nature of their stock of public debt and the need for fiscal adjustment to bring their finances back on track. These calls, however, were ignored, and repeated government deficits have led to today’s crisis. In 2016, when it was clear that kicking the can was no longer an option, there was no effort undertaken to curb down expenditure. Instead, the Ministry of Finance (MoF) started funding itself via off-market deals with Banque du Liban (BDL), Lebanon’s central bank. This process has greatly impacted BDL’s balance sheet and magnified the extent of Lebanon’s ongoing crisis. The sovereign’s debt is only half the story—BDL’s hidden debt is the other half.

As a result of the negative net foreign exchange position (the difference between the assets and liabilities held in foreign currency) at BDL, Lebanon’s financial situation has deteriorated greatly since 2016, and the long-lived tradition of debt rollover is no longer an option. Debt restructuring is needed to avoid a disorderly default. Economic literature proposes that for developing countries the stock of sovereign debt should be brought down to around 60 to 80 percent of GDP. Given that Lebanon’s institutional fragility hinders its ability to generate budget surpluses, the lower part of that range is the most advisable. To reach this target, a large restructuring effort is needed, which bondholders will only agree to if a credible medium-term expenditure framework is presented with the needed checks and balances. Given that the first eurobonds payments are due on March 9, this would necessitate a grace period to work out the plan to restructure. 

Such a plan would need to be drafted by a credible government that would rely on the assistance and support of multilateral organizations to secure its financing gap. Once the plan is accepted by bondholders they would be offered a “menu” of options such as reducing principal and/or interest payments while keeping the same maturity dates, or extending maturities. A combination of these is also an option. The leading principal should be that all creditors are asked to give the same net present value reduction, meaning a reduction in the current value of their debt after discounting its opportunity cost over time. Once the negotiations are successfully concluded, the Lebanese government would exchange the existing stock of eurobonds with the newly negotiated ones. These new bonds could also include warrants that Lebanon would only pay if it reached its growth targets.

In short, restructuring Lebanon’s public debt is not a daunting task on the face of things, but nonetheless requires a massive shift in how the government conducts itself in order to secure a good deal for the country. The 2020 budget was a missed opportunity in this regard. It is now time for the government to roll up its sleeves and proceed immediately to negotiating a debt restructuring plan as part of a credible, fair, and comprehensive macroeconomic-fiscal-financial-banking plan, one that can garner the needed international support and financing and regain the confidence of the Lebanese people.

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the editorial views of Executive Magazine. This is the first article on the question of eurobonds payment, with the intent to share differing opinons from experts prior to the March 9 deadline.

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